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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 TELE-MEDIA COMPANY OF VIRGINIA Appeal of Local Rate Order Issued By ) Botetourt County, Virginia CUID VA0292 ) ) ) ) ) ) ) ) ) File No. CSB-A-0209 MEMORANDUM OPINION AND ORDER Adopted: February 23, 2000 Released: February 25, 2000 By the Deputy Chief, Cable Services Bureau: I. INTRODUCTION 1. Tele-Media Company of Virginia ("TMC-V"), operator of a cable television system serving Botetourt County, Virginia, appealed the local rate order issued by the Board of Supervisors of Botetourt County, Virginia ("County") on January 26, 1995. The County filed an opposition to the appeal. The cable operator supplemented its appeal, seeking treatment as a small cable operator. II. BACKGROUND 3. 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 will sustain the franchising authority's decision provided there is a reasonable basis for that decision, and will reverse a franchising authority's decision only if the franchising authority unreasonably applied the Commission's rules in its local rate order. If the Commission reverses a franchising authority's decision, it will not substitute its own decision but will remand the issue to the franchising authority with instructions to resolve the case consistent with the Commission decision on appeal. 4. An operator seeking to justify its existing rates for the basic service tier, equipment, or installation bears the burden of demonstrating that the rates conform with our rules. In determining whether the operator's rates conform 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 rates or issue a written decision explaining why the operator's rates are not reasonable. If the franchising authority determines that the operator's rates exceed the maximum permitted rate as determined by the Commission's rules, it may order refunds, provided that it explains why the operator's rate or rates are unreasonable. 5. Cable operators may justify their initial basic service tier ("BST") rates using either the benchmark methodology established in the Rate Order or a cost-of-service showing based on the cable operator's actual cost and revenue data. When a cable operator elects to make a cost-of-service showing, the Commission's rules permit local authorities to prescribe any rate that is justified by the cost showing, including a rate lower than the benchmark or operator's current rate level. Cost-of-service showings for rates in effect prior to May 15, 1994 are governed by general cost-of-service principles, and submitted without a Commission-provided rate form. The Commission adopted interim cost-of-service rules effective May 15, 1994 and final cost-of-service rules effective March 9, 1996. Justifications under both the interim and final cost-of-service rules are submitted on FCC Form 1220. Operators with cases pending under the interim rules when the final cost rules became effective could elect to have their cases decided under the final rules. Cases already decided by a final decision of a franchising authority when the final cost rules became effective are to be reviewed in accordance with the rules in effect when the decision was made. 6. The significant administrative and compliance costs associated with cost-of-service regulation impose heavy burdens on regulators and regulated entities. To offer small cable companies administrative relief from rate regulation, the Commission amended the definition of small cable companies and small cable systems and introduced a simplified form of small system relief in the Small System Order. Cable systems serving 15,000 or fewer subscribers, and owned by a company having 400,000 or fewer subscribers, may elect to use the new small cable system rate mechanism in lieu of other Commission rate processes. In adopting these definitions, the Commission took particular note of Congressional intent to ease the regulatory burdens imposed on small cable systems, franchising authorities, and the Commission by rate regulation while protecting cable subscribers from unreasonable rates and enhancing small cable systems' ability to attract capital and achieve the goals set by Congress in the Statement of Policy contained in the Cable Act of 1992. 7. The Small System Order stated that in order to qualify for the modified form of relief, systems and companies must meet the modified size standards as of either the effective date of that order or on the date thereafter when a request for relief under those revised provisions is filed. Franchising authorities were directed to permit systems to use the small system cost-of-service approach in any proceeding that was pending when the Small Systems Order was released, using data that was accurate when the rates were charged. To make the small system cost-of-service showing in a pending case, the system was required to show that it met the new definitions of a small system owned by a small cable company when the Small Systems Order was released and when the disputed rates were in effect. Further, in the interest of administrative finality, the Small System Order stated that the revised form of regulation would not affect the validity of a final rate decision made by a franchising authority before the release date of that item. If such a decision is appealed to the Commission, the decision is to be reviewed in accordance with the rules in effect at the time the rates were charged and the decision was made. VIII. DISCUSSION 9. In response to the County's notification of intent to regulate its cable service rates, TMC-V filed FCC Form 393 and a one page cost-of-service showing to justify its existing BST rate for the period from September 1, 1993 through May 14, 1994. This was received by the County on January 31, 1994 and followed by new cost of service showings, including the showing provided on August 12, 1994 that was addressed in the County's local rate order. TMC-V was charging $10.19 per month during the period under consideration. After making certain adjustments to TMC-V's rate form, the County concluded that TMC-V had justified a monthly BST charge of $7.53 plus franchise fee, and ordered a refund of the difference for the period from September 1, 1993 through May 14, 1994. 10. TMC-V appealed, alleging that the County acted unreasonably. TMC-V contends: (1) that the County failed to timely issue a tolling order preserving its right to review rates and order refunds; (2) that the County denied TMC-V due process by predetermining its decision before providing the cable operator an opportunity to be heard; and (3) that the County misapplied the Commission's rules in certain determinations it made concerning TMC-V's cost-of-service submissions. TMC-V seeks either a finding from the Commission that its rates are justified pursuant to Section 76.933 of the Commission's rules or a remand to the County for further consideration of TMC-V's rate justification. 11. TMC-V submitted a duplicate of its August 12, 1994 cost-of-service showing to the County to justify its basic service rate from May 15, 1995 forward. The County asked the Commission's assistance in reviewing this showing. The Commission addressed the showing in Tele-Media Company of Virginia ("Bureau Order"), along with a complaint against TMC-V's cable programming services tier ("CPST"). The Bureau Order also considered the FCC Form 1230 TMC-V filed on December 15, 1995, seeking to justify its BST and CPST rates through the simplified small system cost-of-service procedures under the Small System Order. The Bureau Order granted TMC-V's request for small system relief, and based on review of TMC- V's Form 1230, denied the pending CPST complaint and found that the CPST and BST rates were not unreasonable. The Bureau Order further provided that the decision regarding the BST rate was binding on the LFA and cable operator. A. Tolling Order 12. TMC-V challenges the effectiveness of the County's order as a tolling order, arguing the County failed to follow the procedures prescribed in section 76.933. Section 76.933(a)-(c) of the Commission's rules, which governs franchising authority review of TMC-V's filing, provides a franchising authority 30 days in which to review the rate filing. The franchising authority can toll this deadline for an additional 90 days for benchmark filings or 150 days for cost-of-service filings by issuing a brief written order within 30 days of the rate submission. If the franchising authority has taken no action within this time period, proposed rates can go into effect or existing rates remain in effect, subject to refunds if the franchising authority later disapproves any portion of those rates and has issued a written accounting order before the end of the 90 or 150 day period. 13. TMC-V's rate justification was received by the County on January 31, 1994. The County wrote to TMC-V on February 16, 1994 that it would not accept TMV-C's Form 393 submission because information required by the form for equipment and installation rates and identified in the letter had not been provided. The County stated that the 30-day review period for Form 393 and the cost-of-service showing would begin when TMV-C provided the missing information. TMC-V argues this was not a tolling order, and the Commission's rules in effect at the time gave the County no authority to reject a facially incomplete filing. TMC-V also argues that the cost-of-service part of its filing was not facially deficient because there were no guidelines governing what should be included. In defending its handling of the rate filing, the County argues that its authority to deal with deficient filings was not limited by law or Commission rule at the time, and that TMC-V waived any entitlement to object to the procedure followed in the case by failing to make timely objection to the procedure and later agreeing to extend the refund period provided under the Commission's rules. This agreement is allegedly documented in TMC-V's letter asking the Commission for waiver of the rules, as necessary, to extend the refund period beyond the one-year period provided in 47 C.F.R.  76.942. 14. We find that the County's letter is sufficient to toll the 30-day review period for the additional time specified in section 76.933(b). The letter was written within 30 days of TMC-V's filing, identifies the missing information, and is clear that the County wants the missing information before reviewing the form or TMC-V's cost-of-service showing. In light of this finding, we need not determine whether the County had authority to postpone the start of the tolling period pending receipt of the missing information. A. Due Process 15. TMC-V asserts that the County denied it due process because comments reportedly made by the Chairman of the County Board of Supervisors prior to the hearing showed that the Chairman and other members had "predetermined" their rate decision before hearing from TMC-V. TMC-V had requested a postponement of the originally scheduled hearing. According to an article in the local newspaper, the Chairman commented that TMC-V's request, "only put off the inevitable." The County argues that the newspaper report was hearsay, but, even if true, the Minutes of the hearing show that the hearing was not a sham. TMC-V addressed the alleged remarks as well as the content of the County consultant's report in a letter to the Board Chairman and Members before the rescheduled hearing. The Board had available for its prior consideration TMC-V's arguments in opposition to the proposed rate order as well as the consultant's response. At the public hearing, four TMC-V representatives made presentations or otherwise addressed the Board. Board members actively participated, questioning both TMC-V representatives and the County consultant. Considering the uncorroborated newspaper article in the context of the entire rate proceeding, including all of the contact between the operator and the County before the County issued its rate order, we find that the County satisfied the requirement in 47 C.F.R.  76.935 that it take into consideration the views of interested parties before making its decision. A. Cost-of-Service Showing 16. TMC-V's appeal asserts that the County's rate order erred by disallowing the cable operator's interest synchronization methodology for calculating interest expenses; by disallowing intangible assets related to the acquisition price of the system; by increasing the depreciable lives of headend, transmission facilities and equipment, and distribution facilities from 10 years to 15 years; and by disallowing management fees TMC-V paid to its affiliated company. TMC-V also claims that a fair cost-of-service proceeding was denied because the County inconsistently applied both general cost-of-service principles and the Commission's interim cost-of-service rules that became effective on May 15, 1994, and because the County inadequately considered TMC-V's rebuttals of presumptions included in the Commission's cost-of-service rules as permitted by the rules. The County defended its decision as consistent with Commission rules and precedent. The County argued that the interest synchronization methodology made no sense and was not supported by precedent. Also according to the County, TMC-V had failed to show why intangibles should be allowed or shorter depreciation lives accepted, and failed to show costs associated with the rejected management services. 17. TMC-V's BST September 1, 1993 - May 14, 1994 rates at issue in this proceeding are subject to review under general cost-of-service regulatory principles. However, TMC-V responded to County questions about its cost-of-service showing by refiling its showing on FCC Form 1220, the cost-of-service form adopted for use after the Cost Order setting forth interim cost-of-service rules became effective on May 15, 1994. The County reviewed this form and TMC-V's subsequent revisions, applying the interim rules. The County asserts that applying the interim rules was appropriate under the circumstances, particularly in the absence of patent inconsistencies between traditional cost-of-service principles and the Commission's interim rules, and TMC-V did not object to accurate and consistent application of the interim rules. 18. The Small System Order provides that certain presumptions and restrictions applicable to standard cost-of-service proceedings and applied in this proceeding shall not apply to cable systems fitting within the small cable system definitions adopted in that order. In particular, the presumptive exclusion of intangibles such as the acquisition costs from the rate base would not apply. The Small System Order also gave eligible operators substantial discretion in determining how the rate of return should be calculated and relieved operators of the heavy burden normally imposed on operators seeking rates of return higher than 11.25%. A strong presumption of reasonableness will apply where an operator seeks to establish rates no higher than $1.24 per channel. 19. In its Supplement, TMC-V argues that the Bureau Order, which granted TMC-V relief pursuant to the Small System Order, should resolve the issues here. The local rate order preceded the Small System Order, however, and we are required by the Small System Order to review it in accordance with the rules in effect at the time the rates were charged and the decision was made. Nevertheless, if the local rate order must be remanded to the franchising authority, the local rate order should no longer be considered a "final rate decision" within the meaning of paragraph 74 of the Small System Order, and the operator should be able to avail itself of the relief provided in that order if it otherwise meets the criteria for doing so. Allowing small cable operators to avail themselves of the relief provided in the Small System Order on reconsideration of remanded local rate orders is fully consistent with the Congressional goals referenced in that order. 20. Turning to the merits of the County's local rate order under review here, we find the County's treatment of TMC-V's "interest synchronization" approach to its cost-of-service showing on Form 1220 to be unreasonable. The revenue requirement computed on Form 1220, Part I includes the "Computed Return on Rate Base" and an income tax allowance, as well as the operator's total operating expenses and other adjustments. The BST Computed Return on Rate Base is based on the net rate base allocated to the BST multiplied by the rate of return. The income tax allowance is computed by subtracting the interest charges applicable to the BST from the BST Computed Return on Rate Base and multiplying this amount by a tax gross-up rate based on the federal and state income tax rates for corporations. Thus, the rate of return affects the amount of the return on rate base included in the revenue requirement, and the allowable interest charges affect the amount of the income tax allowance for the return on the rate base included in the revenue requirement. 21. When calculating its return on ratebase and corresponding income tax allowances, TMC-V relied upon a rate of return of 11.25%, a hypothetical capital structure of 50% debt and 50% equity, and statutory Federal and State tax rates of 34% and 6% respectively. It's imputation of lower interest expenses than it actually experienced resulted in an income tax allowance that was included in its revenue requirement. The County rejected TMC-V's allocation of interest expense, using instead TMC-V's actual reported interest expenses while applying the uniform rate of return. TMC-V argues that the County failed to consider the facts and assigned a rate of return that does not reflect TMC-V's cost of capital, that TMC-V's approach is acceptable under both the Cost Order and general cost of service rules, and that its methodology is used by cable television and utility regulators in other states. In support of its decision, the County argues that TMC- V's approach is not representative of the operator's actual cost experience, was proposed belatedly as an amendment to previously submitted data, and is not supported by any FCC decisions or other relevant precedent. 22. In cost-of-service rate making, the rate of return reflects a reasonable return on allowed investment. In setting a uniform rate of return in the Cost Order, the Commission identified a reasonable range for the cost of equity for regulated cable service and identified a cost of debt and a reasonable range for the capital structure, taking into account the risks associated with regulated cable operations. Based on the averages of these factors, the Commission identified a zone of reasonableness for the cost of capital and set the rate of return at 11.25%, at the upper end of the range, so that cable operators could attract capital. The Commission also allowed cable operators to include taxes on the provision of regulated cable service in their annual expense calculations by applying the grossed-up federal and state statutory corporate tax rates to the amount calculated as subject to the income tax calculation, regardless of the actual business form. In this rate of return environment, the interest expense is recovered through the rate of return rather than as an operating expense. In calculating federal and state taxes allowed to be recovered in rates, however, the Computed Return on Rate Base is reduced by the interest expenses so that it reflects only the equity portion of the return that is subject to income taxes. Because the 11.25% rate of return is based on an imputed debt/equity structure, the appropriate interest expense used in the calculation should be based on the same assumptions used in setting the rate of return, rather than on the operator's actual interest expense. Conversely, if assumptions like those reflected in the uniform rate of return are not applied in this case, generally accepted accounting principles would require that the rate of return be set to reflect the risk of TMC-V's capital structure. The County's use of TMC-V's actual cost of debt while applying the uniform rate of return was not reasonable. 23. Our finding that the County's treatment of TMC-V's interest expenses and rate of return was unreasonable requires remand for further County consideration. On remand, we direct the County to provide TMC-V an opportunity to support its BST and regulated equipment rates for the period at issue here by means of FCC Form 1230 and the modified cost-of-service rate regulations adopted in the Small System Order. In its review of any Form 1230 filed by TMC-V, the County must adhere to the provisions of the Small System Order. XXIV. ORDERING CLAUSES 25. Accordingly, IT IS ORDERED that the Petition for Review of the local rate order of Botetourt County, Virginia (CSB-A-0209) filed by Tele-Media Company of Virginia on February 27, 1995 IS GRANTED IN PART AND DENIED IN PART as indicated in this Memorandum Opinion and Order, and the Resolution Concerning Cable Television Rates From September 1, 1993 through May 14, 1994 adopted by the Board of Supervisors of the County of Botetourt, Virginia on January 17, 1995 IS REMANDED for further consideration consistent with this Memorandum Opinion and Order. 26. IT IS FURTHER ORDERED that Tele-Media Company of Virginia's request for stay IS DISMISSED as moot. 27. IT IS FURTHER ORDERED that the County of Botetourt, Virginia shall not enforce the remanded Resolution pending further action by the County on these matters. 28. This action is taken pursuant to authority delegated by Section 0.321 of the Commission' Rules. 47 C.F.R.  0.321. FEDERAL COMMUNICATIONS COMMISSION William H. Johnson Deputy Chief, Cable Services Bureau