10 FCC Red No. 8 Federal Communications Commission Record DA 95-380 Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of PARAGON CABLE Appeal of Local Rate Order of the Consolidated Cable Communications Commission for Portland, Multnomah County, and Linnton, Oregon Franchise Areas its maximum permitted rate.4 In addition, the CCCC ac cepted as reasonable those equipment and installation charges which were below Paragon's maximum permitted rate, but ordered reductions in the rates Paragon charges for addressable converters, manual converters, remotes, and changes of service because these were all priced above Paragon's maximum permitted rate. Paragon was ordered to refund to subscribers those equipment and installation charges since September 1, 1993 which were in excess of its maximum permitted rates. This refund liability, Paragon argues, is in excess of permitted levels. 3. The central issue presented in Paragon's Appeal in volves the CCCC's failure to allow Paragon to offset certain charges in excess of its maximum permitted rates with undercharges in other services it offered which were below its maximum permitted rate.5 ORDER Adopted: February 28, 1995; Released: March 1, 1995 By the Chief, Cable Services Bureau: I. INTRODUCTION 1. On April 13, 1994, Paragon Cable ("Paragon"), the franchisee in the above matter, filed an Appeal of a local rate order adopted March 14, 1994 by its franchising au thority, 1 the Consolidated Cable Communications Commis sion ("CCCC").)2 On April 25, 1994, the CCCC filed a Reply to Paragon's Appeal. 2. In its local rate order, the CCCC established regulated rates for Paragon's basic cable service and associated equip ment and installation charges for its Portland, Multnomah, and Linnton franchise areas, as provided by the Cable Television Consumer Protection and Competition Act of 1992.3 The CCCC's local rateorder determined that Para gon's basic service rate was reasonable because it was below II. STANDARD OF REVIEW 4. Under the Commission's rules, appeals of franchising authorities' local rate orders are reviewed by the Commis sion.6 In ruling on an appeal of a local rate order, 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.7 Therefore, 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 ren dering a local rate order.8 If the Commission reverses a franchising authority's decision, it will not substitute its own decision, but instead it will remand the issue to the franchising authority with instructions for its resolution.9 The three issues under consideration in the instant appeal are discussed in the ensuing section of the Order. 1 On July 13, 1994, Paragon also filed a Request for Emergency Stay of the Local Rate Order, which the Commission granted pending review of Paragon's Appeal. See Paragon Cable, 9 FCC Red 4091 (1994). 2 Effective July 1, 1994, the Consolidated Cable Communica tions Commission changed its name to the Mt. Hood Cable Regulatory Commission. For clarity's sake, the MHCRC will be referred to throughout this Order as the CCCC. 3 Under the Cable Television Consumer Protection and Com petition Act of 1992, and the Commission's implementing regu lations, local franchising authorities may regulate rates for basic cable service, associated equipment, and installations. See Cable Television Consumer Protection and Competition Act, Pub. L. No. 102-385, 106 Stat. 1460 (1992); Communications Act, § 623(b), 47 U.S.C. § 543(b). 4 As part of the rate review process. Paragon submitted an FCC Form 3^3 ("Determination of Maximum Initial Permitted Rates for Regulated Cable Programming Services and Equipment") to the CCCC on November 15, 1993. Subsequently, Paragon sub mitted two revised FCC Form 393s, one on January 7, 1994 and one on February 13, 1994. Local franchising authorities review the information contained in the FCC Form 393, or its succes sor forms, in order to determine cable operators' maximum permitted rates for basic service, associated equipment, and installations under the Commission's rate regulations. See Re port and Order and Further Notice of Proposed Rulemaking in MM Docket 92-266, 8 FCC Red 5631, 5770 (1993) ("Rate Or der"). 5 In reviewing Paragon's FCC Form 393, the CCCC made two revisions to Paragon's equipment and installation rate calcula tions. First, the CCCC contended that certain labor hours which Paragon allocated to equipment costs should have been allocated to installation costs. Second, the CCCC contended that Paragon should not have included any federal or state income tax liability in its equipment cost calculations, because Paragon does business as a partnership, and thus is not subject to income taxation. However, Paragon stated in its Appeal that it "is not asking for a reversal of the CCCC's . . . position" with regard to these computational revisions. Paragon believes that these revi sions will not have an impact on overall system revenue if it is allowed to offset certain charges in excess of its maximum permitted rates with undercharges in other services it offered which were below its maximum permitted rate. As noted in paragraph 9, infra, Paragon is permitted to offset overcharges in this manner. 6 47 C.F.R. §76.944. 7 Rate Order at 5731 ; Third Order on Reconsideration in MM Docket 92-266, 9 FCC Red 4316, 4346 (1994) ("Third Order on Reconsideration "). 8 Id. 9 Id. 3963 DA 9S-380 Federal Communications Commission Record 10 FCC Red No. 8 III. DISCUSSION 5. FCC Form 393 is the official form used by regulators to determine whether an operator's regulated rates for pro gramming, equipment and installations were reasonable during the time period from September 1, 1993 until May 14, 1994.' FCC Form 393 is divided into three separate, but interrelated parts. In Part II, the operator calculates its maximum permitted programming rates, while in Part III, the operator calculates its maximum permitted equipment and installation rates. Part I is a cover sheet that lists the various programming, equipment and installation rates that have been calculated in Parts II and III and compares them to the rates the operator has actually charged during the period of review. 6. The operator's maximum permitted rates are derived by completing Parts II and III of the FCC Form 393, pursuant to which the operator calculates the actual ag gregate revenues collected by the operator for regulated programming, equipment and installation, as of the initial date of regulation ("current rate") or as of September 30, 1992. 11 After calculating actual aggregate revenues, the op erator converts those revenues to a per-channel rate, and then compares the per-channel figures to the applicable benchmark rate. If an operator's current per-channel rate is below the applicable benchmark rate, then the operator's rate is deemed reasonable, but it must remain at its current level. If its current per-channel rate exceeds the benchmark rate, the operator must then compare its September 30, 1992 per-channel rate to the applicable benchmark rate. If its September 30, 1992 per-channel rate is above the benchmark rate, it must reduce this rate to the benchmark rate or by 10%, whichever reduction is less. The adjusted rate will be its maximum permitted rate for programming. Maximum permitted rates for equipment and installation are based on actual cost and are calculated in Part III of the FCC Form 393. Equipment rates are derived from capital and maintenance costs per unit of equipment. In stallation rates are derived from calculation of an hourly service charge and application of that charge to different types of installations. Under our regulations, the maximum permitted rates are deemed to be reasonable, as required by the 1992 Cable Act. 12 Requiring cable operators to set all or some of their rates for programming, equipment or installation below their maximum permitted levels would force them to charge rates at levels below those specifically allowed under our rules. 13 7. If a franchising authority does not dispute the bases for the figures presented in a cable operator's FCC Form 393 or has not discovered any mathematical errors in the form, the franchising authority should then approve the operator's maximum permitted rates, as derived by the form. A franchising authority should not require the oper ator to set a particular rate for programming, equipment or installations at any rate less than its maximum permitted rate, even if its current or actual rate is below its maxi mum permitted rate. Instead, the franchising authority should allow the operator to charge up to its maximum permitted rates, as derived by FCC Form 393. u 8. After setting the various regulated rates that an oper ator is permitted to charge on a prospective basis, a fran chising authority should then determine if the operator is liable for any subscriber refunds. A refund liability can be imposed when an operator's actual charges exceed maxi mum permitted levels during the applicable period of re view." If an operator's aggregate revenues computed from its actual rates exceeded its revenues computed from its permitted rates during the period of review, the operator must refund the difference to subscribers. 16 If the operator's aggregate revenues computed from its permitted rates ex ceeded its aggregate revenues computed from its actual rates, the operator will not be required to issue any refunds for that period of review. In this proceeding, any refunds to be paid by Paragon should be calculated based on this method. 9. While the Commission will sustain the decisions of franchising authorities if there is a reasonable basis for doing so, we expect franchising authorities to adhere to the mathematical principles underlying the benchmark meth odology, particularly when calculating an operator's refund liability." For instance, in this case, the CCCC may not order Paragon to set its programming, equipment, or in stallation rates below maximum permitted levels. Further more, the CCCC must offset or reduce any refunds it may order with any undercharges in other services offered by Paragon which were below its maximum permitted rate.18 According to Paragon, the CCCC has directed Paragon to- charge less than its maximum permitted levels for certain components of its regulated service and to issue refunds without regard to the fact that some of Paragon's rates are below maximum permitted levels. We are remanding this case to the CCCC so that it can reconsider its ruling in a manner consistent with our findings. 10 To the extent that an operator has sought to take advantage of the refund deferral period available under the Second Order on Reconsideration, Fourth Report an Order, and Fifth Notice of Proposed Rulemaking in MM Docket 92-266, 9 FCC Red 4119, 4183-4185 (1994), the maximum permitted rates deter mined under FCC Form 393 may also apply from May 15, 1994 until .the date that the operator implemented its new rates, as determined under the Form 1200 series. 11 An operator must calculate its rate in effect on September 30, 1992, only if its current rate is above the benchmark rate. If an operator's current rate is at or below the benchmark rate, it is not required to calculate its September 30, 1992 per-channel rate. 12 See Communications Act, § 623(b), 47 U.S.C. § 543(b). 13 If a franchising authority required an operator to set its rates for equipment and installations below their maximum permitted levels, the operator could, in effect, be forced to provide equipment and installations at levels below actual cost. 14 An operator is not required, however, to raise its rates to the maximum permitted level. An operator may voluntarily choose to charge less than the maximum permitted rate. 15 See 47 C.F.R. § 76.942. 16 See Third Order on Reconsideration at 4353 ("Although maximum permitted rates are always determined on an unbundled basis, i.e., separately for program service and equip ment, refund liability may stem from bundled rates. We con clude that the refund liability should be calculated based on the difference between old bundled rates and the sum of the new unbundled program service charge(s) and the new unbundled equipment charge(s).") l ' See Rate Order at 5731; Third Order on Reconsideration at 4346. See also TCI Cablevision of North Central Kentucky, Inc., DA 94-1479 (Cab. Serv. Bur., released December 14, 1994). 18 See Third Order on Reconsideration at 4353. 3964 10 FCC Red NO. 8 Federal Communications Commission Record DA 95-380 10. Accordingly, IT IS ORDERED that the local rate order is REMANDED to the Consolidated Cable Commu nications Commission for resolution in accordance with the terms of this Order. 11. IT IS FURTHER ORDERED that our stay of the local rate order, which was granted pending the resolution of this appeal, is hereby VACATED. 12. This action is taken by the Chief, Cable Services Bureau, pursuant to authority delegated by Section 0.321 of the Commission's rules. 47 C.F.R. §0.321. FEDERAL COMMUNICATIONS COMMISSION Meredith J. Jones Chief, Cable Services Bureau 3965