Before the

**Federal Communications Commission**

**Washington, D.C. 20554**

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| In the Matter of                 | * | File No. CSB-A-0666          |
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| CoxCom, Inc.                     | ) |                              |
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| d/b/a Cox Communications New     | * |                              |
| England                          |   |                              |
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| Appeal of Local Rate Order of    | * |                              |
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| Massachusetts Department of      | * |                              |
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| Telecommunications and Energy    | * |                              |
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| For the Town of Holland, MA      | ) |                              |
| (CUID MA0321)                    | * |                              |
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MEMORANDUM OPINION AND ORDER

**Adopted: April 26, 2002** **Released: April 29, 2002**

By the Deputy Chief, Media Bureau:

# INTRODUCTION

1.  CoxCom, Inc., d/b/a Cox Communications New England ("Cox"), the
    franchised cable operator serving Holland, Massachusetts, has
    appealed the April 26, 2001 Order ("Decision") issued by the
    Commonwealth of Massachusetts Department of Telecommunications and
    Energy ("DTE") affirming the Rate Order of the DTE's Cable
    Television Division ("Cable Division").[^1] The Decision and Rate
    Order address the operator's handling of its true-up adjustment in
    computing its basic service tier rate using FCC Form 1240. The DTE
    opposed this appeal,[^2] and Cox replied.[^3] For the reasons stated
    below, we grant the appeal and remand this matter for further
    consideration consistent with this Memorandum Opinion and Order.

# standard of review

2.  The Communications Act provides that, where effective competition is
    absent, rates charged for the basic service tier ("BST") and
    associated equipment and installation are subject to regulation by
    local franchising authorities in accordance with regulations
    prescribed by the Commission and implemented through Commission rate
    forms.[^4] Rate orders issued by franchising authorities may be
    appealed to the Commission.[^5] In ruling on an appeal, the
    Commission will not conduct a *de novo* review, but will sustain the
    franchising authority's decision if it has a reasonable basis, and
    will reverse a franchising authority's decision only if the
    franchising authority unreasonably applied the Commission's rules in
    its rate order.[^6] If the Commission reverses a franchising
    authority's decision, it will not substitute its own determination
    but will remand the issue to the franchising authority with
    instructions to resolve the case consistent with the Commission's
    decision.[^7]

# background

3.  An operator using the annual rate adjustment methodology on Form
    1240 includes projections of reasonably certain and quantifiable
    cost changes in its rate computation. In the next rate filing, the
    operator trues up any disparities between those projections and the
    actual costs experienced, calculates interest on the disparity, and
    adjusts its new rates accordingly.[^8] If this true-up adjustment
    shows there were undercharges, the operator may elect to defer
    recovery, but section 76.922(e)(3)(iii) of the Commission's rules
    provides that the interest will cease to accrue as of the date the
    operator is entitled to make the annual rate adjustment.[^9] The
    Commission explained, "This policy will give operators the
    flexibility to delay rate increases without losing the opportunity
    to recover interest on costs that accrued due to circumstances
    beyond their control. At the same time, this policy ensures that
    where an operator makes a business decision to delay a rate
    increase, subscribers are not required to pay for the cost of the
    delay."[^10] FCC Form 1240 implements the Commission's rules
    governing the annual rate adjustment methodology.[^11]

4.  An operator computes the true-up adjustment by capturing actual
    costs on Module F of FCC Form 1240 for the same rate segments it had
    used to project its MPR on Module I of its previous rate form. Then,
    using Module H on Form 1240, the operator compares the revenue
    permitted during the true-up period with the revenue collected
    during the true-up period. The difference is the true-up adjustment.
    The adjustment computed using Module F is subject to interest.[^12]
    If the true-up period exceeds 12 months, the operator separately
    computes an adjustment for this second period using Module G,[^13]
    but is entitled to interest only for those months in Period 2 that
    were included in the previous projected period.[^14] Modules F, G,
    and H and the associated worksheets for Form 1240 implement the
    limitation on interest in section 76.922(e)(3)(iii) of the
    Commission's rules.

5.  If the true-up adjustment shows undercharges, the operator can claim
    some or all of the the undercharges or defer claiming them by
    allocating the Total True-Up Adjustment (from Line H13) to either
    Line H14 ("Amount of True-Up Adjustment Claimed For This Projected
    Period") or Line H15 ("Remaining True-Up Adjustment"), or by
    dividing the adjustment between Lines H14 and H15. The amount on
    Line H14 is used to compute the True-Up Segment on Line I8, one of
    the rate segments on Module I used in determining the new MPR for
    the projected period. Because the amount on Line H14 reflects actual
    costs, the same number is used to compute the True-Up Segment on the
    Module F of the next Form 1240. The amount entered on Line H15 is
    not used to determine the projected period MPR on Module I or to
    true up that MPR on Module F of the next Form 1240. Instead, it is
    entered on the next Form 1240 as "Previous Remaining True-Up
    Adjustment" on Line H12 and becomes part of the cumulative, running
    total of previous adjustments included in the Total True-Up
    Adjustment on Line H13. If Line H13 shows an undercharge, the amount
    on Line H13 can be allocated between Lines H14 and H15. The amount
    on Line H14 is used to compute the MPR for the new projected period
    and to true up that MPR in the third year.[^15]

# discussion

## The true-up adjustment

6.  The issue before us is whether Cox was required to enter its true-up
    adjustment on Line H15 rather than Line H14 on its 2001 Form 1240
    when it elected not to charge subscribers the full MPR. The
    computation on Module H showed that Cox had undercharged subscribers
    during the true-up period. Cox entered the full amount of the
    true-up adjustment on Line H14, and, consistent with the
    instructions for Line I8, used the Line H14 adjustment to compute
    the True-Up Segment on Line I8. Thus, the total true-up adjustment
    was included in the new MPR computed on Module I. Although it could
    have raised its rate to the new MPR, Cox left its old, lower rate in
    effect.[^16]

7.  Because Cox's actual rate was less than the MPR, the Cable Division
    found that Cox had not passed the true-up adjustment claimed on Line
    H14 completely through to subscribers as it believes is required by
    the Form 1240 instruction for Line H14.[^17] This instruction
    directs the operator to "\[e\]nter the amount of the True-Up
    Adjustment being passed through to your subscribers during the
    Projected Period."[^18] Because the Line H14 amount must be entered
    on Module F on the next rate form, the Cable Division then found
    that Cox would be truing up these same undercharges a second time in
    its next rate filing and receiving additional interest on these
    undercharges, as well as interest on the interest already included
    in the 2001 true-up adjustment.[^19] It found this to be contrary to
    section 76.922(e)(3)(iii) as implemented in Form 1240.[^20] The
    Cable Division ordered Cox to fix the problem by revising its 2001
    Form 1240 to remove the excessive true-up adjustment from Line H14,
    record it on Line H15, and reduce the projected period MPR
    accordingly,[^21] rather than by raising its subscriber rate. This
    change was not expected to affect the operator's revenues during the
    projected period, since it would not cause Cox to change its actual
    rate. It would affect the true-up of those revenues on Cox's 2002
    Form 1240, because the true-up adjustment entered on Line H15 would
    not be included on Module F or any adjustment carried forward from
    Module F and eligible for interest on Module H. The DTE denied Cox's
    appeal, finding the Cable Division's analysis to be reasonable.[^22]
    The DTE agreed that Cox had not passed on the full amount of the
    true-up adjustment on Line H14 to subscribers, and stated that Cox
    retained the ability to recover the full amount of the true-up in
    future years without recovering additional interest on either the
    2001 true-up adjustment or the interest included in this
    adjustment.[^23]

8.  Cox disputes the DTE's interpretation of the Line H14 instruction.
    According to Cox, the phrase "being passed through to subscribers"
    can mean nothing more than being included in the MPR, a matter the
    Commission has left to its discretion.[^24] Cox argues that it
    should be able to include the true-up adjustment in its MPR,
    regardless of whether it intends to charge the full MPR or something
    less,[^25] and that the DTE erred in attributing the difference
    between the actual rate and the MPR only to the true-up
    segment.[^26] Cox further argues that the DTE had no problem with
    the basis for Cox's figures presented in the Form 1240 and
    discovered no mathematical errors, so charging less than the MPR
    should not have triggered the adverse rate order.[^27]

9.  The DTE contends that the Cable Division's Rate Order was reasonable
    and should be upheld. It argues that the plain language of the
    instructions gives subscribers either the benefit or the burden of
    the true-up adjustment amount, so only the amount passed through to
    subscribers in the actual rate can be claimed on Line H14.[^28]
    Because Form 1240 requires the operator to include certain elements
    in its projected MPR and gives the operator discretion only with
    respect to the true-up adjustment, any disparity between the MPR and
    the actual rate would first be attributable to unrecovered true-up
    adjustment.

10. We find that the DTE's action was not reasonable. The DTE's Decision
    and the Cable Division's Rate Order both attribute the difference
    between the MPR and the operator's selected rate only to the true-up
    adjustment, although the MPR is computed from several rate
    segments.[^29] An operator seeking to increase rates to reflect
    external cost increases must also fully account for both accrued and
    projected changes in inflation, external costs, and the number of
    channels occurring during the period covered by the rate form.[^30]
    While, as the DTE argues,[^31] an operator has discretion to pass
    through unrecovered accrued costs reflected in the true-up
    adjustment, an operator also has discretion to recover or not to
    recover amounts included in other rate segments when setting its
    subscriber rate. The restriction on setting the subscriber rate is
    that the rate not exceed the MPR. "An operator is not required . . .
    to raise its rates to the maximum permitted level and may
    voluntarily charge less than the MPR."[^32]

11. No Commission rule or instruction prioritizes an operator's recovery
    of accrued and projected costs in its actual rate, so there is no
    requirement that a system allocate revenues to projected costs\--or
    to costs included in its Line D8 base rate\--before allocating
    revenues to the accrued costs reflected in the true-up adjustment.
    The Commission's rate form and accompanying instructions allow
    operators to elect a "last-in, first-out" approach to recovering
    costs by using Line H15, but do not preclude a system's election to
    include true-up adjustment on Line H14.[^33] Thus, an operator
    choosing to charge less than its MPR is not required to treat its
    true-up adjustment as unclaimed until the difference between its
    actual and permitted rates is accounted for and to reflect this
    difference with an entry on Line H15. The *Treich Letter* cited by
    the DTE addresses interest should the operator elect not to recover
    accrued costs on the date the operator is entitled to make its next
    annual rate adjustment, but does not attribute any difference
    between the MPR and the operator's actual rate to unrecovered
    accrued costs.[^34] The *Treich Letter* explains how Form 1240
    works: "\[T\]he interest is calculated on the difference between the
    corrected maximum rate (based on the costs which actually occurred
    during the previous year) and the amount of revenue the operator
    actually collected during the previous year, with the accrual of
    interest ceasing at the end of the most recent projected
    period."[^35] Charging less than the maximum permitted rate is
    reasonable and should not trigger adjustments to an operator's rate
    form, if the rate is otherwise supported by the rate form and
    underlying data.[^36]

12. The DTE is correct that allocating true-up adjustment to Line H15
    will lower the projected period MPR computed on Module I, and
    possibly result in lower unrecovered costs in the true-up adjustment
    for the next true-up period and, therefore, a lower true-up
    adjustment subject to interest.[^37] But, subscribers will not
    necessarily benefit from lower rates if, as Cox suggests,[^38] the
    result causes the operator to increase its rate to the full MPR in
    response to the Rate Order or when setting future rates.
    Furthermore, any benefit from requiring an allocation to Line H15
    simply defers the interest of concern to the DTE, because the
    Remaining True-Up Adjustment entered on Line H15 in the first year
    must be entered on Line H12 and included in the Total True-Up
    Adjustment on Line H13 in the second year.[^39] Any of that
    adjustment allocated to Line H14 in the second year would appear on
    Module F in the third year and would be included in the comparison
    of actual and permitted revenues during the true-up period. The
    difference would be subject to interest by operation of the rate
    form.

## Implementation of a rate adjustment

13. The Cable Division's Rate Order addressed the possibility that the
    operator would raise its rate to the MPR in response to the Rate
    Order, rather than lower the MPR, by stating its view that the
    Commission's regulations prohibit a rate increase later in the
    projected period and ordering the operator to refile its Form 1240
    with a lower MPR.[^40] The DTE Decision agreed with the Rate Order,
    because Form 1240 requires the operator to select the rate that it
    plans to charge, and Cox selected its old rate.[^41] Cox was
    expected to wait until it implements its next Form 1240 filing
    before raising its rate.[^42] In challenging this provision, Cox
    argues that a cable operator is permitted to charge up to the
    maximum permitted rate,[^43] and more than 12 months had passed
    since Cox last implemented an actual increase in the rate charged
    subscribers.[^44]

14. Nothing in the Commission's rules or Form 1240 instructions requires
    an operator to implement a rate increase after the initial 90-day
    review period has passed but before the franchising authority acts
    or limits the amount of an increase to a previously noticed rate, as
    long as the increase does not exceed the MPR and the franchising
    authority and subscribers have notice of the actual rate being
    implemented.[^45] A franchising authority should not preclude lawful
    responses to problems it finds with an operator's ratemaking. Even
    if the DTE was reasonable in its analysis of the interest issue, it
    was not reasonable in disallowing an otherwise lawful rate increase
    to address the problem.

# conclusion

15. For the foregoing reasons, we find that the DTE Decision affirming
    the Cable Division Rate Order is not reasonable and must be remanded
    to the DTE for further consideration consistent with this Memorandum
    Opinion and Order. The assumption underlying the DTE Decision and
    the Cable Division Rate Order, that true-up adjustments have not
    been passed through to subscribers when the MPR exceeds the actual
    rate, is not supported by Cox's Form 1240, the Commission's
    ratemaking requirements, or Commission precedent. The DTE's
    determination that Cox must respond to its decision only by reducing
    its MPR is likewise not required by Commission rules or precedent.

# Ordering clauses

16. Accordingly, IT IS ORDERED that the Appeal of Coxcom, Inc. from a
    Rate Order of the Massachusetts Department of Telecommunications and
    Energy IS GRANTED and that the Order on Coxcom, Inc.'s Appeal of
    Cable Television Division's Rate Order, D.T.E. 01-44, IS REMANDED to
    the Commonwealth of Massachusetts Department of Telecommunications
    and Energy for further consideration consistent with this Memorandum
    Opinion and Order.

17. This action is taken pursuant to authority delegated by section
    0.321 of the Commission's Rules, 47 C.F.R. § 0.321.

FEDERAL COMMUNICATIONS COMMISSION

William H. Johnson

Deputy Chief, Media Bureau

[^1]: Order on Coxcom, Inc.'s Appeal of Cable Television Division's Rate
    Order ("Decision"), D.T.E. 01-44 (DTE, Apr. 26, 2001), *affirming*
    Rate Order, Docket No. CTV 00-9 (Cable Division, Mar. 29, 2001),
    *found at* CoxCom, Inc., Appeal of Coxcom, Inc. from a Rate Order of
    the Massachusetts Department of Telecommunications and Energy ("Cox
    Appeal"), Exhibits 1, 2, respectively (May 29, 2001).

[^2]: DTE, Opposition of the Massachusetts Department of
    Telecommunications and Energy to Coxcom, Inc.'s Appeal of Local Rate
    Order ("DTE Opposition") (June 13, 2001).

[^3]: Cox, Reply to Opposition (June 25, 2001).

[^4]: Section 623(a), (b) of the Communications Act, 47 U.S.C. § 543(a),
    (b).

[^5]: Section 76.944 of the Commission's Rules, 47 C.F.R. § 76.944.

[^6]: *See Implementation 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 (*\"Rate Order\"*), 8 FCC Rcd 5631, 5731 (1993); *see
    also* MM Docket No. 92-266, Third Order on Reconsideration, 9 FCC
    Rcd 4316, 4346 (1994).

[^7]: *Rate Order*, 8 FCC Rcd at 5732.

[^8]: 47 C.F.R. § 76.922(e)(3)(iii). Likewise, if the operator
    overestimated its cost changes, it must reduce future rates to
    reflect the accrued amount of the overcharge plus interest.

[^9]: *Id*.

[^10]: *Implementation of Sections of the Cable Television Consumer
    Protection and Competition Act of 1992, Rate Regulation*, MM Docket
    No. 92-266, Thirteenth Order on Reconsideration ("*Thirteenth
    Reconsideration*"), 11 FCC Rcd 388, 421 ¶ 80.

[^11]: *See* section 76.922(h) of the Commission's Rules, 47 C.F.R. §
    76.922(h) ("\[p\]ermitted charges for a tier shall be determined in
    accordance with forms and associated instructions established by the
    Commission"); Instructions for FCC Form 1240, Annual Updating of
    Maximum Permitted Rates for Regulated Cable Services ("FCC Form 1240
    Instructions") (July 1996), at 1.

[^12]: This computation is made using Lines H1-H4 of Form 1240.

[^13]: *See* FCC Form 1240 Instructions at 16, 18-19.

[^14]: This computation is made using Lines H5-H11 of Form 1240.

[^15]: *See* FCC Form 1240 Instructions at 6-7, 18, 21, 22-23.

[^16]: Cox Appeal at 4.

[^17]: Cable Division Rate Order at 5.

[^18]: FCC Form 1240 Instructions at 21 (Line H14).

[^19]: Cable Division Rate Order at 5.

[^20]: *Id*. at 4-5.

[^21]: *Id*. at 5-6.

[^22]: DTE Decision at 6, 8, 10, 12.

[^23]: *Id*. at 6; *see* DTE Opposition at 8.

[^24]: Cox Appeal at 5.

[^25]: *Id.* at 6, 8.

[^26]: *Id.* at 13-15; Cox Reply at 2.

[^27]: Cox Appeal at 8.

[^28]: DTE Opposition at 3.

[^29]: *See* FCC Form 1240, Module I.

[^30]: *See* section 76.922(e)(2)(ii) of the Commission's Rules, 47
    C.F.R. § 76.922(e)(2)(ii). FCC Form 1240 Modules F and G and
    associated worksheets are used for changes in the true-up period;
    Module I and associated worksheets, for projected changes.

[^31]: *See* DTE Decision at 10; DTE Opposition at 3.

[^32]: *Falcon Telecable*, 15 FCC Rcd 52, 54 ¶ 5 (Cab. Serv. Bur. 1999).

[^33]: If an operator postpones filing its annual adjustment for a
    system, it would use Module F to for the first 12 months of the
    true-up period and Module G for additional months in the true-up
    period. By operation of the Form 1240, only the true-up adjustment
    from Module F is reflected in Line H3 and is automatically subject
    to interest. The adjustment from the second true-up period is
    subject to interest only for the months included in the most recent
    projected period. FCC Form 1240 Instructions at 5.

[^34]: *See Mr. Richard D. Treich* ("*Treich Letter*"), 12 FCC Rcd
    10340, 10340-41 (Cab. Serv. Bur. Policy & Rules Div. 1997)
    (rejecting methods of calculating interest not based on the Form
    1240 Instructions).

[^35]: *Id*. at 10342.

[^36]: *See Falcon Telecable*, 15 FCC Rcd at 54 ¶ 5; *see generally*
    *Media General Cable of Fairfax County, Inc.*, 12 FCC Rcd 17424,
    17431-32 ¶ 22 (Cab. Serv. Bur. 1997), *review granted in part and
    denied in part*, 16 FCC Rcd 15617 (2001) (review granted on
    procedural point).

[^37]: Depending upon the actual costs for the system during the
    projected period, it could also result in an overrecovery of system
    costs for the next true-up period and subject the operator to refund
    liability.

[^38]: Cox Appeal at 15-16.

[^39]: *See* FCC Form 1240 Instructions at 21 (Lines H12, H13).

[^40]: *See* Cable Division Rate Order at 6.

[^41]: *See* DTE Decision at 12.

[^42]: DTE Opposition at 8.

[^43]: *See, e.g.*, *Marcus Cable Partners, L.L.C.*, 15 FCC Rcd 8794,
    8795 ¶ 4 (Cab. Serv. Bur. 2000).

[^44]: Cox Appeal at 17-18. *See* section 76.922(e)(1) of the
    Commission's Rules, 47 C.F.R. § 76.922(e)(1). Subject to certain
    exceptions, an operator electing the annual rate adjustment
    methodology may not adjust rates more than annually. An operator may
    change its annual filing date, but at least 12 months must pass
    before the operator can implement its next annual adjustment. *Id*.

[^45]: *See* section 76.933(g) of the Commission's Rules, 47 C.F.R. §
    76.933(g) (an operator must file its rate form "*no later than* 90
    days from the effective date of the proposed rates" (emphasis
    added)); *id.* § 76.933(g)(2) (if the franchising authority has
    taken no action within the 90-day review period, "the proposed rates
    *may* go into effect at the end of the review period, subject to a
    prospective rate reduction and refund if the franchising authority
    subsequently issues a written decision disapproving any portion of
    such rates" (emphasis added)); *Thirteenth Reconsideration*, 11 FCC
    Rcd at 392 ¶ 9; *id*. ¶ 7 ("\[o\]perators would not lose the right
    to make a rate increase at a later date if they choose not to
    implement a rate adjustment at the beginning of the next rate
    year"). *See also* section 76.1603(b) - (d) of the Commission's
    Rules, 47 C.F.R. § 76.1603(b) - (d) (notice requirement); section
    76.933(g)(3) of the Commission's Rules, 47 C.F.R. § 76.933(g)(3)
    ("\[a\]dditional advanced notice is only required in the unlikely
    event that the rate exceeds the previously noticed rate").