******************************************************** 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 ) CUID Nos. HI0042 (Princeville-Hanalei) ) HI0044 (Kekaha) Kauai Cablevision, L.P. ) HI0045 (Waimea) ) HI0046 (Hanapepe) Complaints Regarding ) HI0047 (Eleele) Cable Programming Services Tier Rates ) HI0048 (Kalaheo) and Petition for Reconsideration ) HI0049 (Lawai) ) HI0050 (Omao) ) HI0051 (Koloa) ) HI0052 (Wailau Homesteads) ) HI0053 (Anahola) ) HI0054 (Kilauea) ) HI0055 (Hanalei) ) HI0076 (Haena) ) HI0077 (Wainiha) ) HI0094 (Kaumakani) ) HI0095 (Makaweli) ) HI0098 (Barking Sands) ORDER ON RECONSIDERATION AND RATE ORDER Adopted: December 8, 1998 Released: December 11, 1998 By the Deputy Chief, Cable Services Bureau: 1. In this Order we consider complaints against the rates that the above-captioned operator ("Operator") was charging for its cable programming services tier ("CPST") in the communities referenced above. We have already released an order ("Prior Order") that found that Operator's CPST rates, effective September 1, 1993 through May 14, 1994, were reasonable. The local franchising authority ("LFA") for the communities referenced above filed a petition for reconsideration ("Petition") of the Prior Order on April 25, 1995. Operator filed an opposition to the Petition on May 3, 1995. Operator has also filed FCC Form 1220 (Cost of Service) to justify its rates beginning May 15, 1994, as well as an FCC Form 1230. The LFA has also filed a petition for special relief requesting that we review the FCC Form 1220 concerning the rates for Operator's basic service tier ("BST"). In this Order we consider the Petition as well as Operator's FCC Form 1220 and FCC Form 1230 as justification for Operator's CPST rates, effective May 15, 1994. We also review the FCC Form 1220 as justification for Operator's BST rates. 2. Under the Communications Act, the Federal Communications Commission ("Commission") is authorized to review the CPST rates of cable systems not subject to effective competition to ensure that rates charged are not unreasonable. The Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act"), and our rules in effect at the time the complaints were filed, required the Commission to review CPST rates upon the filing of a valid complaint by a subscriber. The filing of a valid complaint triggers an obligation on behalf of the cable operator to file a justification of its CPST rates. If the Commission finds the rate to be unreasonable, it shall determine the correct rate and any refund liability. 3. The Commission's original rate regulations took effect on September 1, 1993. The Commission subsequently revised its rate regulations effective May 15, 1994. Cable operators with valid CPST complaints filed against them prior to May 15, 1994 must demonstrate that their CPST rates were in compliance with the Commission's initial rules from the time the complaint was filed through May 14, 1994, and that their rates were in compliance with the revised rules from May 15, 1994 forward. Cable operators attempting to justify their rates for the period prior to May 15, 1994 using a benchmark showing must complete and file FCC Form 393. Operators may use the FCC Form 1200 series to justify their rates for the period beginning May 15, 1994 using a benchmark showing. Cable Operators may also use FCC Form 1220 to justify their rates using a cost of service showing. Cable operators may also justify rate increases based on the addition and deletion of channels, changes in certain external costs, and inflation, by filing FCC Form 1210. FCC Form 1210 must be filed at least 30 days before new rates are scheduled to go into effect where the Commission has found the cable programming service rate to be unreasonable less than one year prior to the filing, or where there is a pending complaint against the CPST rate. 4. We first address the LFA's Petition. The LFA states that Operator did not correctly calculate its maximum permitted rate ("MPR") on its FCC Form 393. Specifically, the LFA states that Operator used outdated data rather than current data on Line 104 (Equipment Revenue Per Month). Consequently, the LFA contends that the Commission erred in not adjusting Line 104 to equal the equipment cost amount on Line 301 (Equipment and Installation Costs (Monthly)). Operator contends that the adjustment should not be made but, even if it is made, the CPST rate charged at that time would not be greater than the revised MPR, resulting in no refund liability. The Commission has determined that for systems filing FCC Forms 393, that restructured their rates as of September 1, 1993, Line 104 should be the same, or nearly the same as Line 301. Therefore, we revised Operator's FCC Form 393 so that Line 104 corresponded to Line 301. This resulted in a revised MPR of $10.08 rather than the previous MPR of $10.60. Because Operator was actually charging $9.12 during the period between September 1, 1993 and May 14, 1994, we find that Operator's rates were reasonable. We therefore grant the LFA's Petition and vacate our Prior Order regarding the Line 104 adjustment, but we affirm our prior finding of no refund liability concerning Operator's CPST rates in the communities referenced above. 5. We now review Operator's FCC Form 1220, filed to justify both its BST and CPST rates, beginning May 15, 1994. Upon review of Operator's FCC Form 1220 we eliminated the plant under construction amount claimed and the allowance for funds used during construction ("AFUDC"). This adjustment was made because at the time of the filing, the plant under construction claimed was not used and useful for subscriber benefit. Such an adjustment accords with the Commission's Final Cost Order. At paragraph 32, the Final Cost Order states, "for valuating plant under construction for rate base purposes, we adopted the capitalization method. Thus, an operator must exclude plant under construction from the rate base, but may calculate an allowance for funds used during construction (AFUDC) and include this allowance in the cost of construction. AFUDC is accrued at a rate based on the actual cost of debt. As construction is completed and plant placed into service, the costs of construction, including AFUDC, is included in the rate base and recovered through depreciation." 6. In paragraph 75 of the Final Cost Order, the Commission adopted a methodology to exclude that portion of the acquisition price of cable system assets that represent amounts paid for the system in expectation of monopoly profits. Under the methodology, a 34% adjustment would be made to the purchase price a cable operator paid for cable assets (including both tangible and intangible assets) with the result that some portion of the assets would be excluded from the rate base. We adjusted Operator's FCC Form 1220 accordingly. Finally, we adjusted Worksheet D (Calculation of the Rate Base Interest Expense). Operator reported synchronized interest expenses presuming a hypothetical capital structure of 55 percent debt/ 45 percent equity and an 8.5 percent cost of debt. The interest was calculated based on what Operator's believed to be its justified revenue requirement on the regulated tiers. However, consistent with our recalculations of Operator's allowable tier revenue requirement, we have recalculated its synchronized interest expenses. 7. Our adjustments resulted in an MPR for BST in Princeville-Hanalei (HI0042) of $8.71. Therefore, we find Operator's BST rate in Princeville-Hanalei, of $7.17, to be reasonable. Our adjustments resulted in an MPR for BST, in all of the other communities listed above, of $10.67. Therefore, we find Operator's BST rate of $8.08, in all of the other communities listed above, to be reasonable. Our adjustments also resulted in an MPR for CPST in Princeville-Hanalei of $21.42. Because Operator's actual CPST rate, effective May 15, 1994 in Princeville-Hanalei, of $15.08 did not exceed its revised MPR, we find that Operator's actual CPST rate, effective May 15, 1994, to be reasonable. Further, our adjustments resulted in an MPR for CPST in all of the other communities listed above of $18.13. Because Operator's actual CPST rate, effective May 15, 1994 in all of the communities listed above, of $9.12 did not exceed its revised MPR, we find that Operator's actual CPST rate, effective May 15, 1994, to be reasonable. 8. On July 18, 1997, the Commission received notification of a change in ownership from Kauai Cablevision, L.P. to G Force L.L.C. d/b/a Garden Isle Telecommunications ("G Force"). On June 11, 1998, G Force filed FCC Form 1230 for the communities referenced above seeking to justify its CPST rates through the simplified small system cost of service procedures pursuant to the Federal Communications Commission's Sixth Report and Order and Eleventh Order on Reconsideration ("Small Systems Order"). 9. In an effort to offer small cable companies administrative relief from rate regulation, the Commission amended the definition of small cable companies and small systems and introduced a simplified form of small system rate relief in the Small Systems Order. Operators attempting to justify their rates through small system relief must file FCC Form 1230. FCC Form 1230 requires that the Operator selected Per Subscriber Monthly Programming Rate Per Channel (FCC Form 1230, Line A11) not exceed the Per Subscriber, Per Channel Monthly Programming Costs (FCC Form 1230, Line A6). If the maximum rate established on FCC Form 1230 does not exceed $1.24 per channel, the rate shall be presumed reasonable. Cable systems serving 15,000 or fewer subscribers, and owned by a company having 400,000 or fewer subscribers, may elect to use the small system rate mechanism found in FCC Form 1230 in lieu of other Commission rate processes, provided the commission has not reached a final resolution on the rate complaints filed against the system. 10. Operator asserts that it is a Company with fewer than 400,000 total subscribers and the system in question serves less than 15,000 subscribers, making it eligible for small system relief. Upon review of Operator's FCC Form 1230 we find that Operator has justified its CPST rates. Pursuant to Section 76.934 of the Commission's rules, "the size of a system or company shall be determined by reference to system or company size as of the effective date [of these rules]." The Small Systems Order provides that: A system's initial and continued eligibility for this new form of relief shall be determined in the same manner as any other relief now available to them. Thus, if a system qualifies for relief under this approach as of the effective date of this order or as of the date it files Form 1230, it shall remain eligible for so long as it serves 15,000 or fewer subscribers, regardless of whether it, or the cable operator that owns the system, is subsequently acquired by a company that exceeds the 400,000 subscriber limit, or if its current operator subsequently exceeds 400,000 subscribers due to the normal growth of its systems. When a system that has established rates in accordance with Form 1230 exceeds 15,000 subscribers, the system may maintain its then existing rates. However, any further adjustments shall not reflect increases in external costs, inflation or channel additions until the system has re-established initial permitted rates in accordance with our benchmark or cost-of-service rules. Small Systems Order at  73. 11. In addition, the Small Systems Order provides that "[o]nce the operator has established rates at a level permitted by Form 1230, it may increase rates thereafter at its discretion until it reaches the maximum level permitted by the form, subject only to the 30 days' notice requirement." The Small Systems Order explains that "[a]s long as the actual rate does not exceed the maximum permitted rate, the operator may adjust its actual rate as and when it desires, subject to the notice requirement. In addition, at any time an operator may adjust its maximum permitted rate simply by filing a new Form 1230." 12. We find that as of June 11, 1998, Operator was a company with fewer than 400,000 total subscribers and that the system in question served fewer than 15,000 subscribers, thereby making it eligible for small system relief. Further, Operator's filings show that the Operator Selected Per Subscriber Monthly Programming Rate Per Channel (FCC Form 1230, Line A11) does not exceed $1.24 per channel. We, therefore, find that Operator's actual CPST rate of $15.37, is reasonable. 13. Accordingly, IT IS ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R. Section 0.321, that Operator's request for small system relief, for the system in the communities referenced above, IS GRANTED. 14. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R. Section 0.321, that the monthly BST rates of $7.17 and $8.08 charged by Operator in the communities referenced above ARE REASONABLE. 15. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R. Section 0.321, that the monthly CPST rates charged by Operator in the communities referenced above ARE REASONABLE. 16. IT IS FURTHER ORDERED, pursuant to Section 1.106 of the Commission's rules, 47 C.F.R. Section 1.106, that the Petition for Reconsideration filed on April 25, 1995, by the State of Hawaii, IS GRANTED to the extent indicated herein and that In The Matter of Kauai Cablevision, L.P., 10 FCC Rcd 4360 (1995) IS VACATED to the extent indicated herein. 17. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R. Section 0.321, that the complaints against the monthly CPST rate charged by Operator during the period under review in the communities referenced above ARE DENIED. 18. IT IS FURTHER ORDERED, pursuant to Section 76.933(d) of the Commission's rules, 47 C.F.R. Section 76.933(d), that this ruling on the FCC Form 1220, concerning the BST rates charged by Operator in the communities referenced above, is binding upon the Operator and the local franchising authority. FEDERAL COMMUNICATIONS COMMISSION William H. Johnson Deputy Chief, Cable Services Bureau