******************************************************** 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 ) ) TCI OF RICHARDSON, INC. ) File Nos. CSB-A-0379, CSB-A-0522, ) CSB-A-0545 Appeals of Local Rate Orders ) Issued by the City of Richardson, Texas) (CUID TX 1228) ) MEMORANDUM OPINION AND ORDER Adopted: August 14, 1998 Released: August 17, 1998 By the Acting Chief, Cable Services Bureau: I. INTRODUCTION 1. Pursuant to Section 76.944 of the Commission's rules, TCI of Richardson, Inc. ("TCI"), a franchised cable operator, has appealed three local rate orders issued by the City of Richardson, Texas ("City"). In the orders, the City rejected TCI's proposed rates for its basic service tier ("BST") and for related equipment and installation. We have consolidated the appeals in this Order because they have several issues in common and in the interest of administrative efficiency. 2. The first rate order ("1996-97 Rate Order"), issued on January 27, 1997, rejected TCI's proposed rates for June 1, 1996 to May 31, 1997. TCI appealed this order ("1996-97 Appeal") and the City filed an opposition to the appeal ("1996-97 Opposition"). The second rate order ("1997-98 Rate Order") rejected TCI's proposed rates for June 1, 1997 to May 31, 1998. TCI appealed this order ("1997-98 Appeal"); the City filed an opposition ("1997-98 Opposition"); and TCI filed a reply ("1997-98 Reply"). The third rate order ("1998-99 Rate Order") rejected TCI's proposed rates for June 1, 1998 to May 31, 1999. TCI appealed this order ("1998-99 Appeal"); the City filed an opposition ("1998-99 Opposition"); and TCI filed a reply ("1998-99 Reply"). All three appeals include TCI's requests for a stay of the City's rate orders, as well as other stay-related pleadings. Because this Order resolves the appeals on their merits, we deny the stay requests as moot. 3. Six issues arise in the parties' pleadings. Three relate to equipment costs and three involve BST rates. First, TCI wishes to capitalize certain equipment and installation costs. We deny TCI's appeal on these issues. Second, TCI wishes to recover deferred taxes that it accumulated before rate regulation began and which it says are "unfunded" by subscribers. We deny this request. Third, the City argues that TCI failed to implement properly and explain sufficiently its methodology for aggregating equipment costs nationally. We agree. Fourth, TCI wishes to recover from its subscribers, as an external cost, a cost increase arising from a pre-rate regulation franchise requirement concerning public, education, and government (PEG) access charges. We grant this request. Fifth, the City contends that TCI failed to account for some "gap" period adjustments arising from its initial Form 1240 when it made its second Form 1240 filing. We agree with the City. Sixth, the parties disagree over what "starting rate" an operator should list in its newest rate filing when it is waiting for Commission resolution of a local rate appeal concerning a previous rate filing. TCI should have complied with the City's rate orders pending resolution of the appeals, which, in turn, would have dictated the appropriate starting rate. II. BACKGROUND 4. 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 Commission's decision. 5. When a cable operator does not face effective competition in a local franchise area, it may confront regulation of its rates for installation, equipment, and service. A rate-regulated operator has the burden of proving that its existing and proposed rates conform with Commission rules by submitting the necessary rate forms and responding to an LFA's request for supporting information. An LFA reviews an operator's rate filing, along with any additional information, and may either approve the operator's requested rate increase, or may issue a written decision explaining why a proposed rate is unreasonable and why a prescribed rate, if any, is reasonable. 6. For the period beginning May 15, 1994, a rate-regulated operator must justify its rates by using the FCC Form 1200 series. In Form 1200, an operator calculates its initial maximum permitted rates ("MPRs") for the basic and cable services programming tiers. An operator may change its maximum permitted rates every quarter, using Form 1210, or every year, using Form 1240. In Form 1205, an operator determines the costs of regulated cable equipment and installation for the basic service tier. In the three rate filings at issue in this case, TCI used Forms 1205 and 1240. 7. The annual rate adjustment methodology reflected in Form 1240 permits an operator to establish its programming rates for the upcoming year using estimated costs. Specifically, an operator may adjust its rates to account for reasonably certain and quantifiable changes in external costs, inflation, and the number of regulated channels that it expects to occur during the 12 months following the rate change. In addition to calculating a prospective rate, an operator adjusts, or "trues up," the previous year's rate to correct for differences between actual and projected costs. Pursuant to these true-up calculations, an operator must decrease its projected rates for overestimations and may increase its projected rates for underestimations. 8. When an operator files a Form 1240, it must also file a Form 1205. Pursuant to the 1992 Cable Act, the Commission has established standards for setting, based on actual costs, the rates for installation and lease of equipment used by subscribers to receive the basic service tier. Equipment rates are derived from total capital and maintenance costs per unit of equipment. Installation rates are derived from a calculation of an hourly service charge and an application of that charge to different types of installations. Regulated equipment is the equipment located in a subscriber's home, provided and maintained by the operator, that is used to receive the basic service tier. It includes converter boxes, remote control units, and inside wiring. As the use of one form for cable service and another for equipment suggests, a cable operator must unbundle charges for equipment, installation, and additional outlets from each other and from charges for the BST. An operator also must use a specific methodology for determining the actual cost of each piece of equipment and installation. Under this methodology, an operator establishes an equipment basket that includes all direct and indirect material and labor costs of providing, leasing, installing, repairing, and servicing customer equipment. The equipment basket does not include general overhead, such as marketing expenses, but it does include a reasonable profit. 9. The Commission has expressed its intention that an operator recover the full, actual cost of equipment. An operator, therefore, must base its proposed annual customer equipment and installation rate adjustments on past costs, because it is more difficult to project reasonably certain and reasonably quantifiable changes in equipment and installation costs. The use of actual, past costs in Form 1205 contrasts with the use of estimated costs in Form 1240. III. DISCUSSION A. FORM 1205 EQUIPMENT AND INSTALLATION RATES 1. Capitalization of Converter Costs 10. Two parts of Form 1205, Schedules B and C, are particularly relevant to TCI's appeals. Schedule B reflects the annual operating expenses for service, installation, and maintenance of equipment and plant. Schedule C reflects the annual capital costs of equipment leased to customers. In its 1996-97 Rate Order, the City rejected TCI's capitalization of certain "overhead" costs associated with its converters. Specifically, the City argued that TCI improperly included $20 on Schedule C of its Form 1205 for three items: the labor costs of installing and retrieving converters, the costs of managing converter inventory, and the material costs of converters. The City contends that there is no regulatory support for adding "overhead" to converter costs, and, in any case, it appeared that TCI had already taken the costs into account on Schedule B. TCI responds that it has not previously included the $20 on Schedule B, and that Commission rules allow it to recover "incidental" costs. TCI states that if it can not include the $20, the converter charge will not reflect actual costs. TCI acknowledges that an operator may not recover general overhead, but insists that it may collect "indirect" equipment-related costs. 11. The Commission's rule defining the "equipment basket" states that the basket shall include all "direct and indirect material and labor costs of providing, leasing, installing, repairing, and servicing customer equipment." Pursuant to the 1992 Cable Act, material and labor costs included in the equipment basket must be recoverable by the operator. The labor costs of installing and retrieving converters, the costs of managing the converter inventory, and the material costs of converters are clearly related to providing and installing equipment, and are properly classified as part of the equipment basket. Under the circumstances indicated by the record in this case, however, TCI may not recover these costs. 12. First, TCI does not adequately justify treating the labor costs of installing and retrieving converters as capital costs, rather than expenses, and including them on Schedule C. Including these costs on Schedule C, which is used only to "compute the annual capital costs of equipment leased to customers," is inconsistent with the Commission's rules. TCI does not clearly distinguish these labor costs from the operating expenses and labor costs that are ordinarily included on Schedule B. Instead, TCI argues that it should include these costs on Schedule C because it has not listed them elsewhere in Form 1205. The Form 1205 instructions specifically provide that operators include "all annual operating expenses ... for installation and maintenance of all cable facilities" on Schedule B. Moreover, the instructions for completing Schedule B expressly refer to operating expenses incurred to maintain and install customer equipment. The Form 1205 instructions indicate that TCI should include the labor costs of installing and retrieving converters on Schedule B rather than on Schedule C. Such costs are included in installation charges or in the maintenance element of the equipment lease charges. 13. Second, TCI has not refuted the City's claim that the inventory management costs have already been accounted for in Schedule B. An operator may capitalize and include on Schedule C its inventory costs that are incidental to equipment purchase costs and that it incurred before providing the equipment to subscribers. It may not account for them twice, however. Pursuant to Sections 76.923(f) and (g) of the Commission's rules, capitalized equipment charges include the "acquisition price and incidental costs such as sales tax, financing, and storage up to the time [the converter] is provided to the customer. This list is not exhaustive. The capitalization allowance conforms with generally accepted accounting principles ("GAAP"), which state that it is proper to capitalize costs incurred in storing or handling goods before they are sold. Yet TCI has not taken this position. Significantly, TCI has failed to refute the City's claim that the inventory management costs have already been accounted for in Schedule B. 14. Third, TCI has not supported capitalizing certain material costs associated with its converters (i.e., cable jumpers, fittings, etc.). Materials and supplies associated with equipment installations may be capitalized, but an operator must establish a separate charge for them, and the materials cannot be part of the operator's network equipment. When an operator has capitalized material and supplies as part of the converter cost, it is proper to include the costs on Schedule C and recover them in the converter lease charge. Alternatively, when an operator expenses incidental material and supplies, it may include the costs on Schedule B and recover them in installation charges or in the maintenance element of the appropriate lease charge. The accounting treatment, under GAAP, would determine which schedule an operator uses. If Schedule C is appropriate, the accounting rules determine the asset group in which it is included. If an operator capitalizes certain converter installation materials and supplies in the converter account, it would be proper to report the costs on Schedule C for converters. It is unclear from the record in this case, however, where TCI has recorded the materials and supplies in question. It appears that the costs involved either are not capitalized or have been capitalized in accounts for equipment for which TCI has not established a separate regulated charge. In either case, we find nothing in the record to demonstrate that they may be included with the converter costs on Schedule C and, therefore, find that the City did not act unreasonably in denying capitalization. TCI's appeal on this issue is denied. 2. Unfunded Deferred Taxes 15. Form 1205 requires an operator to reduce its ratebase by the amount of any deferred taxes it accrues from the accelerated depreciation of equipment. 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. 16. 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. 17. In its 1996-97 Appeal, TCI states that it complied with the Form 1205 requirement to reduce its initial equipment rate by its existing deferred taxes. According to TCI, the dispute in this case concerns allegedly "unfunded" deferred taxes that it accrued before cable rate regulation began in 1993. TCI 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, TCI states that it collected only the money needed to pay its actual tax liability at the time. TCI's so-called unfunded deferred tax balance represents the difference between TCI'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. 18. TCI argues that, until recently, the Commission did not allow operators to recover their unfunded, pre-regulatory deferred taxes. Because the Commission provided no guidance, TCI states that it has treated the unfunded balance as an asset and amortized it. This amortization is reflected in TCI'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 1996-97 Opposition, asserts that TCI may not apply its own rate-setting theories if they conflict with the Commission's methods. TCI 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. 19. Initially, the Commission required operators to reduce the regulated rate base by the total deferred taxes associated with the rate base investment. Subsequently, it 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 it first required was "premised on the regulatory presumption that rates reflect the operator's use of straight-line depreciation," the Commission concluded that the presumption could not have existed in the absence of rate regulation. Accordingly, it modified the 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. As noted, 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 to preclude a double recovery. 20. An operator may apply this modified approach only in rate filings subsequent to the effective date of the modification in 1996. Furthermore, an operator may not be compensated for the difference between its actual costs recoveries and those it would have derived if the modified methodology applied from the beginning of the current regulatory regime. Although superficially appealing, such an approach overlooks a crucial factor. As a consequence of the unbundling methodologies reflected in Forms 393 and 1200, used to establish benchmark rates, any perceived shortfalls in an operator's recovery of its equipment costs were equally offset by overages derived from its regulated services tier revenues. An operator has already been made whole for any of the previous costs and may not recover them a second time. An operator's regulated revenue in the aggregate would have been identical under either application of the deferred tax formulae. The Commission's initial treatment of deferred taxes was consistent with generally accepted accounting principles, particularly with FASB Number 96, and was not, therefore, in error. The Commission's subsequent decision to modify its treatment of deferred taxes without revisiting the initial unbundling was of economic benefit to cable operators, but such action does not confer any right to benefit from this decision retroactively or after the onset of regulation. 21. The City applied our rules correctly and, therefore, ruled reasonably when it rejected TCI's attempt to recover deferred taxes as an amortized expense. Our rules do not provide the remedy TCI seeks. The local rate appeal process is not the forum for TCI to seek modification of our rules. In addition, TCI's depreciation practices and rate design methods prior to rate regulation were matters within TCI's control and discretion. It allocated its costs and determined what to collect from subscribers. The treatment TCI seeks for the allegedly unfunded deferred tax liability would allow it to recover for future tax liability without adjusting its rate base. On this record, we find that TCI has neither sustained its burden of demonstrating the reasonableness of its rates on this point nor demonstrated that the City acted inconsistently with the Commission's rules. TCI's appeal on this issue is denied. 3. Aggregation of Equipment and Installation Costs 22. The Commission's rules before the Telecommunications Act of 1996 ("1996 Act") allowed cable operators to aggregate costs on a franchise, system, regional, or company level, consistent with the operator's accounting practices in effect when the Commission adopted its rate regulations in April 1993. The 1996 Act eliminated the restriction on changes in an operator's accounting practices, allowing an operator to change the level at which it aggregates its costs. The 1996 Act also allows operators to aggregate costs into broad categories, such as converter boxes, regardless of the varying levels of functionality of equipment within each category. The costs of customer equipment used by subscribers taking only the basic service tier may not be included in the aggregation. The 1996 Act did not change the requirement that the cable operator's rates must be based on actual cost. 23. A cable operator submitting aggregated equipment costs "must provide a general description of the averaging methodology employed and a justification that its averaging methodology produces reasonable equipment rates." The operator must aggregate installation costs at the same level it aggregates equipment costs, and also make a showing of its methodology and that the methodology produces reasonable rates when submitting installation costs based on average charges. Equipment and installation rates must be set at the same organizational level at which an operator aggregates its costs. 24. In both 1997 and 1998, TCI sought to determine company-wide equipment and installation costs by sampling 40 of its more than 430 cable systems, and it developed company-wide rates from these sampled costs. The City rejected TCI's rates and, in its 1997-98 and 1998-99 Rate Orders, prescribed the rates earlier prescribed in its 1996-97 Rate Order. The City does not argue with the concept of rate aggregation, but contends that TCI has failed to sufficiently demonstrate how its sampling methodology worked, whether it was used properly, and if the "costs" produced under this approach justified the rates proposed for Richardson. According to the City, TCI persisted in hiding probative information, despite several requests for further explanation. The City claims it could not make an independent determination of whether TCI's rates were reasonable and, therefore, could only turn to TCI's 1996-97 equipment rates for guidance. The City was also concerned about the magnitude of the HSC rate increases each year. In Executive Summaries, the City's staff characterizes these increases as 64% the first year and a total of 95% over two years. 25. TCI asks that we reject these rate orders. In its Appeals, the operator argues that it provided prompt and detailed responses to the City's requests for additional information, and specifically notes a professionally-prepared explanation of its sampling methodology. TCI argues that the City's Rate Order lacks a rational basis, because the City cannot simply discard TCI's national rates in favor of earlier local rates computed from local data. TCI also states that the City may not reject the proposed rates simply because they are significantly higher than previous rates. Ultimately, TCI charges, the City failed to identify specifically what proof was lacking, and has established a burden of proof so high that TCI can never prove that its cost aggregation and resulting rates are reasonable. 26. The Commission's rules allows a cable operator to collect or gather cost information at the level of its choosing, and requires that the operator set prices at the same level at which it aggregates its costs. TCI seeks to set prices at the company level, but it has not shown that it collects or gathers cost data at that level. Indeed, its reliance on a statistical sample rather than actual cost information suggests that it does not aggregate cost data at the company level. TCI has invited the City to review costs for the sampled systems, but this is not a substitute for aggregating costs under Sections 76.923(c)(1) and (3), and making that aggregated cost information available for meaningful review. 27. An operator must demonstrate, as part of its justification, a reasonable premise of how it has aggregated costs at the level it has chosen. An operator must make this demonstration whether it uses a sampling approach or actual data. In the record before us, TCI has not provided sufficient information for determining whether its national sampling is accurate. It has not demonstrated that its proposed aggregation average accurately reflects actual cost data. Nor has TCI identified what costs it aggregated so that the City can better understand how TCI computed the averages used to determine rates. 28. Although TCI offered to make the costs of some sampled systems available to the City, asking the City to select a system or systems to review, it has not submitted sufficient information to assure the City that the cost experience or costing methodology it used represents a fair determination across its systems. Commission rules do not place the burden of determining the costs for the sampled systems on the City. The City has no way of ascertaining the kinds of costs that went into the TCI's sampling average. If the City reviews only one sampled system, as it did for TCI's Baton Rouge system, it can not be confident that it has identified the kinds of costs TCI is recovering in its rates. For example, the Baton Rouge costs included a new dispatch system not used in Richardson. An operator must not only provide support for the methodology used, but must demonstrate that the methodology is capable of accurately reflecting proper cost aggregation. 29. TCI also has not met its burden of justifying how its averaging methodology produces reasonable equipment and installation rates. Although, as TCI argues, increases over past rates do not make rates unreasonable, increases of the magnitude of the Richardson installation rate increases raise a question. In its notice soliciting comments on equipment cost aggregation, the Commission tentatively concluded that equipment charges would not vary significantly between systems, although installation charges would vary because of local labor cost variations. In its 1996 comments advocating the aggregation of installation costs, TCI assured the Commission that using its then highest hourly service charge ("HSC") of $34 and lowest HSC of $16 to calculate a uniform HSC at the company level would only change converter prices an average of plus or minus $0.10 and increase the rate of an initial installation by approximately $4.50, at most. 30. TCI's sampling methodology has produced very different results in Richardson. TCI's Richardson HSC has gone from $19.30 in its 1996-97 rates (before the downward adjustment ordered by the City) to $30.18 in its 1997-98 rates to $35.90 in its 1998-99 rates. Its charge for installation in an unwired home has increased from $28.96 (before the downward adjustment ordered by the City) to $47.30 to $53.16. Before a cable operator can meet the reasonableness requirement, it must show that its averaging methodology produces rates that are revenue neutral to the operator and accounts for any large variances in cost characteristics among its systems. It also must show that the included costs are permissible and properly treated in Form 1205. TCI has not done so in this case and has not met its burden of justifying its equipment and installation rates. The City did not act unreasonably when rejecting TCI's equipment and installation rates and prescribing rates based on the best available information. TCI's appeals on this issue are denied. B. FORM 1240 BASIC SERVICE RATES 1. External Cost Treatment of Franchise Requirements 31. Under Commission rules, cable operators may pass through the costs of some franchise requirements to their subscribers as external costs. When determining which franchise requirements are recoverable as external costs, the Commission asks whether they are specifically enumerated in the franchise agreement, and whether they produce costs that an operator would not have incurred without a franchise requirement. The Commission has declined to extend external cost treatment to all possible circumstances. For example, the mere presence of a franchise requirement does not automatically result in a right to recover its cost as an external cost. Also, a cable operator's control over the cost of a franchise requirement is not an exclusive criterion for granting external cost treatment. The Commission has outlined some specific situations where franchise requirements are and are not recoverable as external costs. For example, upgrades and rebuilds, even if mandatory, are not recoverable as franchise costs. In contrast, consistent with the Commission's rules governing external costs, an operator may pass through increases in the costs of meeting technical and customer service standards, to the extent they exceed federal standards; removing aerial facilities from poles and placing them underground; providing video, voice, and data transmission to or from governmental and educational institutions; and providing PEG access channels and programming. 32. In its three Form 1240 rate filings, TCI included in its rates an incremental increase in payments to the City's community access fund that occurred after TCI became subject to rate regulation. TCI contributes to the community access fund under a franchise agreement that pre-dates rate regulation. In the fifth year of the franchise, TCI's annual obligation rose from $100,000 to $125,000, and in the twelfth year it will rise to $150,000. TCI has sought to recover the additional $25,000. TCI argues that it may recover the cost increase under the Commission's Thirteenth Reconsideration, which states that increased franchise costs eligible for "pass through" to subscribers "include both new requirements that the franchising authority imposes and increases in the costs of complying with existing requirements." The City counters that the increases in costs are part of the original franchise agreement and are not new to TCI. The City cites the Cable Services Bureau's decision in Falcon Cablevision, where the operator sought to pass through the costs of a pre-rate regulation franchise requirement to its subscribers. In that decision, the Bureau upheld the LFA's decision to deny recovery, stating that "costs associated with an obligation incurred prior to [rate regulation] should not be accorded pass-through treatment." The City contends that TCI should have included the entire costs of the community access payment in its benchmark rate -- both the original $100,000 and the $25,000 incremental increase -- and asserts that TCI has failed to prove that the costs were not included. TCI acknowledges that it agreed to the access support obligation before rate regulation, but insists that it had not incurred the incremental increases when regulation began and did not include them in the original rate base. 33. TCI may recover the incremental increases in its community access fund obligation. The Thirteenth Reconsideration is controlling: [O]perators should be permitted to include increases in franchise requirement costs that the operator would not have incurred in the absence of the franchise requirement. Such increases include both new requirements that the franchise authority imposes and increases in the costs of complying with existing requirements. The City argues that an operator may not recover the costs of franchise requirements that existed before rate regulation began., and cites Falcon Cablevision and the Commission's Rate Order for support. The Rate Order prohibits external cost treatment of pre-regulation changes in costs, but it does not address changes in those costs after rate regulation begins. Falcon Cablevision offers no additional support to the City's arguments. In that case, the operator sought to pass through the total amortized cost of a pre-rate regulation requirement, not merely an increase in costs, in order to avoid existing rate caps. In this case, TCI is not seeking to pass through, for the first time, any of the "base" community access payment of $100,000. Instead, it is seeking to recover only the recent incremental increase of $25,000 in its annual payment. In an analogous situation, the Commission has stated that increases in state and local taxes applicable to cable service are external costs that an operator may pass through to subscribers. 34. The benchmarks used to set operators' initial rates when rate regulation began were based on the results of the Commission's 1992 price survey. The survey collected information about prior actual franchise costs, but did not collect information about anticipated future increases in franchise costs. Future increases in costs, including community access costs, were not built into the benchmarks. The Commission addressed increases in external costs through its price cap mechanism, reflected in FCC Forms 1210 and 1240. Although the City argues that TCI has not demonstrated that the post-regulation incremental increase was excluded from its rate base, TCI correctly responds that the Commission's benchmark system for setting rates does not contemplate any retroactive justification of pre-regulation rates. TCI is entitled to use the Commission's price cap mechanism governing external cost increases to recover the increases in its franchise- required community access payments, regardless of the date the franchise took effect. The City's determination that these costs are not recoverable is, therefore, an unreasonable application of Commission rules. We grant TCI's appeals on this issue. 2. Gap Period a. Background 35. A cable operator using FCC Form 1240 sets rates by projecting expected changes in external costs, inflation, and channels and by correcting for differences between past projections and actual costs. The projected rates are adjusted to account for overestimations or underestimations in past rates. A cable operator using the quarterly rate adjustment system bases rate changes on past costs, so it does not include cost projections in its rates. A cable operator that switches from the quarterly rate adjustment method to the annual rate adjustment method may not have actual cost data for costs incurred up to the first annual adjustment and, therefore, could experience a delay in recovering those costs until it implements rates after its second annual Form 1240 filing. Because of concern that this delay would create a disincentive for operators to begin using the annual rate adjustment methodology, the Cable Services Bureau granted TCI a one-time waiver that allowed it to estimate costs for the period before and after its new annual rates were to become effective. Importantly, this waiver only applied to TCI's first Form 1240 filing. Specifically, an operator's initial Form 1240 filing may include projected changes in costs, inflation, channels, and subscriber information attributable to the period between the last full month for which cost data is available and the effective date of the new rates. An operator must include with its projections a separate calculation and explanation of the basis for these projected costs. Because this "gap period" waiver resulted in two projected periods in TCI's first Form 1240 filings, TCI was required to true up the gap period as well as the standard projected period when making its second filing on Form 1240. b. Discussion 36. In its 1997-98 Rate Order, the City stated that TCI failed to account for some "gap" period adjustments, originating in its first Form 1240 filing, when it made its second Form 1240 filing. The adjustments relate to the calculation of the base rate in Module D of Form 1240. A proper calculation of the base rate is especially important because an operator uses the base rate to build its true-up and projected period MPRs. TCI defends its calculation by citing a January 9, 1997 letter from the Chief of the Cable Services Bureau that expressly approved TCI's methodology. The City agrees that TCI's calculations are consistent with the letter, but states that TCI's gap adjustments were simply incomplete, because TCI did not carry the adjustments throughout the rate form. Specifically, the City states that when TCI calculated its base rate, it did not correctly calculate the base rate in Module D, which determines TCI's current true-up segment, and it miscalculated an inflation adjustment. 37. In most situations, an operator performs a true-up only for its previous rate period. It uses the resulting true-up figure, recorded on Line I8 of Form 1240, to calculate its MPR for the projected rate period. In its next rate filing, an operator will enter the same Line I8 true-up figure on Line D6 to calculate the base rate. However, when an operator calculates a true-up figure for both the gap period and the projected period, as described above, Line I8 is not sufficient to calculate the base rate by itself. An operator must also use the gap period figure from its gap period calculation. The City found that TCI did not include the gap period figure in Module D of Form 1240, which is used to calculate the base rate. This omission results in an overstatement of TCI's base rate. The City also found that TCI improperly deducted inflation adjustments,which were not included in the previous MPR, from the gap period. According to the City, the total effect of adjustments to the gap period calculations results in a $.28 reduction in TCI's requested 1997- 1998 MPR. 38. TCI argues that it relied on a letter from the Bureau approving its methodology. The City did not act inconsistently with that letter when it carried the approved adjustments through the form. The City acted consistently with Bureau adjudications involving CPST rate complaints that considered the January 9, 1997 letter. Operators have an obligation to complete their rate forms so that accurate and reasonable rates result. We agree with the City that TCI's rate filing did not properly carry the adjustment through the form, and conclude that the City did not act unreasonably in adjusting TCI gap period calculations. We uphold the City's decision and deny this aspect of TCI's appeal. 3. Starting Rate for TCI's 1997-98 and 1998-99 Forms 1240 39. The starting point for computing a cable operator's annual rate adjustment on Form 1240 is the operator's current maximum permitted rate, which it enters on line A1 of Form 1240. The cable operator then adjusts its current MPR to true up past projections with actual cost data and reflect projected costs for the next year. New permitted cable rates are therefore computed from past permitted rates. The higher the starting MPR used in the computation, the higher the new maximum permitted rate will be. 40. In this case, where past rates are unresolved, TCI argues that it should be able to implement rate adjustments on the basis of its proposed rates, rather than the City's prescribed rates while its appeals of the City's rate orders are pending. In its 1996-97 Rate Order, the City rejected TCI's proposed 1996-97 MPR. TCI's appeal of that rate order remained unresolved when TCI made its 1997-98 rate filing. Because of this, the 1996-97 MPR that TCI needed to use as a starting rate for its 1997-98 Form 1240 was in dispute when TCI filed that form. Likewise, in its 1997-98 Rate Order, the City rejected TCI's proposed 1997-98 MPR. TCI appealed that rate order, which also remained unresolved and resulted in a dispute over which starting rate to use in TCI's 1998-99 rate filing. The City argues that TCI may not use a starting rate for 1997- 98 that is based on the 1996-97 MPR, because the City has found the 1996-97 MPR to be unreasonable. Similarly, the City argues that TCI may not use a starting rate for 1998-99 that is based on the 1997-98 MPR, because the City has found the 1997-98 MPR to be unreasonable. TCI responds that, as long as its appeals are pending before the Commission, TCI should be allowed to use its calculation of the 1996-97 MPR as the 1997-98 starting rate and the calculation of the 1997-98 MPR as the 1998-99 starting rate. TCI notes that if it loses its appeals and has to reduce its MPRs, subscribers will be protected because they will receive prospective rate reductions and refunds of the overcharges. In contrast, TCI argues that if it had not increased its rates and it prevails on appeal, then it will not realistically be able to recover the lost revenue, even though it has a right to recover that revenue under Commission rules. 41. TCI improperly ignored the City's three rate orders. When the Commission developed the annual rate adjustment methodology in the Thirteenth Reconsideration, it established several definitive deadlines for the rate filing and approval process by the LFA. These deadlines determine the appropriate starting rate for later filings and the operator's authority to implement new rates. An operator that wishes to make rate adjustments must file the appropriate forms at least 90 days before it plans to implement its proposed rates. When it makes a rate filing, an operator is not informing the franchising authority that it will increase rates, but is asking the franchising authority's permission to raise rates. An LFA does not have an unlimited time, however. If an LFA has taken no action within 90 days of an operator's rate filing, then Commission rules permit the operator to implement its rates as proposed. The LFA may subsequently issue a rate order rejecting the proposed rates and, if the order was adopted within twelve months of the rate filing, may require a prospective rate reduction and refund. If the LFA waits longer than twelve months, however, it loses its right to order a reduction or refund. In any case, an operator is not free to ignore an LFA's rate order, whether that order is issued within the 90-day review period or after it. An operator's appeal of an LFA's rate order does not stay that order. The Commission may grant a stay request or the LFA may consent to a stay. Neither happened here, and TCI should have complied with the City's rate orders when issued and when computing subsequent rate adjustments. 42. TCI should have recalculated and resubmitted its Forms 1205 and Forms 1240 after the City issued its 1996-97 and 1997-98 Rate Orders. TCI should have implemented the revised rates, subject to the City's right to review them, without waiting for the resolution of its appeals. Further, TCI should not have implemented its 1998-99 rates, because the City issued its 1998-99 Rate Order before the 90-day review period expired. The Commission's rules are unequivocal: "Operators may implement rate changes proposed in their filings 90 days after they file unless the franchising authority rejects the proposed rate." In this case, because we have granted part of TCI's appeals, its MPRs will be recalculated and it may add any lost revenue back into the rates at that time. Accordingly, we are ordering TCI to revise and re-file its rate forms with the City and, subject to the City's right to review the rate filings, require TCI to implement revised rates to reflect the rulings discussed herein within 60 days of the effective date of this Order. IV. ORDERING CLAUSES 43. Accordingly, IT IS ORDERED that the appeals by TCI of Richardson, Inc., ARE GRANTED with respect to the community access charge and otherwise DENIED. 44. IT IS FURTHER ORDERED that this case IS REMANDED to the City for proceedings consistent with this Memorandum Opinion and Order. 45. IT IS FURTHER ORDERED that within 60 days of the effective date of this Order, TCI IS DIRECTED to revise and re-file its basic service tier rate forms with the City and, subject to the City's right to review the rate filings, implement revised rates to reflect the rulings discussed herein. 46. IT IS FURTHER ORDERED that the City's Motion for Extension of Time to file its 1996- 97 Opposition IS GRANTED. 47. This action is taken by the Deputy Chief, Cable Services Bureau, pursuant to authority delegated by  0.321 of the Commission's rules. FEDERAL COMMUNICATIONS COMMISSION John E. Logan Acting Chief, Cable Services Bureau