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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 ) ) ) TCI Communications, Inc. ) CUID No. PA1855 (Pittsburgh) d/b/a TCI of Pennsylvania, Inc. ) ) Complaint Regarding ) Cable Programming Services Tier ) Rate Increase ) ORDER Adopted: February 11, 1998 Released: February 12, 1998 By the Deputy Chief, Cable Services Bureau: 1. In this Order we consider a complaint against the June 1, 1997 rate increase that the above-captioned operator ("Operator") implemented for its cable programming services tier ("CPST") in the community referenced above. Operator has attempted to justify its CPST rate increase through a benchmark showing on FCC Forms 1240. We have already issued a separate order ("First Order") which resolved Operator's CPST rates from September 1, 1993 through September 15, 1995. We subsequently issued another order ("Second Order") which found that Operator's CPST rate increase effective June 1, 1996, was not unreasonable. This Order addresses only the reasonableness of Operator's June 1, 1997 CPST rate increase. 2. The Communications Act authorizes the Federal Communications Commission ("Commission") to review the CPST rates of cable systems not subject to effective competition to ensure that rates charged are not unreasonable. If the Commission finds the rate unreasonable, it shall determine the correct rate and any refund liability. The Telecommunications Act of 1996 ("1996 Act"), and our rules, require that complaints against the CPST rates be filed with the Commission by a franchising authority that has received subscriber complaints. A franchising authority may not file a CPST rate complaint unless, within 90 days after such increase becomes effective, it receives more than one subscriber complaint. 3. On November 17, 1997, the local franchising authority ("LFA") filed its complaint against Operator's June 1, 1997 CPST rate increase. In its complaint, the LFA asserts that it has received more than one subscriber complaint against Operator's CPST rate increase, thereby triggering the Commission's jurisdiction to review this complaint. The valid complaint from the LFA triggers an obligation on behalf of the cable operator to file a justification of its CPST rates with the LFA. Thus, in this case, Operator is required to justify the increase in its CPST rate which is the subject of the LFA's complaint. Operator filed FCC Forms 1240 with the LFA as justification for this rate increase. The LFA also attached to its complaint a Supplement raising several issues contending that the Operator has not met its burden of justifying its CPST rate. Operator submitted a letter ("Response") responding to the LFA's Supplement. 4. First, the LFA contends that Operator, by its own admission, has a financial interest in numerous channels offered by Operator on the CPST. The LFA states that Operator's financial interest in these channels may be discerned from Attachment B to the FCC Form 1215 filed with the LFA by Operator on or about March 1, 1997 and Attachment 2A of the FCC Form 1240 filed by Operator with the LFA on or about March 1, 1997. Section 76.922(f)(6) of our rules allows adjustments to permitted charges in the cost of programming purchased from affiliated programmers, but only so long as the price charged to the affiliated system reflects either: 1) the prevailing company prices offered in the marketplace to third parties; or 2) the fair market value of the programming. The LFA states that on May 30, 1997, it issued a written rate decision which found that Operator did not establish the showing required by Section 76.922(f)(6) as it pertains to the programming rate for the basic service tier ("BST"). Accordingly, the LFA contends that "there is reason to doubt that the required Section 76.922(f)(6) showing can be made by [Operator] as it pertains to CPST." The LFA requests that the Commission require Operator to submit "record evidence" demonstrating that Operator has met its burden under Section 76.922(f)(6) of the Commission's rules. In its Response, Operator contends that it has "met its initial burden" of proving compliance with Section 76.922(f)(6) "[w]ith the documents [already] delivered to the Commission." 5. Second, the LFA requests that the Commission require Operator to provide information demonstrating that Operator's projected costs of programming are "reasonably certain" and "reasonably quantifiable." The Commission's rules provide that "[i]n order that rates be adjusted for projections in external costs, the operator must demonstrate that such projections are reasonably certain and reasonably quantifiable." The Commission's rules also state that "[p]rojections involving copyright fees, retransmission consent fees, other programming costs, Commission regulatory fees, and cable specific taxes are presumed to be reasonably certain and reasonably quantifiable." The LFA contends that, although the Commission's rules state that programming costs are presumed to be reasonably certain and reasonably quantifiable, such presumption only is applicable "to the extent that programmers and operators have agreed in advance to the amount of programming cost changes and the date the cost changes will take effect." In addition, the Commission has explained that "[t]his presumption does not eliminate an operator's duty to respond to reasonable requests for information in support of rate filings." The LFA states that as part of its rate review of the FCC Form 1240 filed by Operator on April 14, 1997, requesting a change in the basic service tier ("BST") rate, the LFA delivered to Operator a detailed Letter of Inquiry ("LOI") requesting that Operator provide clarification and additional information. On April 24, 1997, Operator delivered to the LFA a reply in writing to the LOI. On May 30, 1997, the LFA issued its written rate decision in which the LFA found that Operator "did not establish the showing required by Section 76.922(e)(2)(ii)(a) of the FCC's Rules as it pertains to the [BST] rate." Accordingly, the LFA requests that the Commission "make inquiry of [Operator] to ascertain whether [Operator's] projected costs of programming are 'reasonably certain' and 'reasonably quantifiable.'" In its Response, Operator states that it has "no obligation to submit additional information unless specifically requested." 6. Upon review of these two issues raised by the LFA, the LFA has not stated, with any specificity, why Operator has failed to meet its burden under Sections 76.922(f)(6) and 76.922(e)(2)(ii)(a) of the Commission's rules. The LFA states that it has issued a written rate decision which determined that Operator had not met its burden, concerning Sections 76.922(f)(6) and 76.922(e)(2)(ii)(a), in its rate justification for its BST rate. While encompassing similar concepts, the LFA's review of BST rates and the Commission's review of CPST rates are independent proceedings. In a CPST complaint, an LFA must specify its assertions and not rely on actions it has taken in its review of the BST. The LFA has failed to include its written decision, or any document outlining its reasons showing the deficiencies in Operator's filing, with its CPST complaint. We will not request additional information from Operator concerning its showing under Sections 76.922(f)(6) and 76.922(e)(2)(ii)(a), except to the degree the LFA articulates a concern with Operator's programming costs and Operator's relationships with its programmers, affiliated and otherwise. Consistent with our other recent decisions, we will order the Operator to provide, for each CPST channel for which programming costs are being increased or revenues are being received from programmers, a channel by channel explanation of the revenues received from programmers, a description of the revenue, as well as a channel by channel explanation of its programming costs increases, along with documentation explaining why, pursuant to the Commission's rules, the revenues received from programmers should not offset the increases in Operator's programming costs. 7. Third, the LFA contends that Operator has failed to justify its CPST maximum permitted rate because the License Fee Reserve claimed by Operator was neither reported nor justified on "Worksheet 7 - External Costs" as it asserts is required by FCC Form 1240 and Section 76.922(f) of the Commission's rules. The LFA argues that it is improper for Operator to recover license fee payments after December 31, 1996 as a License Fee Reserve. Rather, the LFA contends that, after December 31, 1996, license fees incurred (or to be incurred) by Operator are properly recovered under Section 76.922(f) "External Costs." 8. In its Response, Operator states that beginning in 1997 "cable operators were allowed to 'pass through' all licensing fees associated with Caps channels." Operator contends that the LFA has erred "in asserting that it was improper [for the Operator] to continue entering these additional licensing fees on Worksheet 2 of the Form 1240." Based on its understanding of the FCC Form 1240, Operator states that it has "continued to include all of its Caps channels, and all Caps-related licensing fees, on Worksheet 2." Operator contends that this approach ensures that these channels receive the regulatory treatment intended by the Commission. Operator argues that, notwithstanding the LFA's assertions, "the approach works to the customer's benefit, for it is the best means available to ensure that Caps-related licensing fees are not improperly 'marked-up' in Worksheet 7 by the 7.5% intended for other channels." Operator recognizes that "an operator could use the $.30 Caps-related [license fee] reserve in 1995 and 1996 only if it, in fact, incurred the claimed licensing fees." In addition, Operator recognizes that "an operator's unrestricted ability to claim Caps-related licensing fees beginning in 1997 still requires that the operator actually incur the claimed licensing fees." Operator argues that the LFA "compounds its error by accusing [Operator] of trying to avoid scrutiny of its licensing fees by claiming them under the 'license fee reserve' rather than as an ordinary 'external.'" Operator disputes this accusation and contends that it "has never argued to the [LFA] or the Commission that licensing fees associated with Caps channels (and recorded under the 'license fee reserve' entry on Worksheet 2) are entitled to a different standard of review than other licensing fees." Operator contends that the LFA's "arguments regarding [Operator's] use of the license fee reserve are erroneous and have no consequence to the CPST rates ultimately established." 9. Operator has elected to justify adjustments to its rates by using the annual method available on FCC Form 1240 and has chosen to add channels using the Caps Method that is permitted pursuant to Section 76.922(g)(3) of the Commission's rules. The LFA has misinterpreted the Commission's rules. The Operator correctly raised its rates under the Caps Method. Using the Caps Method, an Operator may increase its rates between January 1, 1995, and December 31, 1997, by a per channel adjustment of up to $0.20 per channel, exclusive of programming costs, for new channels added to CPSTs on or after May 15, 1994. The Operator may not make per channel adjustments totalling more than $1.20 per month per subscriber through December 31, 1996, or by more than $1.40 per month per subscriber through December 31, 1997 (the "Operator's Cap"). The Commission's rules also allow for a license fee reserve when adding new channels. Operators that make channel additions on or after May 15, 1994, may increase their rates by a total of $0.30 per month, per subscriber, between January 1, 1995, and December 31, 1996, for license fees associated with such channels. The $0.30 limit no longer applies after December 31, 1996. After December 31, 1996, "license fees may be passed through to subscribers pursuant to [Section 76.922(f)], except that license fees associated with channels added pursuant to [Section 76.922(g)(3)] will not be eligible for the 7.5% mark-up on increases in programming costs." 10. The LFA argues that Operator was required to calculate its programming costs, including license fees, on Worksheet 7 of the FCC Form 1240. This is incorrect. Had Operator calculated its programming costs on Worksheet 7, an automatic 7.5% mark-up would have been added to its programming costs. This is not permitted because Operator's channels were added pursuant to the Caps Method and Section 76.922(g)(3). Therefore, these channels are ineligible for the 7.5% mark-up on increases in programming costs. As required by FCC Form 1240, Operator correctly calculated its programming costs for these channels on Worksheet 2 of FCC Form 1240, which does not add a 7.5% mark-up. We find that Operator has correctly calculated its programming costs associated with channels Operator added using the Caps Method. 11. We have examined the documentation, including FCC Forms, which Operator has submitted to justify its June 1, 1997 CPST rate. To justify rates for the period beginning May 15, 1994 through a benchmark showing, 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 alternatively justify adjustments to their rates on an annual basis using FCC Form 1240 to reflect reasonably certain and quantifiable changes in external costs, inflation, and the number of regulated channels that are projected for the twelve months following the rate change. Any incurred cost that is not projected may be accrued with interest and added to rates at a later time. 12. On February 22, 1996, the Commission issued an order granting Operator a waiver (the "Waiver Order") of certain rate adjustment requirements in its initial filing of the Commission's annual rate adjustment form (FCC Form 1240). Specifically, the Waiver Order allowed Operator, in its initial FCC Form 1240 filings, to include estimated changes in costs, inflation, channels and subscriber information attributable to the period between the last date for which actual cost data was available and the effective date of the new rates. In the Waiver Order, Operator was instructed to include in its initial FCC Form 1240 filing certain calculations, such calculations to be performed on FCC Form 1240 (primarily in Module G), or off FCC Form 1240, in an alternative showing done pursuant to the Waiver Order's "General Guidelines." Operator chose to use an alternative showing pursuant to the "General Guidelines" rather than perform its calculations directly on FCC Form 1240. 13. On October 25, 1996, Operator wrote to the Commission requesting review and approval of a modified FCC Form 1240 to justify rates for the projected period from June 1, 1997 to May 31, 1998. On January 9, 1997, we consented to the Operator's use of the form for such period in lieu of filings on the Commission's standard FCC Form 1240. 14. To justify its CPST rate, effective June 1, 1997, Operator submitted two FCC Forms 1240, the first for the projected period June 1, 1996 to May 31, 1997 ("First Form 1240"), and the second for the projected period June 1, 1997 to May 31, 1998 ("Second Form 1240"). Operator's First Form 1240 used Operator's alternative showing, calculated pursuant to the Waiver Order. Operator's Second Form 1240 followed the format set forth in Operator's October 25, 1996 letter. On reviewing the submitted forms, we determined that neither of the submitted forms produced identical results to filings that would have been made on the Commission's standard FCC Form 1240. 15. Accordingly, on December 12, 1997, Operator submitted new standard FCC Forms 1240, for the projected periods June 1, 1996 to May 31, 1997, and June 1, 1997 to May 31, 1998, which performed the Waiver Order's calculations directly on the standard FCC Forms 1240 as well as the calculations described in Operator's October 25, 1996 letter. Review of both forms is necessary to calculate the appropriate maximum permitted rate ("MPR") and refund liability, if any, for the period beginning June 1, 1997. Operator also submitted a refund plan which calculated the amount of refunds owed to subscribers in the community referenced above for the duration of the one year projected period ending May 31, 1998. 16. Upon review of Operator's new FCC Form 1240, for the projected period June 1, 1996 to May 31, 1997, we find that Operator has correctly calculated its MPR of $18.22. Upon review of Operator's new FCC Form 1240, for the projected period June 1, 1997 to May 31, 1998, we find that Operator has correctly calculated its MPR of $18.28. However, Operator's actual CPST rate, effective June 1, 1997, is $18.68. Operator has submitted a refund plan which calculates, with interest, the total amount of overcharges that will be collected from CPST subscribers in the community referenced above from June 2, 1997 (the date of the first subscriber complaint) to May 31, 1998. Upon review of Operator's refund plan, we find that Operator has correctly calculated, with interest, the amount of overcharges that will be received from subscribers during the projected period ending May 31, 1998. These calculations result in a total refund amount of $4.98 per CPST subscriber, including interest. We will order Operator to pay the refund amount of $4.98 to each current CPST subscriber within 60 days of the release of this order. We will also order that any rate Operator charges on and after June 1, 1998 shall be premised on Operator's use of (1) the standard FCC Form 1240 for rate calculation purposes and (2) $18.28 as Operator's Current Maximum Permitted Rate as called for on Line A1 of its FCC Form 1240 filing for the projected period beginning June 1, 1998. Contingent upon Operator's refund payment to its subscribers, we have determined that Operator's total CPST rate collections in the community referenced above, for the projected period June 1, 1997 to May 31, 1998, will be reasonable, pending our review of the revenue/offset issue. 17. Accordingly, subject to our review of issues reflected in paragraph 20, IT IS ORDERED, pursuant to Section 76.961 of the Commission's rules, 47 C.F.R. Section 76.961, that Operator shall refund to CPST subscribers in the franchise areas referenced above the amount of $4.98 within 60 days of the release of this Order. 18. IT IS FURTHER ORDERED, pursuant to Section 76.962 of the Commission's rules, 47 C.F.R. Section 76.962, that Operator, within 90 days of the release of this Order, shall file with the Chief, Cable Services Bureau, a certification of compliance with the refund requirements of this Order, and a certification of its intent to comply with all other aspects of this Order. 19. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R. Section 0.321, that Operator shall use (1) the standard FCC Form 1240 for rate calculation purposes and (2) $18.28 as Operator's Current Maximum Permitted Rate as called for on Line A1 of its FCC Form 1240 filing for the projected period beginning June 1, 1998, pending our review of the revenue/offset issue. 20. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R. Section 0.321, that Operator shall file with the Chief, Cable Services Bureau, within 30 days of the release of this Order, a channel by channel explanation of the revenues received from programmers, a description of the revenue, as well as a channel by channel explanation of its programming costs increases, for each CPST channel for which programming costs are being increased or revenues are being received from programmers, along with documentation explaining why, pursuant to the Commission's rules, the revenues received from programmers should not offset the increases in Operator's programming costs. 21. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R. Section 0.321, that the complaint referenced herein against the rates charged by Operator in the community set forth above IS GRANTED TO THE EXTENT INDICATED HEREIN. FEDERAL COMMUNICATIONS COMMISSION John E. Logan Deputy Chief, Cable Services Bureau