11 FCC Red No. 7 Federal Communications Commission Record FCC 96·13 
Before the 
Federal Communications Commission 
Washington, D.C. 20554 
In the Matter of 
Media General Cable of Fairfax CUID Nos. 
County, VA VA0301 (Fairfax County, Inc.) 
VA0318 (Vienna, VA) 
VA0326 (City of Fairfax, VA) 
V A0327 (Falls Church. VA) 
V A0346 (Herndon, VA) 
Cost of Service Filing To Support 
Cable Programming Service Rate 
MEMORANDUM OPINION AND ORDER 
Adopted: January 19, 1996; Released: January 26, 1996 
By the Commission: 
I. Introduction 
II. Background 
III. Discussion 
A. Test Year 
B. Rate Base 
Table of Contents 
1. Operating Losses 
2. Construction Work In Progress 
C. Operating Expenses 
1. Allocations 
2. Amortization Expenses 
Paragraphs: 
1 
9 
11 
12 
13 
14 
20 
21 
22 
23 
1 Media General provides cable service in the County of Fair­
fax, the City of Fairfax, Falls Church, Vienna. and Herndon. 
Virginia. 
2 The Commission has accepted for filing over 80 complaints 
by subscribers in the five areas in which Media General pro­
vides service. The earliest complaint filed and accepted by the 
Commission for each franchise area served by Media General is: 
City of Fairfax (CUID No. VA0326) - complaint received by the 
Commission on September 30, 1993: Fairfax County (CUID No. 
VA0301) - complaint received by the Commission on September 
30, 1993; Vienna ( CUID No. VA0318) - complaint received by 
the Commission on October 21, 1993; Falls Church (CUlD No. 
VA0327) - complaint received by the Commission on December 
3, 1993: and Herndon (CUlD No. VA0346) - complaint received 
by the Commission on February 18, 1994. 
3 
·Media General submitted a supplement to its showing on 
August 15, 1994. Commission staff had contacted Media General 
for further information, to be filed no later than July 14, lll94 
(as established in Cable Operators' Rate Justification Filings, 
Sections 76.945, 76.956 of the Commission's Rules, Order, DA 
ll4-526 (released May 23, 1994) ("May 23 Order"): see also, Cable 
Operators' Rate Justification Filing, Order, DA 94-619 (released 
June 14, 1994)). Further filings in this proceeding continue to be 
made that have not been specifically requested by the Commis-
3655 
3. Corporate Expenses 
4. Revenue and Income Adjustments 
D. Rate of Return 
IV. Conclusion and Ordering Clauses 
I. INTRODUCTION 
24 
29 
31 
34 
1. Media General of Fairfax County, Inc. ("Media Gen­
eral"; "Company"), which is 100% owned by Media Gen­
eral, Inc., was incorporated in 1982. The Company 
subsequently sought and was granted separate fifteen-year 
cable television franchises from Fairfax County and mu­
nicipalities within the County.1 Media General's system 
provides 49 channels on its cable programming services 
("CPS") tier to approximately 185,800 CPS subscribers. 
2. On November 12, 1993, Media General filed a cost of 
service submission with the Commission in response to 
complaints2 alleging that Media General's CPS rate in its 
Fairfax County, Vienna, City of Fairfax, Falls Church, and 
Herndon, Virginia franchises is unreasonable. Media Gen­
eral supplemented its filing on January 11, 1994 and Au-
gust 15, 1994.3 · , 
3. Citing the significant number of CPS subscribers in its 
five Fairfax County communities who have filed com­
plaints, Media General filed a request for waiver of Section 
76.956(a) of the Commission's rules, which requires that a 
cable operator "serve its response on the complainant (and, 
if the complainant is a subscriber, the relevant franchise 
authority) via first class mail." Media General filed a re­
sponse, accompanied by its cost of service submission, to 
the complaint filed by Fairfax County. However, the Com­
pany requests permission to serve the other complainants 
with only the pleading and not the cost of service filing. 
Media General also asks to be relieved of the obligation to 
make copies of its cost of service filing available to com­
plainants free of charge upon request. 
4. The Cable Television Administrator for Fairfax Coun­
ty has filed an opposition to Media General's requests. 
Fairfax County asserts that granting the waiver requested by 
sion nor authorized by the Commission. On October 11. 1994, 
Fairfax County Government filed a supplement to its complaint 
of October 1, 1993. Media General filed a supplement to its 
answer to its cable programming service complaint on October 
28, 1994 and Fairfax County Government submitted a reply to 
Media General's supplemental answer on November 2, 1994. We 
do not condone the practice of late filings of additional plead­
ings. Such filings, particularly as they have occurred in this 
case, impede our ability to review and to rely on the informa­
tion provided to us in the first instance, and further delay 
resolution of matters before us. We underscore that it is incum­
bent upon parties to ensure that their filings are accurate and 
final when submitted to the Commission for filing. While a 
party is responsible for continuing accuracy and completeness of 
information which it submits to the Commission, the additional 
filings have not been of this nature. Nonetheless. since Media 
General and its local franchising authorities have not had prior 
experience with these cost of service rules filings. for purposes 
of this review, we have considered the additional information in 
our analysis. Consistent with our rules, in the future, we may 
not consider such additional, unauthorized filings. 
FCC 96-13 Federal Communications Commission Record 11 FCC Red No. 7 
Media General would allow an inappropriate level of oper­
ator responsiveness to subscribers concerned about high 
cable service 
5. The purpose of Section 76.956(a) is to ensure that 
complainants are fully informed as to the details of the 
submission which a cable company files in response to 
their complaints. Without that information, complainants 
will not have the information necessary to avail themselves 
of the opportunity to participate in the review of the cable 
operator's regulated cable rates. However, the Company, 
which has submitted a voluminous cost of service filing, 
would have to respond to more than 80 complaints against 
its CPS rate. Given the high number of complaints, and 
the voluminous nature of Media General's cost of service 
filing, requiring service on all parties would be unduly 
burdensome.4 Accordingly, we grant Media General's re­
quested waiver of Section 76.956(a). However, making all 
relevant papers available to all parties is essential to assure 
fairness in an adversarial proceeding. The Company has 
offered no evidence that making copies of its filings avail­
able to complainants free of charge upon request is unduly 
burdensome. Therefore, we find that Media General's sec­
ond waiver request would undermine the underlying inter­
est of the rule and disserve the public interest, and is thus 
denied. Our grant of a waiver of Section 76.956(a) is 
predicated on the knowledge that filings and other relevant 
papers will be freely available to interested parties. 
6. Media General's cost of service filing seeks to establish 
that its CPS rate of $17 .77 per month for the period 
September 1, 1993, through May 14, 1994, is justified based 
on Media General's cost of providing CPS. Our review of 
the record indicates that Media General's rate of $17.77 per 
month in effect for the referenced time period is cost 
justified under general cost of service principles.5 
7. Pursuant to our rules, cable operators are required to 
make showings on a franchise-level basis.6 The purpose of 
the rule is to assign costs (both jnvestment and expenses) 
and revenues accurately to the regulated services offered by 
the cable operator, so that the rates charged for such 
services are just and reasonable. Media General has submit­
ted a single cost of service filing for its integrated cable 
system in Virginia which includes the County of Fairfax 
(CUID No. VA0301), Town of Vienna (CUID No. 
VA0318), City of Fairfax (CUID No. VA0326), City of 
Falls Church (CUID No. VA0327), and City of Herndon 
(CUID No. VA0346). The record indicates that these fran­
chises are served through the same cable system, the same 
4 See WAIT Radio v. FCC, -ll8 F.2d 1153,1157 (D.C. Cir. 1969) 
5 This Order does not make any findings or rulings regarding 
Media General's rates for basic service and equipment, or pre­
mium services. Regulation of rates for basic service and equip­
ment is generally the responsibility of the local franchising 
authorities, and premium services are unregulated. See Im­
plementation of Sections 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, 8 FCC Red 5631, 5637 (1993) ("Rate 
Order"). Data for these services were reviewed only to the 
extent needed for our. evaluation of the reasonableness of the 
operator's CPS rates (e.g .. allocations). 
6 47 C.F.R. Section 76.924(e)( I). 
7 See WAIT Radio v. FCC, 418 F.2d 1153,1157 (D.C. Cir. 1969). 
8 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 ( l!J92), at Section 
3656 
rates are charged for cable services and associated equip­
ment in all five areas, and the same channel line-ups are 
offered. Therefore, we will, on our own motion, waive the 
applicability of Section 76.924(e)(l) and permit the single 
filing. The characteristics peculiar to Media General's filing 
distinguish it from filings where the applicability of Section 
76.924(e)(l) would be more appropriate and will not com­
promise our determination of cost-based rates in this pro­
ceeding. 7 
8. We emphasize that in this review process, pursuant to 
the Cable Television Consumer Protection and Competi­
tion Act of 1992 (the "1992 Cable Act"), we are analyzing 
rates for a limited past period to ensure that rates charged 
were not unreasonable, and if so, to determine the asso­
ciated refund liability.8 In reviewing and evaluating this 
filing, we are applying general cost of service principles 
with Commission rules and guidance that were available at 
the time these filings were made. 
II. BACKGROUND 
9. On May 3, 1993, the Commission released its Rate 
Order establishing rules to implement the cable television 
rate regulation provisions of the 1992 Cable Act. In the 
Rate Order, the Commission determined that a benchmark 
and price cap approach should serve as the primary meth­
od for regulating basic service and CPS rates. The Commis­
sion 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 based on costs, using individual 
cost of service showings.9 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 not 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 invested 
capitaI. 10 
10. The Commission found, however, that the record 
before it at the time of the adoption of the Rate Order did 
not provide sufficient information on which to develop 
detailed cost of service rules for the cable industry. 11 There­
fore, on July 16, 1993, the Commission issued a Notice of 
Proposed Rulemaking which proposed requirements to 
govern cost of service showings submitted by cable oper-
623(c)( l)(C). The 1992 Cable Act authorizes the Commission to 
order that the operator refund to subscribers that portion of 
rates that subscribers have paid after the filing of a valid com­
plaint, that are then found to be unreasonable. See Communica­
tions Act, Section 623(c)(3), 47 U.S.C. Section 543(c)(3). 
9 Rate Order, 8 FCC Red at 5794-95; see also, 47 C.F.R. Section 
76.922. 
to Under the traditional cost of service formulation, a com­
pany'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. depreci­
ation 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 Notice at 40765, n.18. 
11 Rate Order, 8 FCC Red at 5798-99. 
11 FCC Red No. 7 Federal Communic~tions Commission Record FCC 96-13 
ators seeking to justify rates higher than those determined 
under the benchmark approach. 12 The Commission in­
dicated 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. 13 Media General's cost of service filing under review 
in this proceeding was submitted during that pre-adoption 
time period and covers only the period prior to May 15, 
1994. We are analyzing the rates in effect for the period 
prior to May 15, 1994 under general cost of service princi­
ples, not under the rules we adopted in February 1994. 14 
III. DISCUSSION 
11. We have analyzed Media General's cost of service 
submission consistent with our cost of service approach 
discussed above. If we found that a certain rate base or 
expense element was not supported, was excessive, or was 
unrelated to providing regulated cable service, we have 
disallowed that cost in whole or in part. 15 We have evalu­
ated rate base and expense items to determine whether 
Media General should be permitted to recover those items 
in its rates. In some cases, we have found coststhat are not 
allowable, and we have made appropriate adjustments. We 
have also adjusted the rate of return to be authorized 
during this period, as discussed below. Even with our 
adjustments and disallowances, however, we find that Me­
dia General's rate of $17. 77 per month for its CPS tier for 
the period under review has been justified. 
A. Test Year 
12. Determining a regulated company's cost of service 
involves the selection of an appropriate test year. The test 
year measures a company's operating experience during a 
twelve-month period and is the basis for determining re­
presentative levels of revenues, expenses, and rate base and 
capital structure.16 The test year is one of the fundamental 
concepts upon which a determination as to a company's 
revenue requirement and· the reasonableness of its rates is 
based. In its cost of service submission Media General 
selected a test year that consisted of actual data for the 
twelve months of calendar year I 992. We conclude that the 
test year selected by Media General is appropriate for 
determining the reasonableness of the CPS rates which the 
Company charged during the period under consideration. 
The test year is a recent time period for which actual data 
is available and reasonably represents Media General's cost 
of providing cable service. 
12 Implementation of Sections of the Cable Television Con­
sumer Protection Act of 1992: Rate Regulation, MM Docket No. 
93-215, Notice of Proposed Rulemaking, FCC 93-353 (released 
July 16, 1993), 58 Fed. Reg: -10762 (July 30, 1993) ("l\'otice"). 
13 Id. at 40763; Rate Order, 8 FCC Red at 5798-99, 5854. n.859. 
14 In February 1994, the Commission adopted an order setting 
forth specific regulatory requirements to govern cost of service 
filings to justify rates above levels determined under its bench­
mark requirements. The new rules apply to rates charged or to 
be charged after May 14, 1994. 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) ("Cost Order"). 
15 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 
3657 
B. Rate Base 
13. Rate base represents the amount of used and useful 
investment the cable company prudently makes in its fa­
cilities to provide service to its customers. 17 Under tradi­
tional cost of service principles, it is necessary to determine 
the allowable rate base both to calculate the return compo­
nent of the revenue requirement and to compute the 
earned rate of return. In analyzing Media General's filing, 
we have reviewed the components of the Company's rate 
base to determine the investment upon which Media Gen­
eral is entitled to earn a return. For purposes of this 
review, we have made adjustments to the rate base as 
discussed below. 
14. Operating Losses: Media General has included accu­
mulated start-up losses in the amount of $61,123,293 for 
the years 1984 through and including 1991. ts The Com­
pany proposes to amortize the accumulated operating losses 
over four years which represents the remaining life of the 
franchise in the five franchise areas. 19 Of the total amount 
of accumulated losses, $15,280,823 has been included as 
amortization expense for 1992, the first year of its proposed 
four-year amortization period. The remaining $45,842,470 
represents the portion for which Media General seeks rate 
base treatment until that amount is fully recovered during 
its proposed amortization period (the amount in rate base 
would be reduced by 113 for each of the remaining three 
years of amortization, with a corresponding amount for 
amortization expense included in operating expenses for 
each of those year). 
15. Media General asserts that it incurred these substan­
tial start-up losses because an immediate return on its 
investment in the cable system was deferred to allow the 
Company to price its service at a level which promoted the 
growth of the system, as well as permit reinvestment in the 
system. 20 Media General states that when cable services 
were first introduced in Fairfax County, it was a new 
service to potential subscribers, requiring considerable pro­
motion and aggressive pricing, as well as system construc­
tion. The Company also maintains that competition from 
over-the-air broadcast stations and the nonessential nature 
of the service created market price elasticities higher than 
those for traditional utility services.21 Media General asserts 
that these differences in the market environment confront­
ing cable required the Company to operate at a loss for 
several years in order to ensure its long-term viability. 22 
Therefore, it is Media General's position that it is entitled 
to recover all accumulated start-up losses incurred in the 
construction and operation of its cable system.23 
at 5794, n.619. "When electing (to makel a cost of service 
showing, the cable operator assumes the risk that its rate could 
be lowered if such action is justified by the cost showing." Id. at 
5800. 
16 Notice at -10771. 
17 Rate base traditionally consists of plant in service, 
noncurrent assets, materials and supplies, and cash working 
capital. 
18 The accumulated losses include operating losses, interest 
expenses, and depreciation and amortization expenses. 
19 Amortization means the systematic recovery, through rat­
able charges to expenses, of the cost of assets. 
20 November 11, 1993 Initial Submission at Section 13. 
z1 Id. 
22 Id. 
23 Id.; October 28, 1994, Supplemental to Media General's 
Answer to Cable Services Complaint at 2-5. 
FCC 96-13 Federal Communications Commission Record 11 FCC Red No. 7 
16. In response, Fairfax County objects to the inclusion 
of start-up losses. Fairfax County asserts that Media Gen­
eral has not met any of the conditions imposed by the Cost 
Order for the inclusion of start-up losses in the rate base.24 
17. We continue to consider the issue of the inclusion of 
· accumulated start-up losses in rate base for ratemaking 
purposes.25 We recognize that a prudent investor will com­
mit to build a cable system with a level of investment that 
makes economic sense, i.e., the return reasonably expected 
on the investment justifies the capital expenditures. As part 
of that decision cable operators realize that, since they will 
incur significant capital and operating expenses building 
the physical plant and implementing marketing and devel­
opment plans to expand their customer base, they will 
experience substantial losses during the early years of op­
eration. As part of that effort, in most if not all instances, 
cable rates were set at levels that were more concerned 
with attracting potential customers than recouping costs. 
We also recognize that the range of prematurity periods 
and the associated accumulated start-up losses will vary 
widely depending upon the particular circumstances in 
each cable system. We conclude that Media General has 
presented sufficient probative evidence to demonstrate that 
these are the same circumstances under which it began to 
build and operate its cable system in Fairfax County.26 
18. Therefore, we will allow Media General to recover its 
accumulated start-up losses. The period of losses which we 
will consider for rate recognition will be those years from 
the period when the first subscriber's revenue was earned 
( 1984) until Media General no longer had negative net 
operating income (1991).27 As previously discussed, Media 
General proposes to amortize the accumulated operating 
losses over four years. We have determined that this time 
period is too short and results in an unusually high ex­
pense in the test year. We have determined that a reason­
able time period for amortization is the service life of 
Media General's longest depreciable asset. Because this 
time period will not vary significantly among cable com­
panies, it provides a reasonable time period within which 
companies may recover operating expenses in those in­
stances where a much shorter period would, as in this case, 
24 November 2, 1994, Reply of Fairfax County to Media Gen­
eral's Supplemental Answer at 2-4. The County states that 
Media General has not met the following conditions in the Cost 
Order: (I) the Company has never recorded start-up or past 
losses on the audited balance sheets of either Media General or 
its parent corporation: (2) Media General did not begin am­
ortization of start-up losses at the end of the second year of 
operation, and has never engaged in any such amortization on 
its own or its parent's audited income statements; and (3) the 
Company has included no detailed evidence of the effect of 
inclusion of start-up losses on its rates in comparison to the 
competitive rates of similar systems. 
25 In the 1\'otice we did not reach any tentative conclusions as 
to the appropriate treatment of accumulated losses but, instead, 
we sought comment on the issue, noting that it might be 
reasonable to view such losses as capital invested with the 
expectation of recovery in future periods as the industry reaches 
maturity. We also asked whether these losses should be am­
ortized over some future period, and whether a return should 
be allowed on such unrecovered amounts until they are fully 
recovered. See Notice at 40767, n.44. The interim rules adopted 
in the Cost Order allow recovery in the rate base of accu­
mulated start-up losses that are equal to the lesser of the first 
two years of operating costs or accumulated losses incurred 
until the system reaches the end of its prematurity stage as 
3658 
result in an unusually high expense in the test year. The 
burden shall be on the Company to support a shorter 
amortization period. The unamortized balance will be in­
cluded in Media General's rate base and the Company may 
earn a return on the rate base portion consistent with the 
rate of return adopted in our discussion below. 
19. Accordingly, Media General's amortization expense 
for 1992, the first year of the amortization period, and each 
subsequent year until the accumulated start-up losses are 
fully amortized is $4,074,886 ($61,123,293 x 1/15).28 The 
total remaining unrecovered balance to be included in rate 
base in 1992 is $57,048,407 ($61,123,293 - $4,074,886).29 
20. Construction Work In Progress: Media General in­
cludes an amount for Construction Work In Progress 
("CWIP") of $452,079 which was not used and useful at 
the time of its filing. Under general cost of service princi­
ples, allowable costs in rate base are associated with plant 
that is used and useful. Review of Media General's submis­
sion shows that this plant was not used and useful at the 
time of filing and, thus, was not providing cable service to 
current subscribers. Therefore, we removed the amount 
reported as CWIP from the rate base and made appropriate 
adjustments to the CPS revenue requirement. 
C. Operating Expenses 
21. Cable operators may recover in rates their reasonable 
operating expenses normally associated with providing rate 
regulated cable services. Operating expenses incurred by 
the cable operator could be expected to include plant 
specific costs (e.g., maintenance), plant non-specific costs 
(e.g., programming expense, engineering and testing), cus­
tomer operations (e.g., marketing, billing and collection), 
and corporate operations (e.g., legal, planning, accounting 
and finance). Our review of Media General's expenses 
under general cost of service principles results in the ad­
justments discussed below. 
22. Allocations: Our rules in effect at the time of the 
Company's filing required that cable operators generally 
aggregate expenses and revenues at either the franchise, 
system, regional, or company level in a manner consistent 
defined by the Statement of Financial Accounting Standards 
No. 51, Financial Reporting by Cable Television Companies. See 
Cost Order, 9 FCC Red at 45. 
26 We reject Fairfax County's assertion that Media General has 
not met any of the conditions imposed by the Cost Order for 
the inclusion of start-up losses in the rate base. The purpose of 
this proceeding is to determine the reasonableness of the CPS 
rate charged by the Company during the period from Septem­
ber I, 1993 through May 14,1994. In the Notice we stated that 
general cost of service principles would apply to cost of service 
filings submitted for rates in effect during this period. The 
interim rules adopted in the Cost Order apply to the review of 
rates charged or to be charged after May 14, 1994. 
l1 November 11, 1993 Initial Submission at Section 13.1 
28 The Commission's rules in effect at the time of Media 
General's filing specify that inter-tier allocations of all cate­
gories of costs are to be made based on the ratio of channels on 
each tier to the total number of channels offered. See 47 C.F.R. 
Section 76.924(e)(2). The calculation for Media General results 
in an allocation factor of 42.32% for the CPS tier. Therefore, 
the amortization expense allocated to the CPS tier equals 
$1,724,491 ($4,074 x 42.32%). 
29 Consistent with the allocation factor used for amortization 
expenses, the capitalized start-up losses allocated to the CPS tier 
is 42.32% of that amount: $24,142,885 ($57,048,407 x 42.32%). 
11 FCC Red No. 7 Federal Communications Commission Record FCC 96-13 
with the practices of the operator as of April 3, 1993.30 We 
also established cost allocation requirements. Costs aggre­
gated at a higher level are to be allocated to the franchise 
level proportional to the number of subscribers in the 
franchise area, and the costs are to be allocated between 
tiers proportional to the number of channels on the tiers.31 
For the most part, Media General's allocation methodology 
conforms to our rules. However, the Company employed 
an indirect assignment analysis (based on the allocated 
costs of the distribution system and cable network fixed 
costs) in allocating certain operating expenses (commercial 
sales and easements; project administration, engineering 
design, restoration, and safety; construction and mainten­
ance; and engineering management). Therefore, in our re­
view and analysis of Media General's rates in effect for the 
period under review we have reallocated these operating 
expenses on the basis of the channel factor allocator.32 
23. Amortization Expenses: As discussed above, the Com­
pany's amortization expense associated with its accumu­
lated operating losses is $4,074,886. 
24. Corporate Expenses: As previously stated, Media 
General Cable of Fairfax is a wholly owned subsidiary of 
Media General, Inc. The parent company provides a vari­
ety of services (e.g., research, internal auditing, budgeting 
and planning, data processing and risk management) to its 
subsidiaries including Media General. Media General of 
Fairfax's filing includes a "management fee" in the amount 
of $857,024, which was adjusted by an additional 
$3,408,047 of allocated corporate expenses for a total of 
$4,265,071,of which $3,329,741 is proposed for recovery in 
regulated rates. We requested, and obtained, from Media 
General its detailed study of corporate expenses. A review 
of the study reveals that costs incurred by some corporate 
cost centers are allocated to subsidiaries and the parent 
company on the basis of direct assignment or are directly 
attributable. We take no exception to the costs allocated to 
Media General using this methodology. Those costs in­
curred by Media General, Inc.'s corporate cost centers 
which were not directly allocated were allocated to the 
parent company and its subsidiaries, including Media Gen­
eral of Fairfax using a general allocator. Media General. 
Inc. developed its allocator by taking an average of each 
subsidiary's proportion of operating expenses, operating 
revenues and assets. Thus, Media General Inc.'s general 
allocation factor is calculated as follows: 
% of Assets Directly Assigned/Attributed to Media 
General 33.93% 
% of Operating Revenues 
signed/Attributed to Media General 
% of Operating Expenses 
signed/Attributed to Media General 
Average 
Directly 
Directly 
As-
18.70% 
As-
17.39% 
23.34% 
30 See Rate Order, 8 FCC Red at 5976. See also 47 C.F.R. 
Section 76.924(d). 
31 See Rate Order, 8 FCC Red at 5976. See also 47 C.F.R. 
Section 76.924(e)(l) and (2). This requirement does not apply to 
programming costs, franchise fees, or public, education and 
government access costs, which are allocated entirely to the 
basic service tier or directly assigned as appropriate. 
3659 
On the basis of this allocation method, an additional 
$1,466,566 of costs was assigned to Media General of Fair­
fax. 
25. Generally, we take no exception to developing a 
general allocator for the allocation of corporate expenses. 
However, the general allocator should be based on the 
expenses directly assigned or attributed to regulated and 
nonregulated activities as opposed to an average of each 
subsidiary's assets, revenues and expenses. Under our rules 
which were in effect at the time of Media General's filing, 
common costs "shall be allocated to each service cost cate­
gory based on the ratio of all costs directly assigned and 
attributed to a service catego~ over total costs directly 
assignable and attributable." 3 Under this rule, the 
allocator, which is to be "based on the ratio of all costs," 
would more accurately use expenses as the basis for deter­
mining the proper allocator. 
26. Therefore, we reject Media General's allocation factor 
of 23.34% and, instead, we will use 17 .39%, which is based 
upon expenses, as the general allocator. Consequently, we 
disallow $373,868 of the $1,466,565 in corporate expenses 
allocated to Media General under this method, of which 
$140,873 is deducted from the CPS tier. The disallowance 
is computed based upon the difference between the 23.34% 
allocator used by Media General and our recommended 
allocator of 17.39% based upon expenses. 
27. Corporate expenses allocated under the direct assign­
ment and general allocator methodologies discussed above 
result in the allocation of $4,943,153 of corporate expenses 
to the parent company itself. These costs are then re­
allocated to the subsidiaries based on various percentages 
("load" factor). On the basis of this load factor, $950,088 of 
the parent company's expenses were allocated to Media 
General. 
28. The allocation of the parent company's expenses 
necessitates the need for a general, or common. allocator 
since these costs, by their very nature, could not directly or 
indirectly assigned. Employing the previously discussed 
corporate general allocator of 17.39%, which is based on 
expenses, versus a load factor, results in a disallowance of 
$90,473 of corporate expenses allocated to Media General, 
of which $34,090 is deducted from the CPS tier. 
29. Revenue and Income Adjustments: Note 5 to Media 
General's audited financial statements for the years ending 
December 27, 1992, and December 29. 1991, and included 
as Appendix A with Media General's cost of service filing, 
discusses other related party transactions. The Note, in 
part, states: 
The Company has an agreement with a wholly-owned 
subsidiary of Media General whereby the subsidiary 
acts as the Company's exclusive advertising sales re­
presentative. The Company receives revenues (1992: 
$ Ll 77,000; 1991: $973,000) from the subsidiary, 
based on advertising placed on the cable system. 
32 The only deviations from this method were direct assign­
ments of those operating expenses that could be specifically 
identified with either the equipment basket or one of the tiers. 
3J 47 C.F.R. Section 76.924(£)(3). 
FCC 96·13 Federal Communications Commission Record 11 FCC Red No. 7 
30. Under general cost of service principles, the expenses 
incurred by a company are offset against lhe revenues it 
receives. Therefore, advertising revenues received by Media 
General from the use of its cable plant and resources 
should be offset against its operating expenses. As noted 
above, $1,777 ,000 in advertising revenu.es were received in 
1992. Allocating these revenues based on the ratio of chan­
nels on each tier to the total number of channels offeredJ4 
results in a reduction to the revenue requirement on the 
CPS tier of $510,465. 
D. Rate of Return 
31. A regulated entity is entitled to the opportunity to 
earn a fair return on investment.JS That return should be 
sufficient to ensure confidence in the financial integrity of 
the enterprise,J6 but should be balanced against our interest 
in protecting a company's subscribers from paying exces­
sive rates. In the Rate Order, we stated that we would make 
a case-by-case determination of reasonableness for submis­
sions made before specific cost rules were adopted.J7 In 
order to make a determination of a reasonable rate of 
return for an operator, we stated that we would evaluate 
the operator's capital structure, cost of debt, and cost of 
equity, among other factors. 
32. In the Notice, released several weeks before the sub­
mission date of Media General's cost of service filing, the 
Commission discussed its analysis of rate of return gen­
erally, and tentatively concluded that an after tax, overall 
rate of return in the range of 10% to 14% would reflect a 
reasonable balancing of subscriber and cable interests.JS 
The Commission reached its conclusion based on a sum­
mary analysis of the cost of equity and the capital structure 
of regulated cable services.J9 The Commission examined the 
risk premium between the yield on public "Aa" rated 
bonds and the estimated cost of equity for the Standard & 
Poor's 400 companies (S&P 400). The Commission specifi­
cally found that 
[i)f we use the S&P 400, or a subgroup of S&P 400 
companies, as the primary surrogate for determining 
an appropriate cost of equity of regulated cable ser­
vice, we tentatively conclude that the cost of equity 
will be in the range of 12-17%. This, in turn, assum­
ing a debt/equity ratio of 50%, would lead to a rate of 
return for regulated cable service of between approxi­
mately 10 to 12.4%. Given market changes in the 
cost of debt and equity, we tentatively conclude that a 
rate of return somewhere in the range of 10% to 
14%, after taxes, would reflect a reasonable balancing 
of subscriber and cable operator interests and that we 
J4 See 47 C.F.R. Section 76.924(e)(2). 
35 Notice at 40769. 
36 Id.; see also, Federal Power Commission v. Hope Natural 
Gas Company, 320 U.S . 591, 603 (1944). 
37 Rate Order, 8 FCC Red at 5795. 
Js_ See Notice at 40765. Since the release of the Notice, the 
Commission has adopted a unitary rate of return for cable of 
11.25%. Cost Order, 9 FCC Red at 463~-35. The Commission 
adopted the 11.25% rate of return on an interim basis, based on 
evidence in the record. However, the Cost Order applies to rate 
justification filings submitted after the effective date of the 
rules, and not to filings already pending. Id. at 45277; see also, 
3660 
would select a final rate of return within this range 
to achieve our balancing of goals for cost-based rates 
for cable services.40 
Thus, as a general approach for the evaluation of refund 
liability from cost of service submissions filed before the 
effective date of the interim cost of service rules, we find it 
appropriate and reasonable to use the range established in 
the Notice for our analysis. 
33. The Rate Order postulated a case by case determina­
tion of reasonableness regarding the rate of return. Media 
General's cost of service submission claims an allowable 
after-tax rate of return of 16%. While Media General does 
discuss its "higher cost situation," it does not assert any 
particulars of capital structure, cost of equity, or cost of 
debt that would justify an after-tax rate of return of 16% in 
this proceeding. Therefore, Media General has not sus­
tained its burden of proving that a 16% rate of return is 
reasonable. In the Cost Order, which was issued shortly 
after Media General had filed its cost of service showing, 
we adopted a presumptive unitary rate of return of 11.25% 
for regulated cable operations.41 Under the circumstances, 
we have no reason to believe that an 11.25% rate of return 
would be unreasonable in this context. The period of time 
for which the 11.25% rate of return was calculated is 
sufficiently close to the period of time at issue in Media 
General's cost of service showing and we believe that the 
methodology used in arriving at a presumptive rate of 
return of 11.25% is reasonable, and would be reasonable in 
this context as well. Moreover, no commenters have sug­
gested that the appropriate rate of return should be any 
lower than 11.25%. Even if we found that Media General 
was only allowed to earn a rate of return of 11.25% during 
the test year rather than the 16% claimed by Media Gen­
eral, we would find that its CPS rates are reasonable, and 
no refund is due. 
IV. CONCLUSION 
34. Based on our review of Media General's cost of 
service filing and supplemental information, applying gen­
eral cost of service principles and applicable cost allocation 
rules, we find that, even with the adjustments discussed 
above, Media General's costs still justify a higher rate than 
the CPS rate of $17.77 per month which Media General is 
seeking to justify for the period September I, 1993, 
through May 14, l 994.4 i 
35. Accordingly, IT IS ORDERED, pursuant to Section 
0.321 of the Commission's rules, 47 C.F.R. Section 0.321, 
that the CPS rate charged by Media General Cable of 
Rate Order, 8 FCC Red at 5854, n.859. 
39 See Notice at 40765. 
40 Id. 
41 Cost Order, 9 FCC Red at 4635. 
42 This finding is based solely on the representations of Media 
General in its cost of service filing. Should information come to 
our attention that these representations were material inac­
curate, we reserve the right to take appropriate action. This 
Order is not to be construed as a finding that we have. accepted 
as correct any specific entry, explanation or argument made by 
any party to this proceeding not specifically addressed herein 
(including the operator's Form 393). The findings in this Order 
do not in any way prejudge the reasonableness of prices for CPS 
service after May 15, 1994. 
11 FCC Red No. 7 Federal Communications Commission Record 
Fairfax County, Inc. with respect to the above-referenced 
CUID numbers, for the period September 1, 1993, through 
May 14, 1994, of $17.77 per month, ARE JUSTIFIED, and 
no refund liability for the CPS rate during that period will 
be imposed. 
36. IT IS FURTHER ORDERED that, pursuant to Sec­
tion 0.321 of the Commission's rules, 47 C.F.R. Section 
0.321, the complaints against the CPS rate of $17.77 per 
month, charged by Media General of Fairfax County, Inc. 
with respect to the above-referenced CUID numbers, for 
the period September 1, 1993, through May 14, 1994, ARE 
DENIED. 
37. IT IS FURTHER ORDERED that the request of 
Media General Cable of Fairfax County, Inc. for waiver of 
Section 76.956 of the Commission's rules, 47 C.F.R. Sec­
tion 76.956(a), IS GRANTED TO THE EXTENT INDI­
CATED HEREIN. 
FEDERAL COMMUNICATIONS COMMISSION 
William F. Caton 
Acting Secretary 
3661 
FCC 96-13