Before the

**Federal Communications Commission**

# Washington, D. C. 20554

In the Matter of: )

)

Falcon Cablevision ) CSB-A-0509

)

Appeal of Local Rate Order of the )

City of Thousand Oaks, California )

(CUID NO. CA0850) )

# MEMORANDUM OPINION AND ORDER

##  Adopted: May 4, 2000 Released: May 5, 2000

By the Deputy Chief, Cable Services Bureau:

I.  INTRODUCTION

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1.  On February 6, 1998, Falcon Cablevision filed a Petition for Review
    of the local rate order, Resolution No. 97-277, of the City of
    Thousand Oaks, California adopted on December 16, 1997. The City of
    Thousand Oaks filed an opposition to the petition, and Falcon filed
    a reply. After considering all of the pleadings, we are denying the
    Petition.

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II. BACKGROUND

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2.  Under the Commission's rules, rate orders issued by local
    franchising authorities may be appealed to the Commission.[^1] In
    ruling on an appeal of a local rate order, the Commission will
    sustain the franchising authority's decision provided there is a
    reasonable basis for that decision, and will reverse a franchising
    authority's decision only if the franchising authority unreasonably
    applied the Commission's rules in its local rate order.[^2] If the
    Commission reverses a franchising authority's decision, it will not
    substitute its own decision but will remand the issue to the
    franchising authority with instructions to resolve the case
    consistent with the Commission decision on appeal.[^3]

3.  An operator proposing an increase in basic service tier (\"BST\"),
    equipment or installation rates bears the burden of demonstrating
    that the proposed increase conforms with our rules.[^4] In
    determining whether the operator\'s proposed increase conforms with
    our rules, a franchising authority may direct the operator to
    provide supporting information.[^5] After reviewing an operator\'s
    rate forms and any other additional information submitted, the
    franchising authority may approve the operator\'s requested rate
    increase or issue a written decision explaining why the operator\'s
    rate is not reasonable.[^6] If the franchising authority determines
    that the operator\'s proposed rate exceeds the maximum permitted
    rate as determined by the Commission\'s rules, it may prescribe a
    rate different from the proposed rate provided that it explains why
    the operator\'s rate is unreasonable and the prescribed rate is
    reasonable.

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III. ANALYSIS AND DECISION[^7]

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4.  Falcon attempted to establish its base rate as of July 15, 1994 with
    a cost-of-service showing on FCC Form 1220. In *Falcon Cablevision*,
    11 FCC Rcd 10511 (CSB 1996), we remanded the local rate order
    addressing this form after finding that the City unreasonably set
    Falcon's intangible assets at zero, and directed the City to
    consider what tangible and intangible assets should be included in
    Falcon's rate base in light of *Tele-Media Company of Western
    Connecticut*, 11 FCC Rcd 3161 (CSB 1996).[^8] On remand, Falcon
    submitted a revised Form 1220 that adjusted the rate base consistent
    with *Falcon Cablevision*. It also changed the treatment of the net
    cost of tangible assets replaced in its 1990 rebuild. It had
    reflected a write-off of the net cost of the replaced assets in its
    original Form 1220, but it included the replaced assets in its
    revised Form 1220 by increasing the rate base, and it increased the
    depreciation expense to reflect the inclusion of these assets. [^9]

5.  In its order on remand, the City adopted the maximum permitted rate
    recommended by its cable rate consultant. This rate was based in
    part on the consultant's determination that Falcon's revised Form
    1220 improperly attempted to add service costs and assets to the
    rate base. The consultant characterized such costs and assets as
    either duplicating those previously included in the 1993 test year
    previously reviewed by the City or as representing a misplaced
    attempt to add "new" investment to the 1993 test year rate base
    along with related service costs. The consultant took the position
    that since those items were not at issue in Falcon's appeal of the
    earlier rate order considered in *Falcon Cablevision* and were not
    included within the ensuing remand order, such investments and costs
    should be disallowed.[^10]

6.  Falcon contends the City and its consultant misunderstood the rate
    base changes made in the revised Form 1220 because the previously
    written off or retired assets were not "new" assets added to its
    rate base. Falcon contends that the Commission's rules in place when
    it completed the revised Form 1220 permit an operator to continue to
    recover the undepreciated cost of the retired plant in its regulated
    service rates after an upgrade.[^11] It believes its addition of the
    retired assets to its rate base and its recovery of associated
    depreciation expenses is consistent with this policy.

7.  We find the City's rejection of these additional assets and
    depreciation expenses to be reasonable and reject Falcon's arguments
    to the contrary. The test year for the data included in its Form
    1220 filing was to be the most recently ended fiscal year before its
    filing, unless use of a different 12 month period was justified as
    provided under the Commission's rules.[^12] Falcon's test year ended
    December 31, 1993.[^13] Falcon had retired the cost of replaced
    plant from its books when it rebuilt its plant in 1990, [^14] before
    the test year and before the onset of rate regulation. The costs at
    issue here were not on its books during the test year and should not
    be reincarnated in the rate base. Furthermore, under Generally
    Accepted Accounting Principles in an unregulated environment, Falcon
    would be expected to have recovered the value of lost assets when
    they were replaced by selling what retired assets it could and
    taking an extraordinary expense on its 1990 income statement for
    losses on the disposal of assets. This would have produced a tax
    benefit at that time. Since the lost asset value should have been
    recovered through this method, there is no basis for further
    recovery. In a regulated environment, on the other hand, a cable
    operator making a cost-of-service showing is allowed to recover the
    undepreciated value of a retired asset as an annual depreciation
    expense over the remaining ordinary useful life of the asset, but it
    cannot also earn a rate of return on the retired asset because the
    assets are no longer used and useful in the provision of regulated
    cable service. This treatment does not apply to assets like those at
    issue in here that were retired before the onset of rate regulation
    and not in the rate base at the time of the cost-of-service
    showing.[^15]

8.  Falcon also asserts that the City improperly reduced its revenue
    requirement by an amount represented by advertising revenue by
    treating that revenue as an offset against subscriber revenue
    requirements. We denied Falcon's appeal with respect to the City's
    treatment of advertising revenue as an offset against revenue
    requirements in *Falcon Cablevision*, finding that the City had
    acted reasonably in applying the Commission's rules regarding
    advertising offsets.[^16] Falcon claimed for the first time in the
    revised Form 1220 that advertising is not inserted at the headend
    serving Thousand Oaks, and argues on appeal here that since no
    advertising revenue is derived from the Thousand Oaks system a
    revenue requirement offset is not justified. Falcon states further
    that these facts were not made clear in its prior appeal of this
    issue, "because it believed that it was correct on the offset issue"
    considered in *Falcon Cablevision*.[^17] We deny Falcon's petition
    on this point. As noted above, the matters remanded for further
    consideration by the City concerned what tangible and intangible
    assets reasonably may be included in Falcon's rate base and an
    hourly service charge issue that was subsequently resolved. For this
    reason, we find the City's decision once again to offset Falcon's
    revenue requirements by the amount of advertising revenue to be
    reasonable. Moreover, the principle of administrative finality is
    intended to put an end to litigation once a case has been presented
    and a decision entered, and militates against permitting Falcon to
    make a serial presentation of factual matters and issues once its
    case is lost on other facts and theories.[^18]

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IV. ordering clause

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9.  For the foregoing reasons, **IT IS HEREBY ORDERED**, pursuant to
    authority delegated under Section 0.321 of the Commission's rules,
    that the Petition for Review filed by Falcon Cablevision on February
    6, 1998, of Resolution No. 97-277 adopted December 16, 1997 by the
    City of Thousand Oaks, California, **IS DENIED.**

    FEDERAL COMMUNICATIONS COMMISSSION

    William H. Johnson\
    Deputy Chief, Cable Services Bureau

[^1]: 47 C.F.R. § 76.944.

[^2]: *See Implementation of Sections of the Cable Television Consumer
    Protection and Competition Act of 1992*, Rate Regulation, 8 FCC Rcd
    5631, 5731 (1993) (*\"Rate Order\"*); *See also Implementation of
    Sections of the Cable Television Consumer Protection and Competition
    Act of 1992*, Rate Regulation, *Third Order on Reconsideration*, 9
    FCC Rcd 4316, 4346 (1994).

[^3]: *Rate Order* at 5732.

[^4]: 47 C.F.R. § 76.937(a).

[^5]: *See* *Rate Order*, 8 FCC Rcd at 5718-19.

[^6]: 47 C.F.R. § 76.936; *see* *Ultracom of Marple Inc.*, 10 FCC Rcd
    6640, 6641-42 (CSB 1995).

[^7]: Our issuance of an effective competition order, *see* *Falcon
    Cablevision*, 12 FCC Rcd 21611 (CSB 1997), did not abrogate the
    City's jurisdiction to respond to this order, since the rate filing
    and the rate-effective period at issue in this proceeding predate
    our finding of effective competition. However, the City may not
    prescribe rates after March 5, 1997, the date on which Falcon filed
    its effective competition petition, and Falcon shall not be liable
    for refunds related to rates charged after that date. *See Falcon
    Cablevision*, 12 FCC Rcd 8229, 8234 (CSB 1997).

[^8]: Among other things, *Tele-Media* effectively limited the amount of
    acquisition tangible and intangible assets that may be included in
    an operators cost-of-service rate base to 66% of net book value. The
    City noted that Falcon's revised Form 1220 increased the claimed
    basic tier rate base by 19.3 percent over the original Form 1220,
    whereas the limitations of *Tele-Media* should point to a decreased
    rate base. City Response at 3.

[^9]: Falcon petition at 4-6, Exhibit B at first 2 pages, Exhibit E at
    1-2. Falcon reduced these retired plant assets, which were on the
    books when this system was acquired, by 34%, and claimed 66% of
    normal depreciation and net book value on the revised Form 1220.
    *Id*., Exhibit E at 2.

[^10]: Falcon Petition, Exhibit D, at p.4

[^11]: Falcon Petition at 4-6. Falcon states that it reduced the assets
    by 34% of the net book value as of December 31, 1993.

[^12]: FCC Form 1220, Instructions for the Completion of Cost of Service
    Filing for Regulated Cable Services at 4 (Apr. 1994).

[^13]: Falcon Petition, Exhibit B at second page.

[^14]: Falcon Petition, Exhibit E at 1, 2.

[^15]: The Commission's Form 1235, Falcon's only cite for its contrary
    position, does not require a different treatment. Falcon seems to be
    arguing that the Commission's adoption of FCC Form 1235,
    "Cost-of-Service for Network Upgrades," has modified the treatment
    of replaced assets in a regulated environment, because it allows
    operators to add rebuild costs to the ratebase without any
    adjustment for retired assets. Falcon's argument misconstrues the
    nature of Form 1235. To enable operators to attract capital for
    major upgrades in a regulated environment, the Commission allows
    cable operators undertaking significant network upgrades to make an
    abbreviated cost-of-service showing for the upgrade on Form 1235.
    The revenue requirement computed on Form 1235 can be recovered
    through an add-on to rates established under the benchmark and price
    cap methodologies. Rates established using the benchmark methodology
    were based on rates charged by systems with similar characteristics
    but operating in a competitive environment, not on costs or a
    traditional cost-of-service rate base and did not have to be
    adjusted as part of the abbreviated cost-of-service methodology on
    Form 1235. The Form 1235 computation was not available to operators
    like Falcon whose upgraded services became available before May 15,
    1994, the date on which the Commission's rules, policies, and
    requirements for abbreviated cost-of-service showings became
    effective. *See* FCC Form 1235, Instructions for Completion of
    Abbreviated Cost of Service Filing for Cable Network Upgrades at 1
    (Feb. 1996); *Implementation of Sections of the Cable Television
    Consumer Protection and Competition Act of 1992: Rate Regulation and
    Adoption of a Uniform Accounting System for Provision of Regulated
    Cable Services*, 9 FCC Rcd 4527, 4674-76 (1994). It also was not
    available for setting the operator's initial regulated rate.

[^16]: 11 FCC Rcd 10511, 10519-20.

[^17]: Falcon Reply at 5.

[^18]: *Hazel\--Atlas Co. v. Hartford Co*., 332 U.S. 238, 244 (1944).