******************************************************** 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 ) ) TCI OF AUBURN, INC. ) Pierce County, WA. WA0420 WA0062 TCI OF TACOMA, INC. ) Orting, WA. WA0060 ) Wilkeson, WA. WA0383 Appeals of Local Rate Orders of the ) Ruston, WA. A0306 Rainier Cable Commission ) MEMORANDUM OPINION AND ORDER Adopted: February 2, 1998 Released: February 5, 1998 By the Deputy Chief, Cable Services Bureau: I. INTRODUCTION 1. TCI of Auburn, Inc. and TCI of Tacoma, Inc.(TCI-WA), the franchisees in the above matter, filed appeals of local rate orders adopted by the Rainier Cable Commission (RCC) for Pierce County, Orting, Wilkeson, and Ruston, Washington. The RCC's rate orders accept TCI-WA's Form 1205 calculations, except for the inclusion of a capitalized direct overhead cost of $20 per converter. TCI-WA submits that the RCC erred in rejecting these costs and reducing the rates specified on the filed 1205 Forms. 2. In the appeals, TCI-WA argues that the rate reductions required by the RCC's orders are erroneous and should be overturned by the Commission because the RCC's orders exclude $20 in "overhead" costs per converter including labor costs of installing and retrieving converters, operating costs of managing converter inventory, and material costs for converters from Schedule C of Form 1205. II. STANDARD OF REVIEW 3. Under our rules, rate orders made by local franchising authorities may be appealed to the Commission. In ruling on appeals of local rate orders, 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. 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. III. DISCUSSION 4. Pursuant to the Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act"), the Commission established standards for setting, on the basis of actual cost, the rates for installation and lease of equipment used by subscribers to receive the basic service tier. Under Commission rules, cable operators have the burden of proof in demonstrating the reasonableness of existing or proposed rates for their basic service tier and associated equipment. Equipment rates are derived from total capital and maintenance costs per unit of equipment. Installation rates are derived from a calculation of an hourly service charge and an application of that charge to different types of installations. Form 1205 is the official form used by regulators to determine whether an operator's regulated rates for equipment and installations are reasonable under the revised benchmark rules which apply to operators beginning May 15, 1994. Schedule B of Form 1205 is the schedule operators are required to use for their annual operating expenses for service installation and maintenance of equipment. Schedule C of Form 1205 is the schedule operators are required to use for their capital costs of leased customer equipment. Maximum permitted rates for installation and lease of equipment properly calculated pursuant to Commission regulations and Form 1205 are deemed to be reasonable, and are, therefore, lawful under the 1992 Cable Act. 5. Form 1205 may be submitted along with Form 1200, which is used to establish initial programming service rates to determine initial rates for regulated cable services. Alternatively, Form 1205 may be used to update permitted regulated equipment and installation charges based on equipment basket costs. Forms 1200 and 1205 establish a direct linkage between programming service rates and equipment and installation costs and charges. Using Form 1200, the operator calculates its total revenue requirement per subscriber for all regulated services. The operator then subtracts or "unbundles" costs associated with the equipment basket. The result is that the costs of providing regulated services that are not included in the equipment basket are included in the rates for programming services. Therefore, for example, Form 1205 calculations resulting in lower equipment basket costs should lead to higher programming service rates and correspondingly lower equipment and installation rates. Similarly, calculations resulting in higher equipment basket costs should lead to lower programming rates and correspondingly higher equipment and installation rates. 6. In its appeals, TCI-WA raises several arguments concerning the treatment, in Form 1205, of labor costs of installing and retrieving converters, operating costs of managing converter inventory, and material costs for converters. TCI-WA included $20 in capital costs per converter in its Form 1205, Schedule C to account for all of these costs. TCI-WA derived the $20 figure by adding the following capital costs: $7 per converter for the labor costs of installation, $7 per converter for the labor costs of retrieving a unit from a customer's home, $3 per converter for inventory management costs, and $3 per converter for material costs, including cable jumpers, fittings and splitters. The RCC disallowed TCI- WA's capitalization of converter costs for the following five reasons: (1) the costs are inconsistent with the Commission's definition of "annual purchase costs;" (2) capitalization of the costs is inconsistent with generally accepted accounting principles; (3) material and labor costs associated with installation of converters are already incorporated by TCI-WA in its installation charges in Schedule B of Form 1205; (4) labor or other operating costs associated with converter disconnects and converter inventory management are already incorporated by TCI-WA in its programming service rates; and (5) the proposed capital costs for converters are not based on the books and records of the local system. The RCC excluded the installation, disconnect, and administrative costs added to the annual capital cost of converters from Form 1205, thereby reducing TCI-WA's lease rates for addressable and standard converters. In its appeal, TCI-WA challenges each of the RCC's reasons for disallowing its inclusion of $20 of capital costs per converter. 7. In TCI-WA's challenge of the RCC's finding that the converter costs cannot be included as annual purchase costs, TCI-WA cites Commission rules which allow for recovery of incidental costs as part of annual purchase costs. TCI-WA acknowledges that none of the costs at issue are among those listed in the rule describing incidental costs of annual purchase costs, but the operator argues that this list is not exclusive. TCI-WA contends that its $20 of "overhead" costs per converter are incidental costs that must be included in Schedule C in order to ensure that converters are priced at actual cost. TCI-WA also contests the RCC's claim that TCI-WA should not be permitted to capitalize its converter costs because such costs are not capitalized under GAAP. According to TCI-WA, the Commission should focus on whether an operator's accounting treatment meets the Commission's regulatory objective of establishing actual costs for converters rather than on whether the operator is adhering to GAAP. In support of this claim, TCI-WA cites a Commission rule that states that the Commission's accounting rules are based on GAAP only "to the extent regulatory considerations permit." Contending that the converter costs at issue are actual costs, TCI-WA maintains that regulatory considerations of establishing converter rates at actual cost outweigh the importance of adhering to GAAP in this instance. Thus, TCI- WA claims that it should be allowed to recover these costs. Finally, TCI-WA challenges the RCC's assertion that the $20 in capital costs per converter should be rejected because the $20 figure was not based on the records of the local system. TCI-WA admits that the $20 figure is based on national, rather than system-specific information. However, TCI-WA contends that, because of the discrepancy between TCI-WA's accounting system and the regulatory demands now placed upon that accounting system, it made more sense for TCI-WA to derive cost figures based on a national cost survey rather than to develop system-specific figures. 8. The Commission rule defining the "equipment basket" states that the basket shall include all "direct and indirect material and labor costs of providing, leasing, installing, repairing, and servicing customer equipment." Pursuant to the 1992 Cable Act, material and labor costs included in the equipment basket must be recoverable by the operator. The costs of installing and retrieving converters, the costs of managing the converter inventory, and the material costs of converters are clearly related to providing and installing equipment, and are properly classified as part of the equipment basket. Thus, TCI-WA must be permitted to recover the labor costs of installing and retrieving converters, the costs of managing converter inventory, and the material costs of converters. 9. TCI-WA, however, does not adequately justify its reasons for treating the labor costs of installing and retrieving converters as capital costs and including them in Schedule C of Form 1205. Indeed, TCI-WA does not clearly distinguish these costs from the operating expenses and labor costs that are ordinarily included in Schedule B. Instead, TCI-WA argues that it should include these costs in Schedule C because it has not listed them elsewhere in Form 1205. The Commission's instructions for completing Schedule B specifically provide that operators include "all annual operating expenses . . . for installation and maintenance of all cable facilities" on Schedule B. Moreover, operating expenses incurred specifically to maintain and install customer equipment are referenced expressly in the instructions for completing Schedule B. Thus, the Commission's instructions for Form 1205 clearly indicate that TCI-WA should include the labor costs of installing and retrieving converters on Schedule B rather than on Schedule C. Such costs are thereby included in installation charges or in the maintenance element of the equipment lease charges. They may not be included on Schedule C, which is used only to "compute the annual capital costs of equipment leased to customers." 10. TCI-WA states that certain costs in question are related to inventory management and claims that such costs are incidental costs that may be included as annual purchase costs. We agree that certain costs of managing converter inventory may be capitalized and therefore included on Schedule C as converter costs. Pursuant to Commission rules, purchase costs that are capitalized and reported on Schedule C as converter costs would include "acquisition price and incidental costs such as sales tax, financing, and storage up to the time [the converter] is provided to the customer. Although the list of incidental costs in 76.923(f) is not exhaustive, the costs at issue, i.e., labor costs of retrieval and reinstallation of converters, the cost of inventorying such items, and the material supplies associated with their reinstallation, are not incidental to the activities associated with placing new converters into service. The rules define incidental costs as costs incurred up to the time the equipment is provided to the customer. The converter installation and retrieval costs that TCI-WA seeks to capitalize appear to have been incurred after the initial converter installation. The rules do not provide for the capitalization of the costs of retrieval, re-installation and re-inventorying of converters. 11. Further, TCI-WA does not clearly explain the basis for including the material and equipment costs in question on Schedule C. Certain materials and supplies associated with equipment installations may be capitalized. Where such material and supplies have been capitalized as part of the converter cost, it would be proper to include such costs on Schedule C and recover them in the converter lease charge. Alternatively, incidental material and supplies could be expensed, included on Schedule B, and recovered in installation charges or in the maintenance element of the appropriate lease charge. The accounting treatment, under GAAP, would determine which schedule is used. If Schedule C is appropriate, the accounting would determine which asset group it should be included with on this schedule. Thus, if the operator capitalizes certain converter installation materials and supplies in the converter account, it would be proper to report the costs on Schedule C for converters. It is not clear from the record in this case, however, where all of the materials and supplies in question have been recorded. It appears that the costs involved either are not capitalized or have been capitalized in accounts for equipment for which TCI-WA has not established a separate regulated charge. In either case, we find nothing in the record to indicate that they may be included with the converter costs on Schedule C. 12. We find that TCI-WA has not provided any support for its $20 figure for converter capital costs, aside from its assertion that the figure is based on a national survey. The instructions to Form 1205 state, in part, that "data may be identified at the level of organization at which the records are kept, e.g., system-wide." As noted above, although TCI-WA concedes that the RCC correctly notes that it "relied on national, rather than system-specific, information to calculate the $20 figure," it contends that because of conflicts between its bookkeeping and regulatory demands, "it made far more sense to derive a conservative figure based on a national cost survey than trying to develop numerous system-specific figures." Moreover, TCI-WA continues, the $20 figure is at the lowest end of its sampled range. The onus is not upon the RCC to accept TCI-WA's proposed $20 figure and reasons in support thereof, but rather, on TCI-WA to provide the RCC with data collected and maintained on the same organization level at which TCI-WA keeps its other records. We are not persuaded by TCI-WA's justifications to deviate from that requirement. We find, therefore, that TCI-WA has failed to meet its burden under Commission rules to demonstrate the reasonableness of its rates. Accordingly, we deny TCI-WA's appeal with respect to the labor costs of installing and retrieving converters, the operating costs of managing converter inventory, and the material costs of converters. V. ORDERING CLAUSES 13. Accordingly, IT IS ORDERED that the appeals by TCI of Auburn, Inc. and TCI of Tacoma, Inc., of the local rate orders of the RCC, with respect to the capitalization of the labor costs of installing and retrieving converters, the operating costs of managing converter inventory, and material costs of converters, ARE DENIED. 14. This action is taken by the Deputy Chief, Cable Services Bureau, pursuant to authority delegated by  0.321 of the Commission's rules. FEDERAL COMMUNICATIONS COMMISSION John E. Logan Deputy Chief, Cable Services Bureau