Federal Communications Commission DA 96-1339

Before the Federal Communications Commission Washington, D.C. 20554

) In the Matter of ) ) InterMedia Partners ) CUID No. GA0289 (City of Hogansville) ) Cost of Service Showing and ) FCC Form 1210 Filings to Support ) Basic Service Tier Rate and ) Cable Programming Services Rates )

ORDER

Adopted: 19, 1996 Released: August 19, 1996

By the Deputy Chief, Cable Services Bureau:

INTRODUCTION

1. On August 12, 1994, Robin Media Group, Inc. d/b/a InterMedia Partners ("InterMedia"), serving CUID Number GA0289, filed a cost of service showing with its franchising authority, the City of Hogansville, Georgia ("City"), seeking to justify its Basic Service Tier ("BST") rate. 1 Thereafter, on September 13, 1994, the City petitioned the Federal Communications Commission ("Commission") to review the BST cost of service showing.2 On 15, 1995, the Commission granted the City's request and agreed to review InterMedia's cost of service showing for the BST rate.3

1 In accordance with 47 C.F.R. § 76.910, on , 1993 the City filed FCC Fonn 328 with the Commission requesting certification to regulate the BST rate. The City also served a copy of FCC Form 328 on InterMedia which served as notification to InterMedia of the City's intention to regulate the BST rate. On , 1993 the City ( 1) authorized the filing of FCC Fonn 328 with the Commission and (2) adopted regulations with respect to the rates for the BST that were consistent with the regulations prescribed by the Com.mission for regulation of the BST. 2 See Third Order on Reconsideration in MM Docket Nos. 92-266 and 92-262 (Third Recon. Order), 9 FCC Red 4316, 4338-39 (1994). The Commission recognized that some local franchising authorities may have resources and personnel sufficiept to conduct a review of the rate-setting justification based on the benchmark approach but not to examine and review a cost of service showing. The Commission also understood that this concern may have discouraged certification by many local franchising authorities. Therefore, it established procedures under which the Commission, if requested by the local franchising authority in a petition for special relief under Section 7 6. 7 of the Commission's rules, will issue a ruling that makes cost of service detenninations for the BST. 47 C.F.R. § 76.933(d). ; The City asserted that it lacked the municipal resources and adequately trained personnel necessary to conduct the cost of service review. See Petition of City September 13, 1994; see also Affidavit of Constance G. Ellis, City Clerk, City of Hogansville (September 7, 1994). The Commission granted the City's request on March 15, 1995 and 9949 Federal Communications Commission DA 96-1339

2. On 11, 1995, InterMedia also filed a cost of service submission with the Commission in response to complaints which allege that InterMedia' s cable programming services tier ("CPST") rate is unreasonable.4 On , 1996, InterMedia supplemented and amended this filing.

3. According to infonnation provided by InterMedia in its cost of service showings, the franchise area comprised approximately 676 BST subscribers and 288 CPST subscribers at the time of the August 12, 1994 filing, and approximately 680 BST subscribers and 302 CPST subscribers at the time of the April 11, 1995 filing. InterMedia provided 12 BST channels and 7 CPST channels at the time of both filings. In this review process, pursuant to the Cable Television Consumer Protection and Competition Act of 1992 (" 1992 Cable Act"), 5 we analyze InterMedia's BST and CPST cost of service showings to ensure that the rates charged were not unreasonable and to determine any associated refund liability.6

4. In this review, we are analyzing BST rates charged from , 1994 to the present.7 InterMedia's cost of service filings seek to esta~lish that its BST rate of $17.54 per month for this period is justified based on its cost of providing service on its BST. Our analysis indicates

agreed to review InterMedia's cost of service showing regarding its BST rates for the City. See Letter dated March 15, 1995, from Jacqueline Spindler, Deputy Division Chief, Financial Analysis and-Compliance Division, to the Honorable Calvin Turbyfield, Mayor, City of Hogansville, Georgia. 4 The earliest valid complaint filed and accepted by the Commission for the CPST rate charged in the above franchise area served by InterMedia was received on February 23, 1995. On April 4, 1995, InterMedia filed a request for extension oftime (until April IO, 1995) in which to file its cost of service rate justification. The request for extension of time is moot, because lnterMedia filed its cost of service rate justification on April 11, 1995. 5 See Communications Act of 1934, as amended by the Cable Television Consumer Protection and Competition Act of 1992, Pub. L. No. 102-385, 106 Stat. 1460 (1992) ("1992 Cable Act") at § 623{c)(l){C), 47 U.S.C. § 543(c)(l)(C). The Communicatfons Act authorizes the Commission to order that an operator refund to subscribers that ponion of rates that subscribers have paid that are, upon review, found to be unreasonable. 6 See Communications Act, §§ 623(b)(l) and 623(c){l)(C). 7 InterMedia submitted a letter on 23, 1993 to the City advising that InterMedia qualified as a small system and that, accordingly, the Commission's stay of rate regulation, for systems with 1,000 or fewer subscribers, applied to InterMedia's Hogansville system. See Letter from Bruce J. Stewart, Counsel, InterMedia Partners, to A. Quillian Baldwin, Jr., City Attorney, City of Hogansville, Georgia (November 23, 1993). See also Implementation of Sections of the Cable Television Consumer Protection Act of 1992: Rate Regulation, :MM Docket No. 92-266, Memorandum Opinion and Order and Further Notice of Proposed Rulemaking, 8 FCC Red 5585 (1993). On May 16, 1994, the City issued a letter to InterMedia advising lnterMedia that the stay for small systems terminated on May 15, 1994 and that the City was authorized to regulate InterMedia's BST rate as of May 15, 1994. See Letter from The Honorable Calvin J. Turbyfield, Mayor, City of Hogansville, to Anthony (Sonny) Seneker, Jr., General Manager, Peachstate Cablevision (May 16, 1994). See also Implementation of Sections of the Cable Television Consumer Protection Act of 1992: Rate Regulation, MM Docket No. 92-266, Second Order on Reconsideration, Fourth Repon and Order, and Fifth Notice of Proposed Rulemaking, 9 FCC Red 4119 (1994).

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that the rate charged by InterMedia during the period under review should instead have been $13 .41 per month. 8

5. We are also analyzing CPST rates charged beginning February 23, 1995, the date of the first valid complaint regarding the CPST rate in GA0289.9 InterMedia's April 11, 1995 cost of service filing, on FCC Form 1220, and subsequent FCC Form 1210 filing seek to establish that its CPST rate of $11.94 per month beginning February 23, 1995 is justified based on its cost of providing service. Our review indicates that InterMedia' s CPST rate, as substantiated on its FCC Form 1220 and FCC Form 1210 filing, is justified under the Commission's rules.

BACKGROUND

6. On , 1993, the Commission released an Order establishing rules to implement the cable television rate regulation provisions of the 1992 Cable Act. 10 In the Rate Order, the Commission determined that a benchmark and price cap approach should serve as the primary method for regulating BST and CPST rates. The Commission also concluded that because the benchmark methodology might not produce fully compensatory rates in all cases, it was appropriate to permit operators, as an alternative, to justify rates using cost of service showings.11 The cost of service approach was intended to be used only if an operator believed that the maximum rate permitted under the benchmark formula would no~ enable the operator to recover costs reasonably incurred in providing rate regulated cable services. Under traditional cost of service regulation, rates are set at a level to provide a company with recovery of its costs and a reasonable opportunity to earn a fair return on its capital investment. 12

8 On 23, 1995, the City issued an accounting order pursuant to 47 C.F.R. § 76.933(c), thereby preserving its ability to order refunds. As a result, applying 47 C.F.R. § 76.942(c)(2), the total refund period shall be for a period not to exceed one year back in time from the date of the accounting order. The actual refund liability time period is from May 15, 1994 (the date the stay ended), to January 23, 1995 (the date of the City's accounting order). 9 See Communications Act, § 623(c)(l)(C). 10 Implementation ~fSections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation, MM Docket No. 92-266, Report and Order and Further Notice of Proposed Rulemaking (''Rate Order''), 8 FCC Red 5631, 5637 (1993). 11 Rate Order, 8 FCC Red at 5794-95; see also 47 C.F.R. § 76.922. 12 Under the traditional cost of service formulation, a company's revenue requirement is equal to the reasonable expenses of providing service and a fair return on investment: R = E + (V - d) r, where R is the revenue requirement; E is expenses, including operating expenses, maintenance expenses, depreciation and taxes; V is the value of the rate base, including plant in service and working capital; d is accumulated depreciation; and r is the authorized rate of return, consisting of a weighted average of long term debt, preferred stock, and common stock. See Implementation of Sections of the Cable Television Consumer Protection Act of 1992: Rate Regulation, MM Docket No. 93-215, Notice of Proposed Rulemaking, FCC 93-353 (released 16, 1993), 58 Fed. Reg. 40762 (July 30, 1993) ("Notice') at 40765 n.18.

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7. At the time of the adoption of the Rate Order the Commission found that the record before it did not provide sufficient information on which to develop detailed cost of service rules for the cable industry. 13 Therefore, on , 1993, the Commission issued a Notice of Proposed Rulemaking which proposed requirements to govern cost of service showings submitted by cable operators seeking to justify rates higher than those determined under the benchmark approach. 14 The Commission indicated in the Notice, as it did in the Rate· Order, that general cost of service principles would apply to cost of service filings submitted prior to the adoption of specific rules. 15 lnterMedia' s cost of service filing under review in this proceeding was submitted during that pre-adoption time period. In February 1994, the Commission adopted an order (the "Cost Order") setting forth specific regulatory requirements to govern cost of service filings to justify rates above levels determined under its benchmark requirements. Those rules were to apply to rates charged or to be charged after , 1994. The guidance of the Cost Order became known as the "Interim Rules." 16

8. On 15, 1995, the Commission adopted the Second Report and Order, First Order on Reconsideration, and Further Notice of Proposed Rulemaking, :M:11 Docket No. 93-215 and CS Docket 94-28 ("Final Cost Order") 11 setting forth its final rules to govern cost of service filings. In the Final Cost Order the Commission refined the approach it adopted in the Notice and Cost Order and reaffirmed the use of the cost of service approach for operators for which the benchmark approach might not produce fully compensatory. rates. 18 The Commission also determined that cost of service filings still pending before the Coinmission would be reviewed in accordance with the Final Cost Order, unless the operator notified the Commission by April 8, 1996, that it wished its filing to be reviewed under the Interim Rul~s of the Cost Order.19

DISCUSSION

A. FCC Form 1220

9. InterMedia did ·not notify the Commission that it elected to have the Interim Rules applied to the filings pending in this proceeding. Therefore, we have analyzed InterMedia's BST and CPST cost of service submissions consistent with the Final Cost Order. Rate base and

13 Rate Order, 8 FCC Red at 5798-99. 14 Notice, 58 Fed. Reg. 40762 (July 30, 1993). 15 Id. at 40763; Rate Order, 8 FCC Red at 5798-99, 5854 n.859. 16 See Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation, MM Docket No. 93-215, Report and Order and Further Notice of Proposed Rulemaking, 9 FCC Red 4527 (1994). 17 11 FCC Red at 2220 (1996).

IS Id.

19 Id.

9952 Federal Communications Commission DA 96-1339 expense items have been evaluated to determine whether InterMedia should be permitted to recover those items. Where a certain rate base or expense element was not supported, was excessive, or was unrelated to providing regulated cable service, such cost was disallowed in whole or in part. 20 Where reported costs were disallowed, we have made appropriate adjustments.

I 0. The rate base represents the amount of used and useful investment the cable company prudently makes in its facilities to provide service to its customers.21 It is necessary to determine the allowable rate base both to calculate the return component of the revenue requirement and to compute the .earned rate of return. In analyzing InterMedia' s filing, we reviewed the components of InterMedia's rate base to determine the investment upon which InterMedia is entitled to earn a return. For purposes of this review, we have made adjustments to the rate base as discussed below.

11. Construction Work in Progress: InterMedia includes allocated amounts for construction work in progress of $14,408 and $8,405 for BST and CPST, respectively?2 The Final Cost Order allows costs associated with plant in the rate base if such plant is used and useful.23 As discussed in the Final Cost Order, used and useful plant is plant that is actually used to send signals to customers. 24 The used and useful standard thus prohibits the inclusion of the cost of plant in the rate base unless the plant is in operation and providing direct benefits to subscribers. 25 A review of InterMedia' s submissions shows the arriounts reported as construction work in progress represents projects that were not used and useful at the time of filing. Therefore, we removed the amount reported as construction work in progress from the rate base and made appropriate adjustments to the BST and CPST revenue requirement.

12. Asset Valuation: InterMedia's cost of service filing includes both tangible and intangible assets in its rate base. InterMedia used an estimated original cost valuation to establish the value of the assets in its rate base. InterMedia also provided a rate base valuation using its book cost based on the acquisition price it paid for the above referenced franchise. 26 InterMedia asserts that the intangible assets that it includes in its rate base play an important role in the

20 The Commission made clear that the fact that an operator has incurred costs does not necessarily establish its right to recover those costs from subscribers. See Rate Order, 8 FCC Red at 5794 n.6I9. 21 Rate base traditionally consists of plant in service, non-current assets, materials and supplies, and cash working capital. 22 For purposes of our analysis, construction work in progress includes plant under construction and allowance for funds used during construction. · 23 Final Cost Order, I I FCC Red at 2236-37.

24 Id.

25 Final Cost Order, 11 FCC Red at 2235. 26 InterMedia acquired this franchise in I 991.

9953 Federal Communications Commission DA 96-1339 operation of its cable system. 27 InterMedia further states that a policy of excluding intangibles from rate base fails to recognize the substantial investment cable system operators must make in developing and/or acquiring the many intangible assets that are prerequisites either to operating a cable system or to its efficient operation.28 According to lnte~Medi~ by excluding intangibles the Commission is unfairly penalizing those operators who have acquired an existing cable system.29

13. As the Commission reiterated in the Final Cost Order, original cost is a reliable and fair measure of the value of tangible assets. However, as discussed in the Final Cost Order it is often difficult, if not impossible, for cable operators to determine the original cost of a tangible asset.30 Thus, to accommodate this reality for cable systems constructed before May 15, 1994, the Final Cost Order allows operators to use the book value that was recorded as of May 15, 1994, regardless of whether the system was built or acquired by the current operator. 31 Therefore, we will allow lnterMedia to use the book value of its tangible assets to determine the reasonableness of its rates in this proceeding.

14. In the Final Cost Order, the Commission adopted a methodology to exclude that portion of the acquisition price of cable system assets that represents amounts paid for the system in expectation of monopoly profits. Under the methodology, a 34% adjustment would be made to the purchase price a cable operator paid for cable assets (including both tangible and intangible assets) with the result that some portion of the assets would be excluded from rate base.32 Applying the methodology approved in the Final Cost Order to lnterMedia' s cost of service in this proceeding results in a gross disallowance of $530,879. Of that amount, $265,440 has been 33 allocated to the BST and $154,840 has been allocated to the CPST. -

15. Use of Equivalent Billing Units: On , 1994,34 the Commission announced that a cable operator, in the absence of an actual subscriber count, may use a subscriber count based on equivalent billing units ("EBUs") for purposes of filing the Corillirissfon's benchmark and

27 InterMedia's Aug. 15, 1994 filing at p. I. 28 Id. at p. 1. 29 Id. at p. 1. 30 Final Cost Order, 11 FCC Red at 2253.

31 Id.

32 Final Cost Order, 11 FCC Red at 2246-47. 33 "Gross disallowance" equals 34% of the purchase price of the system. 34 See Questions and Answers on Cable Television Rate Regulation, Public Notice dated July 27, 1994.

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quarterly increase forms (FCC Forms 1200 and 1210, respectively).35 The Public Notice on the use of EBUs in these forms, however, was silent regarding the propriety of using EBU counts on FCC Form 1220, the cost of service form.

16. When calculating its maximum permitted rate InterMedia reported subscriber counts based upon EBUs. InterMedia has persuaded us that EBU counts are appropriate for use on FCC Form 1220. EBU counts more accurately account for the unique revenue and cost characteristics of special customer .classes. EBU counts correctly recognize the reduced costs of providing services on a per subscriber basis to special customer classes, and ensure that related revenues are properly assigned. Therefore, we conclude that InterMedia has used acceptable allocation methodologies, both in allocating costs from higher organizational levels to lower organizational levels and for inter-tier allocations. Therefore, we did not revise its cost allocations.

17. Upon review of InterMedia's cost of service filings, and having incorporated the adjustments discussed above, we conclude that InterMedia has failed to justify the BST rate of $17.54 charged from May 15, 1994 to January 23, 1995. Rather, lnterMedia's cost of service filings justify a maximum permitted BST rate of $13.41 per month (plus franchise.fee).

B. FCC Form 1210 Filings

18. In addition to its April 11, 1995 FCC Form 1220 filing; which is based on a test year ending December 31, 1994, InterMedia submitted an FCC Form 1210 on November 30, 1995 to reflect changes in channels, external costs, and inflation for the period January 1, 1995 to September 30, 1995. We have reviewed the FCC Form 1210 and, while we found no apparent errors in the methodology that lnterMedia applied, we adjusted Module A of FCC Form 1210 to reflect adjustments we made to lnterMedia's April 11, 1995 Form 1220 filing as described previously. After making the appropriate adjustments, we conclude that InterMedia has justified the CPST rate of $11.94 that it was charging pursuant to its FCC Form 1210 filing.36

;s Under this methodology, as specified in the Commission's "Annual Report of Cable Television Systems" (FCC Form 325) instructions, subscribers to bulk-rate service are calculated by dividing "the annual bulk-rate charge" by "the basic annual subscription rate for individual households."

6 ; According to the Final Cost Order, the 34% adjustment methodology (to allow 66% of a system's purchase price in the rate base) may be applied only for the purpose of justifying rates in effect as of the effective date of the Final Cost Order, which date was April 8, 1996, or for earlier periods if the operator elects in accordance with the provisions to elect the final cost rules for pending complaints. Accordingly, the 66% allowance may not be used after April 8, 1996 to justify future rate increases. Future rate increases, however, may be justified by cost increases after April 8, 1996, as provided on FCC Form 1210, on FCC Form 1240, or, when the operator again becomes eligible to file, on FCC Form 1220. See Final Cost Order, 11 FCC Red at 2247 and 2298.

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CONCLUSION

19. Based on our review of InterMedia's cost of service filings and supplemental information and applying the Commission's current rules, we find that, as discussed above, lnterMedia has not justified the monthly BST rate of $17.54 (plus franchise fee) for the period after May 15, 1994.

20. Based on our review of InterMedia's cost of service filings and supplemental information and applying the Commission's current rules, we find that, as discussed above, InterMedia has justified the monthly CPST rate of $11.94 (plus franchise fee) for the period beginning February 23, 1995.

21. Based on our review of InterMedia's FCC Form 1210s filings, we find that, as discussed above, lnterMedia has justified the monthly CPST rate of $11.94 (plus franchise fee) that lnterMedia charged for the period covered by its Form 1210 filing, is not unreasonable.

22. Accordingly, IT IS ORDERED, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R. Section 0.321, that the monthly BST rate charged by InterMedia with respect to the above-referenced community, for the period, since May 15, 1994 IS NOT JUSTIFIED.

23. IT IS FURTHER ORDERED, pursuant to Section 76.942 of the Commission's rules, 47 C.F.R. Section 76.942, that InterMedia Partners shall refund to BST subscribers in the franchise area referenced in the caption that portion of the amount paid for basic service during the period from May 15, 1994 to the date of payment which exceeded· the maximum permitted rate of $13.41.

24. IT IS FURTHER ORDERED, pursuant to Section 76.933(d) of the Commission's rules, 47 C.F.R. Section 76.933(d), that this ruling on the monthly rate InterMedia was charging for its BST is binding on the local franchising authority, the City of Hogansville, and the cable operator, InterMedia. The maximum permitted BST rate of $13.41 shall take effect upon implementation of such ruling by the City of Hogansville, the local franchising authority, and refund liability shall be governed thereon.

25. IT IS FURTHER ORDERED, pursuant to Section 0.321 of the Commission's rules, 4 7 C.F .R. Section 0321, that the monthly CPST rates charged by InterMedia Partners with respect to the above-referenced community, for the period covered by its cost of service filing and FCC Form 1210 filing, ARE_ JUSTIFIED, and that no refund liability will be imposed.

26. IT IS FURTHER ORDERED that, pursuant to Section 0.321 of the Commission's rules, 47 C.F.R. Section 0.321, that the complaint against the monthly CPST rates charged by InterMedia with respect to the above-referenced CUID number, IS DENIED.

9956 Federal Communications Commission DA 96-1339

27. IT IS FURTHER ORDERED that the Motion for Extension of Time filed by InterMedia Partners IS DENIED.

FEDERAL COMMUNICATIONS CO:MMISSION

John E. Logan Deputy Chief, Cable Services Bureau

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