******************************************************** 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. CA0680 (Los Osos) ) CA0706 (Garden Farms) Falcon Cable Systems Company ) CA0707 (Santa Margarita) ) CA0709 (Cambria) Complaints Regarding ) CA0927 (Templeton) Cable Programming Services Tier Rates ) and ) Petition for Reconsideration ) ORDER ON RECONSIDERATION and RATE ORDER Adopted: December 16, 1998 Released: December 17, 1998 By the Deputy Chief, Cable Services Bureau: 1. In this Order we consider complaints against the August 1, 1998 rate increase of the above- referenced operator ("Operator") for its cable programming services tier ("CPST") in four of the communities referenced above. In response to the complaints, Operator filed FCC Form 1235. We have already issued a rate order concerning Operator's prior CPST rates ("Prior Order"). On July 21, 1997, Operator filed a petition for reconsideration of our Prior Order ("Petition"). In this Order we will consider Operator's Petition as well as the above-referenced complaints. 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 Telecommunications Act of 1996 ("1996 Act") and our rules implementing the legislation ("Interim Rules"), require that a complaint against the CPST rate be filed with the Commission by a local franchising authority ("LFA") that has received more than one subscriber complaint. 3. The LFA for the franchise areas referenced above filed complaints with the Commission on September 18, 1998 against Operator's August 1, 1998 CPST rate increase from $9.32 to $10.32. The LFA verified that it received more than one subscriber complaint for each franchise area and that the first valid complaints were received by the LFA on the dates listed in the attached Appendix. The filing of a complete and timely complaint triggers an obligation upon the cable operator to file a justification of its CPST rates. The Operator has the burden of demonstrating that the CPST rates complained about are reasonable. If the Commission finds a rate to be unreasonable, it shall determine the correct rate and any refund liability. 4. To justify rates for the period beginning May 15, 1994, operators must use the FCC Form 1200 series. Operators are permitted to make changes to their rates on a quarterly basis using FCC Form 1210. Operators may adjust their rates on an annual basis using FCC Form 1240. Additionally, an Operator may file an FCC Form 1235 (Abbreviated Cost of Service Filing for Cable Network Upgrades). The FCC Form 1235 allows cable operators to justify rate increases related to significant capital expenditures used to improve rate-regulated services. This option is extended only in cases of significant upgrades requiring added capital investment, such as bandwidth capacity and conversion to fiber optics, and for system rebuilds. Normal improvements and expansions of service remain subject to the usual rate adjustments allowed by filing FCC Form 1210s, 1220s and 1240s. Cable operators that incur increases in operating costs associated with a significant network upgrade will be permitted to charge additional rates as justified by their FCC Form 1235 filing. 5. In our Prior Order, we adjusted Line A2 (Permitted Charge) on Operator's FCC Form 1210 for the period January 1, 1995 to December 31, 1995 ("1995 Form 1210") to reflect the maximum permitted rate ("MPR") as calculated on its preceding FCC Form 1210. In its Petition, Operator argues that it should have been allowed to file the 1995 Form 1210 as an unregulated operator, using its actual CPST rate, in effect prior to the rate increase complained about, as its Permitted Charge on Line A2. An operator may file an FCC Form 1210 rather than the FCC Form 1240 to update an actual CPST rate in accordance with Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation, Thirteenth Order on Reconsideration, MM Docket No. 92-266 ("Thirteenth Reconsideration Order") so long as the changes contemplated by the Thirteenth Reconsideration Order and included in the instructions for first-time filers using the annual rate adjustment methodology are incorporated in the FCC Form 1210 filing. Any such filing made using an FCC Form 1210 must include a detailed explanation by the operator explaining why its use of the FCC Form 1210 conforms with the instructions for the FCC Form 1240. 6. An unregulated operator may file an FCC Form 1210 or an FCC Form 1240, but cannot file multiple forms to update an actual CPST rate. Operator could have filed its FCC Form 1240 using its actual CPST rate of $7.95 on Line A1 and we would have reviewed only the rate increase, so long as Operator was not currently regulated. However, in this case, the results would be a lower MPR than the $9.32 approved in our Prior Order. We do not permit Operator to use an actual CPST rate, which in this case was higher than its own calculated MPR, as the Permitted Charge on Line A2 of an FCC Form 1210 and then update that rate using multiple filings. We will deny that part of Operator's Petition. 7. In its Petition, Operator also argues that its entry on Line C1 (Inflation Factor for True-Up Period 1) included unclaimed inflation for the last six months of 1995. We agree that Operator is entitled to claim this inflation adjustment. We will grant that part of Operator's Petition. We adjusted Operator's revised FCC Form 1240 to include an unclaimed inflation factor of 1.0111 for the period July 1, 1995 through December 31, 1995. Our adjustment revised Line C1 to 1.0227 and resulted in a new revised MPR of $9.42 for the projected period October 1, 1996 through September 30, 1997. Because Operator's actual CPST rate of $10.67 exceeds its revised MPR of $9.42, we find Operator's actual CPST rate of $10.67, effective January 17, 1997 through September 30, 1997, to be unreasonable. 8. Operator has not filed another FCC Form 1240. Instead, Operator's relies on its prior FCC Form 1240 and an FCC Form 1235 to justify its current CPST rate of $10.32. The LFA filed a separate report which challenged the conclusions in Operator's FCC Form 1235. Our review of Operator's FCC Form 1235, dated July 21, 1998, reveals that Operator has certified that the upgrade meets the minimum technical requirements of FCC Form 1235 and that the upgrade was completed by December 31, 1996. Operator chose to allocate its Monthly Network Upgrade Add-on (Part III, Lines 4 and 5) to its CPST and basic services tier ("BST") rates. Such an election is consistent with the FCC Form 1235 instructions. Operator assigned all upgrade-related headend costs reported on Worksheet A (Cost Assignments and Allocations), Line 1 (Total Plant and Equipment) to the upgraded segment of the San Luis Obispo system rather than to the entire system. Because Operator ultimately intends to provide upgraded services to all system subscribers, the additional headend costs incurred thus far will benefit all subscribers eventually. Because the benefits of these costs are not limited to upgraded subscribers, the application of these costs exclusively to upgraded subscribers is inappropriate. Consequently, we have excluded $413,072 of the headend costs reported by Operator. 9. Operator recorded its gross upgrade additions on Worksheet A, Line 1 without any corresponding adjustments for early asset retirements resulting from the upgrade. The FCC Form 1235 Instructions, however, limit upgrade increases to "the actual cost of the capital improvement, less any gains realized from the disposition of property, plant and equipment used prior to the upgrades" irrespective of an operator's initial rate-setting methodology. We have removed the value of the retired assets from Worksheet A, Line 1 and reduced Worksheet A, Line 1 by $2,302,476. Without evidence of gains or other proceeds from Operator's asset dispositions, we have allowed Operator to continue to recover depreciation expense based on the value of the retired assets, which added $226,458 to Worksheet A, Line 7 (Upgrade Related Depreciation Expense). 10. Operator based its calculation of Allowance for Funds Used During Construction (AFUDC) (Worksheet A, Line 2) on a period of April 1994 to December 1996, or 33 months. However, supplemental information accompanying Operator's filing indicates that subscribers began to receive upgrade benefits as early as March 1996. Therefore, we have recalculated Operator's AFUDC based on a 24 month period and reduced Worksheet A, Line 2 by $615,112. Operator also neglected to account on Worksheet A, Line 10 (Other Cable Revenue) for additional home shopping revenues anticipated under the upgrade, with an estimated annual value of $7,020. The FCC Form 1235 Instructions require an accounting for revenues earned due to the implementation of the upgrade. We have included these costs in our calculations as a direct assignment to the CPS tier because the added home shopping channel is assigned to that tier. As a result of our adjustments, we find Operator has justified an MPR of $2.15 for its Monthly Network Add-on for its CPST. When Operator's Monthly Network Add-on is added to its revised FCC Form 1240 MPR of $9.42, Operator has justified an MPR of $11.57 for its CPST. Because Operator's actual CPST rate of $10.32, effective August 1, 1998, does not exceed its revised MPR, we find Operator's actual CPST rate of $10.32, effective August 1, 1998, to be reasonable. 11. Accordingly, IT IS ORDERED, pursuant to Section 1.106 of the Commission's rules, 47 C.F.R. 1.106, that Operator's Petition for Reconsideration IS GRANTED IN PART AND DENIED IN PART. 12. IT IS FURTHER ORDERED, pursuant to Section 0.32l of the Commission's rules, 47 C.F.R. 0.321, that In the Matter of Falcon Cable Systems Company, DA 97-1283, 12 FCC rcd 23428 (1997), IS VACATED TO THE EXTENT INDICATED HEREIN. 13. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R.  0.321, that the CPST rate of $10.67, charged by Operator in the franchise areas referenced above, effective January 17, 1997 through September 30, 1997, IS UNREASONABLE. 14. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R.  0.321, that the CPST rate of $10.32, charged by Operator in the franchise areas referenced above, effective August 1, 1998, IS REASONABLE. 15. IT IS FURTHER ORDERED, pursuant to Section 76.961 of the Commission's rules, 47 C.F.R.  76.961, that Operator shall refund to subscribers in the franchise areas referenced above that portion of the amount paid in excess of the maximum permitted CPST rate of $9.42 per month (plus franchise fees), plus interest to the date of the refund, for the period January 21, 1997 through September 30, 1997. 16. IT IS FURTHER ORDERED that Operator shall promptly determine the overcharges to CPST subscribers for the stated periods, and shall within 30 days of the release of this Order, file a report with the Chief, Cable Services Bureau, stating the cumulative refund amount so determined (including franchise fees and interest), describing the calculation thereof, and describing its plan to implement the refund within 60 days of Commission approval of the plan. 17. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R.  0.321, that Operator take into account our FCC Form 1240 adjustments when calculating its maximum permitted rate and performing the true-up calculation on its next FCC Form 1240. 18. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R. 0.321, that the September 18, 1998 complaints, against Operator's August 1, 1998 CPST rate increase from $9.32 to $10.32 in the communities referenced above, ARE DENIED. FEDERAL COMMUNICATIONS COMMISSION William H. Johnson Deputy Chief, Cable Services Bureau APPENDIX DATE LFA RECEIVED CUID NO. COMMUNITY FIRST VALID COMPLAINT CA0680 Los Osos 8/3/98 CA0706 Garden Farms 8/4/98 CA0709 Cambria 8/11/98 CA0927 Templeton 8/11/98