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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 TIME WARNER CABLE Appeal of Local Rate Order Issued by the City of Raleigh, North Carolina ) ) ) ) ) ) File No. CSB-A-0502 CUID NC0028 MEMORANDUM OPINION AND ORDER Adopted: January 19, 2000 Released: January 25, 2000 By the Deputy Chief, Cable Services Bureau: I. Introduction 1. Time Warner Cable ("Time Warner"), a franchised cable operator serving the City of Raleigh, North Carolina ("City"), has filed an appeal from a local rate order issued by the City for the rate period beginning January 1, 1998 ("1998 rate"). The City's rate order reduced Time Warner's maximum permitted rate for the basic service tier ("BST") calculated on FCC Form 1240. The City did not file a responsive pleading. II. BACKGROUND 2. Under the Commission's rules, rate orders issued by local franchising authorities may be appealed to the Commission. In ruling on an appeal of a local rate order, the Commission will not conduct a de novo review, but instead will sustain the franchising authority's decision as long as there is a reasonable basis for that decision. Therefore, the Commission will reverse a franchising authority's decision only if it determines that the franchising authority acted unreasonably in applying the Commission's rules in rendering its local rate order. 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. 3. An operator proposing an increase in the BST or equipment or installation rates bears the burden of demonstrating that the proposed increase conforms with our rules. In determining whether the operator's proposed increase conforms with our rules, a franchising authority may direct the operator to provide supporting information. After reviewing an operator's rate forms and any other additional information submitted, the franchising authority may approve the operator's requested rate increase or issue a written decision explaining why the operator's rate is not reasonable. If the franchising authority determines that the operator's proposed rate exceeds the maximum permitted rate as determined by the Commission's rules, it may prescribe a rate different from the proposed rate, provided that it explains why the operator's rate is unreasonable and the prescribed rate is reasonable. 4. An operator using the annual rate adjustment method on FCC Form 1240 projects its costs for the 12 month period starting from the date the operator implements its new rates and, in the next year, trues up those projections against actual costs. It then must adjust its rate downward to compensate for any over- estimations of its cost changes and may adjust its rate upward to compensate for any under-estimations. Because operators file their proposed rates at least 90 days in advance of the intended implementation, and the true-up must be based on actual costs, the true-up period will not fully coincide with the period covered by the previous year's projections. III. DISCUSSION 5. According to Time Warner, the City made two changes to Time Warner's 1998 rate calculation, which resulted in a downward adjustment of Time Warner's proposed MPR. First, where the Form 1240 for 1998 calls for the past permitted rate, the City staff used a lower maximum permitted rate ("MPR") for Time Warner's 1997 rate than it had previously approved. Second, the City used inflation data not released until after Time Warner had submitted its rate form to the City. Time Warner argues that the City erred when changing the previously-approved MPR because no appeal of the order approving the 1997 rate was filed and the rate had become final. Because no other errors were alleged by the City, Time Warner argues that the City should not have refreshed the inflation data in Time Warner's Form 1240. 6. The City's local rate order found that Time Warner did not base its true-up or projected costs on the most current inflation data available at the time of the City's action and that "Time Warner Cable proposed maximum permitted Basic Service Tier rate charge of $8.80, cannot be supported by presently known inflation data." The City ordered Time Warner to "revise its Form 1240 for the 1997 by applying the inflation values published by the FCC for each of the four (4) quarters in 1997." The rate order also found that "Time Warner had by in large substantiated the other adjustments to its Basic Service Tier rate based on past and estimated cost elements." The City approved a maximum permitted rate of $8.63 for 1998. This rate comes from Table A, Cable Service Rate Adjustments Effective January 1, 1998, of the Staff Report prepared by the City's Information Access Staff. Table A shows operator selected and "Max Rate[s]" for 1996 through 1998. The BST "1997 Max Rate" in Table A is $8.50 rather than the $8.68 approved in the City's local rate order adopted December 11, 1996. 7. From the record, it appears that the Staff recalculated Time Warner's permitted rate brought forward from 1997 to reflect inflation information made available after that rate was approved and after Time Warner filed its Form 1240 for its 1998 rate. The Commission allows operators projecting their rates to adjust for inflation for the coming year using past inflation data, and Time Warner's 1997 rate would have included an inflation projection based on past inflation data. Because this projection may not exactly reflect inflation actually experienced, the Commission provides a true-up mechanism for correcting inexact estimations. In calculating its 1998 rate on FCC Form 1240, Time Warner should have reflected the trued- up inflation for the appropriate true-up period in its rate. Form 1240 Worksheet 1 True-Up Period Inflation is used to calculate the average inflation factor for the true-up period. This information from Worksheet 1 is entered on Module C, the module showing inflation information, and carried forward into the calculation of the maximum permitted rate for the true-up period on Modules E and F. The trued-up maximum permitted rate from Module E and F is then carried forward onto Module H, which determines any overcharge or undercharge from the true-up period. This information is then reflected in the new maximum permitted rate calculated on Module I. Because the inflation adjustment for the true-up period is calculated on the current Form 1240 for the BST rate implemented in 1998, the City should not recalculate the 1997 maximum permitted rate outside the form for the 1998 rate to correct it for subsequently available inflation information. 8. An operator completing the true-up portion of Form 1240 is to use inflation figure published by the Commission for each month of the true-up period. If the true-up period includes months for which the Commission has not released an inflation figure, the operator is to use the figure for the most recent quarter for which an inflation figure is available. The operator calculates the current inflation factor used for the projected period using the quarterly inflation factor most recently released by the Commission. Time Warner correctly states that a franchising authority should not find a rate unreasonable solely because more current inflation data has become available by the time the franchising authority reviews a cable operator's rate submission. Since a cable operator must give its franchising authority 90 days notice before implementing rate adjustments, allowing franchising authorities to refresh a cable operator's inflation calculation with new quarterly inflation data released during the review period would result in adjustment for most, if not all, BST rate changes. This could delay otherwise permissible rate changes or require changes in already-implemented rates, causing needless confusion to subscribers and increased administrative costs for the cable operator. On the other hand, if a rate is unreasonable on its face or has to be adjusted for reasons other than availability of a more current inflation figure, e.g., because the operator failed to provide correct information in its rate justification or failed to complete its rate justification form correctly, the franchising authority may recalculate the maximum permitted BST rate using the most accurate inflation information available at the time of its review for the period at issue. 9. Time Warner contends that the franchising authority unreasonably adjusted its rate using new inflation information that only became available after Time Warner filed its rate form. If Time Warner correctly prepared its rate form, as it argues, this would end the matter. However, the Staff Report raises a question as to whether this is the case. Time Warner submitted its Form 1240 on September 29, 1997 to justify the rate it planned to put into effect beginning January 1, 1998. The Staff Report states that the "true-up period covers the 12 months of 1997, from January 1 to December 31," which includes a period of more than three months after Time Warner prepared its rate forms. The true-up period should indicate real, not projected, cost data. Because the operator must file Form 1240 at least 90 days before an increase takes effect, the period for the true-up will not coincide with the previous year's projection. Information about the actual costs incurred between the filing and the planned implementation date for the new rate belongs in the next true-up. While we are not reviewing the rate form or making findings about the form here, we are not required to disregard questions arising from the face of the operator's documentation that could have an impact on the issue raised in its appeal. 10. We are remanding the local rate order addressed herein for action consistent with this Memorandum Opinion and Order. IV. ORDERING CLAUSES 11. Accordingly, IT IS ORDERED that the Petition for Review of Local Rate Order filed by Time Warner Cable on February 13, 1998 IS GRANTED to the extent indicated herein and the local rate order IS REMANDED to the City of Raleigh, North Carolina for action consistent with this Memorandum Opinion and Order. 12. IT IS FURTHER ORDERED that the City of Raleigh, North Carolina shall not enforce matters remanded for further consideration pending further action by the City on those matters. 13. This action is taken pursuant to authority delegated by section 0.321 of the Commission's rules. 47 C.F.R.  0.321. FEDERAL COMMUNICATIONS COMMISSION William H. Johnson Deputy Chief, Cable Services Bureau