QUESTIONS AND ANSWERS ON CABLE TELEVISION RATE REGULATION May 18, 1994 The Cable Services Bureau has received questions from cable operators and other interested parties concerning the Commission's revised rules governing cable rate regulation. The following questions and answers provide guidance on a variety of issues of general interest regarding the revised rules, as well as the Commission's new forms for calculating maximum permitted rates for regulated service and equipment offerings. This is the third set of questions and answers on the revised rules. The first set was released on April 26, 1994; the second set was released on May 6, 1994. Cable Programming Services Tier Q1: How does a cable operator know if a complaint filed against it is valid for purposes of the operator being required to file a Form 1200 or other rate justification with the Commission? A1: The Commission's rules provide that absent a notification from the Commission to the contrary, such as where a cable services tier complaint fails to satisfy the minimum showing requirement, a cable operator must respond to the complaint. See 47 C.F.R. Section 76.956(a). The same standard applies to filing a Form 1200 or other rate justification where a complaint is pending. A cable operator may telephone the Commission's contractor, Garcia Consulting, Inc. (202-416- 0919) to confirm whether or not a complaint has been returned to the complainant for failing to satisfy the minimum showing requirement. That contractor maintains a log of complaints filed state by state. The log includes the date on which a complaint was returned to the complainant. The log may be inspected in the contractor's offices at 2033 M Street, NW, Washington, DC, Room 207. It may be purchased from International Transcription Service by calling 202-857-3800. Q2: Are there any limitations on how often a cable operator may pass through external cost changes on the cable services tier? A2: Cable programming services rates generally are reviewed only after they have become effective and only pursuant to a complaint. As a result, the rule that "permitted charges for a tier may be adjusted up to quarterly to reflect changes in external costs" does not apply to a cable programming services tier unless a complaint has been filed with the Commission about that tier. Absent a complaint being filed, a cable operator may pass through external costs at will, subject to the rules requiring 30 days' notice and subject to refund liability if the cable programming services rate is later found to be unreasonable. If, however, a cable programming services tier complaint is pending before the Commission, the cable operator must file a Form 1210 with the Commission before raising its rates. In those circumstances, the cable operator is bound by the rules limiting external cost filings to one per calendar quarter. In addition, a Commission decision requiring a prospective rate reduction remains binding on a cable operator for one year unless the Commission designates a different time period. Thus, following a Commission-ordered rate reduction, a cable operator may not increase rates on account of changes in external costs or otherwise without the Commission's advance approval for a period of one year. During that period, the Commission will consider applications to pass through changes in external costs no more frequently than once per quarter as provided by the Commission's rules. See Section 922(d)(3) of the Commission's rules. Franchising Authority Discretion Q3: When a franchising authority orders a prospective rate reduction, may it decide when those rate changes should be made? A3: Yes. The franchising authority may specify when the rate change is to take effect, so long as it allows the cable operator to provide at least thirty days' notice of the change to its subscribers. In specifying the effective date of a prospective rate reduction, a franchising authority should take into consideration the amount of time necessary to prepare and send out notices and bills reflecting the rate change, giving due regard to the impact of cycle billing, if applicable. The Commission's rules require that a cable operator provide subscribers with at least thirty days' notice before any rate change may be made. See Section 76.964 of the Commission's rules. Q4: When a franchising authority orders a refund, may it specify how the refund should be made? A4: No. The Commission's April, 1993 Rate Order and Section 76.942(d) of the Commission's rules provide that cable operators that are ordered to issue refunds have the option either (1) of returning overcharges directly to those subscribers who were overcharged or (2) if it is difficult or unreasonably burdensome to identify those customers, of issuing a prospective percentage reduction in rates (i.e., a billing credit) to the class of subscribers that was charged the unreasonable rate (e.g., the current basic service tier customers). While the Commission stated that the first method was preferable, it left the ultimate decision to the cable operator, not to the franchising authority. Q5: Does a cable operator whose basic tier is regulated need to seek advance authorization from its franchising authority to pass through higher franchise fees? A5: Yes. A cable operator must file an FCC Form 1210 with the franchising authority before it can pass through any external cost changes, including increased franchise fees, to basic tier subscribers. The franchising authority would evaluate the proposed rate increase pursuant to the Commission's price cap rules. See Section 76.922(d)(3)(iii) of the Commission's rules. Equipment/Form 1205 Q6: For purposes of completing Form 1205 and Part III of Form 393, how is leased property treated? A6: For purposes of completing Form 1205 and Part III of Form 393, leased property should be included on Schedule A or Schedule B depending on whether the lease is considered a capital lease or an operating lease under generally accepted accounting principles (GAAP). Under GAAP, any non- cancelable lease that transfers ownership to the lessee by the end of the lease term is treated as a capital lease. As such, the property should be treated as acquired property and included on Schedule A of Form 393 and Form 1205. There are other conditions as specified by GAAP, however, when title does not pass to the lessee but the lease is nevertheless treated as a capital lease. These conditions include any of the following: (1) the lease contains a bargain purchase option; (2) the lease term is greater than or equal to 75% or more of the economic life of the leased property; (3) the present value of the lease payments equals or exceeds 90% of the fair value of the leased property. See Statement No. 13 of the Financial Accounting Standards Board ("FASB") and Amendments. If any of these conditions exist, whereby the lease would be treated as a capital lease for accounting purposes, the property should be treated as acquired property and included on Schedule A. Leases not meeting any of the above four criteria are generally classifiable for accounting purposes as operating leases. In such cases, the payments for such leases should be treated as period expenses, to be included on Schedule B of Form 393 and Form 1205. See FCC Form 1205 Schedule A, Line A and Schedule B, General Instructions. Stay of Rate Decisions Q7: Does an appeal of a franchising authority's decision in a rate proceeding stay that decision? A7: No. An appeal of a franchising authority decision in a rate proceeding to the Commission does not automatically stay that decision. A local franchising authority may decide, however, to stay a decision pending appeal either on its own motion or upon the request of an interested party. In addition, upon written petition, the Commission may stay a decision of a local franchising authority pending a decision on appeal. To support the issuance of a stay by the Commission, petitioners must demonstrate that (1) they are likely to prevail on the merits; (2) they will suffer irreparable harm if a stay is not granted; (3) other interested parties will not be harmed if the stay is granted; and (4) the public interest favors grant of a stay. See, e.g., In re TCI Cablevision of St. Louis, Inc., DA 94- 424, (adopted and released April 29, 1994 by Acting Chief, Cable Services Bureau).