Before the

Federal Communications Commission

Washington, D.C. 20554

+----------------------------------+---+------------------------------+
| In the Matter of                 | * | CSB-A-0633                   |
|                                  | * |                              |
| MARCUS CABLE PARTNERS, L.L.C.    | ) |                              |
|                                  | * |                              |
| Appeal of Local Rate Order       | * |                              |
| Issued By                        |   |                              |
|                                  | * |                              |
| The City of Wisconsin Rapids,    | * |                              |
| Wisconsin                        | ) |                              |
|                                  | * |                              |
| (CUID WI0062)                    | * |                              |
|                                  |   |                              |
|                                  | * |                              |
|                                  | * |                              |
|                                  | ) |                              |
|                                  | * |                              |
|                                  | * |                              |
|                                  |   |                              |
|                                  | * |                              |
|                                  | * |                              |
|                                  | ) |                              |
|                                  | * |                              |
|                                  | * |                              |
|                                  |   |                              |
|                                  | * |                              |
|                                  | * |                              |
|                                  | ) |                              |
|                                  | * |                              |
|                                  | * |                              |
|                                  |   |                              |
|                                  | * |                              |
|                                  | * |                              |
|                                  | ) |                              |
|                                  | * |                              |
|                                  | * |                              |
|                                  |   |                              |
|                                  | * |                              |
|                                  | * |                              |
|                                  | ) |                              |
|                                  | * |                              |
|                                  | * |                              |
+----------------------------------+---+------------------------------+

MEMORANDUM OPINION AND ORDER

**Adopted: May 11, 2000** **Released: May 15, 2000**

By the Deputy Chief, Cable Services Bureau:

# INTRODUCTION

1\. Marcus Cable Partners, L.L.C. ("Marcus"), the franchised operator of
a cable system serving the City of Wisconsin Falls, Wisconsin
(\"City\"), appealed a local rate decision of the City that denied
Marcus' request to increase rates charged to basic service tier ("BST")
subscribers.[^1] The City did not file an opposition to the appeal.
Marcus also filed a Request for Emergency Stay of Local Rate Order. For
the reasons stated herein, we grant the appeal and remand the rate order
to the City for further proceedings. We dismiss the operator's request
for emergency stay as moot.

**II. BACKGROUND**

2\. Under the Commission\'s rules, rate orders issued by local
franchising authorities may be appealed to the Commission.[^2] 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 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.[^3] If the Commission reverses a franchising authority\'s
decision, it will not substitute its own decision but instead will
remand the issue to

the franchising authority with instructions to resolve the case
consistent with the Commission\'s decision on appeal.[^4]

3\. An operator seeking to justify its existing or proposed rates for
the BST, equipment or installation bears the burden of demonstrating
that the rates conform with our rules.[^5] In determining whether the
operator\'s rates conform with our rules, a franchising authority may
direct the operator to provide supporting information.[^6] 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.[^7] If the franchising authority
determines that the operator\'s proposed rate exceeds the maximum
permitted rate ("MPR") 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.[^8]

4\. The Commission\'s rules allow periodic BST rate adjustments for
inflation, changes in external costs,[^9] and changes in the number of
regulated channels using either the quarterly or annual adjustment
method.[^10] They permit operators undertaking significant network
upgrades to recover the net costs of the added capital investment
allocated to the BST through an increase in the BST rate.[^11] The rules
also provide for periodic adjustments to equipment and installation
rates based on the operator\'s actual costs.[^12] The rules do not
provide any other basis for rate decisions. If the franchising authority
does not dispute the bases for the figures presented in the cable
operator\'s rate forms and has not discovered any mathematical errors in
the forms, it should approve the operator\'s rates as derived from the
forms. A cable operator must be allowed to charge up to the maximum
permitted rates derived from its rate forms. The franchising authority
may not arbitrarily deny a justified rate increase in an effort to
address non-rate matters.[^13] Instead, non-rate matters should be
addressed pursuant to the Commission\'s rules on technical standards,
the Commission\'s rules on customer service obligations, the franchising
authority\'s own cable regulations, or the franchise agreement.

5\. The City rejected the proposed BST rates submitted by Marcus in
connection with the Company's scheduled June 1, 1999 rate adjustment. On
February 26, 1999, the operator transmitted to the City FCC Form 1240,
the form for computing the annual BST rate adjustment, and FCC Form
1235, the form for making an abbreviated cost of service showing to
justify a network upgrade add-on to the BST rates, in order to justify
an increase in the BST rates. On March 23, 1999, it filed with the City
a revised Form 1235 to indicate that the upgrade had not been completed.
The amendment cover letter stated that the upgrade would not be
completed until April 1999.[^14] In its one-page rate order, the City
found that "\[t\]he cable operator did not demonstrate that the capital
upgrade will benefit subscribers of the basic service tier," and that
"\[t\]he network upgrade was not completed as of February 26,1999 or as
of the amended filing on March 23, 1999." It denied the rate surcharge
citing 47 C.F.R. § 76.922(j)(1),(2) and (3).[^15]

**III. DISCUSSION**

6\. Marcus contends that the City's brief order does not identify a
legitimate basis for denying the requested rate adjustment on the Form
1235;[^16] does not explain how the operator failed to demonstrate that
the upgrade would benefit BST subscribers; and does not articulate any
reasoned basis for its decision.[^17] The operator further asserts that
the order erroneously rejects the operator's Form 1235 because the
upgrade was not complete.[^18] Marcus states that it had no intention of
charging any customer the additional rates associated with the Form 1235
until the upgrade encompassed by that filing was available to that
particular customer, and contends that there is no requirement that the
entire upgrade be completed before some system customers are charged for
the upgraded offerings they receive.

7\. In Implementation of Sections of the Cable Television Consumer
Protection and Competition Act of 1992: Rate Regulation and Adoption of
Uniform Accounting System for Provision of Regulated Cable Service
(\"*Cost Order*\"), the Commission concluded that cable operators making
significant upgrades should be allowed to establish the upgrade costs
through an abbreviated cost-of-service showing and add an upgrade
surcharge to their rates otherwise determined pursuant to the
Commission\'s benchmark and price cap methodology.[^19] The Commission
further concluded that allowing abbreviated cost-of-service showings and
surcharges for network upgrades is an appropriate way to implement the
goals of the 1992 Cable Act. Permitting abbreviated cost-of-service
showings could promote the availability of diverse cable services and
facilities, encourage economically justified upgrades, and reduce
regulatory burdens, while ensuring reasonable rates for regulated
services.[^20]

8\. Before a cable operator can recover upgrade costs through an
abbreviated cost-of-service showing, the Commission requires:[^21] (1)
that the upgrade be \"significant\" and require added capital
investment, such as expansion of bandwidth capacity and conversion to
fiber optics, and for system rebuilds; (2) that the upgrade benefit
subscribers through improvements in the regulated services subject to
the rate increase; (3) that the upgrade rate increase not be assessed on
customers until the upgrade is complete and providing benefits to
subscribers of the regulated services; (4) that the operator demonstrate
its net increase in costs, taking into account current depreciation
expenses, likely changes in maintenance and other costs, changes in
revenues, and expected economies of scale; and (5) that the operator
allocate the net increase in costs in conformance with the cost
allocation rules for cost-of- service showings, to assure that only
costs allocable to regulated services are imposed on subscribers to
those services. Pursuant to authority delegated by the Commission,[^22]
the Bureau developed FCC Form 1235 to permit operators to show they have
met these requirements.[^23]

**A. Network Upgrade Not Completed**

9\. Regarding the City's finding that a rate increase on account of
upgrades shall not be assessed on subscribers until the upgrade is
complete and providing benefits, we note that the Form 1235 Instructions
expressly provide for a "pre-approval" process any time prior to the
upgrade services becoming available to subscribers using projected
upgrade costs.[^24] As stated in the instructions, "\[t\]he pre-approval
option is provided to assist operators in projecting cash flows and
obtaining capital for the construction of upgraded cable systems. The
network upgrade add-on, however, cannot be charged to subscribers until
upgraded cable services become available and are providing benefits to
customers of rate-regulated services. The pre-approval upgrade incentive
add-on may be charged to subscribers as subsections of the filing entity
are completed and begin providing service to subscribers in those
subsections (Phased-In Approach)." The instructions further provide for
a follow-up second submission of the form to substitute actual costs for
the earlier projected costs.[^25] We agree with Marcus that there is no
requirement that the entire upgrade be completed before an operator can
file for pre-approval of its upgrade rate and some system customers are
charged for the upgraded offerings they receive.

**B. Benefit to Subscribers**

10\. In addition, the record before us does not support the City's
finding that the operator failed to demonstrate that the capital upgrade
will benefit subscribers of the basic service tier. As we noted in *Cox
Communications San Diego, Inc*.,[^26] the *Cost Order* requires that
subscribers benefit through \"improvements in the regulated services
subject to the rate increase,\"[^27] without specifying the kind of the
improvements required. FCC Form 1235 requires that an operator state
whether the upgrade meets minimum technical specifications described in
the Instructions for Part I, Line A.1 of the form.[^28] The instructions
provide that an operator other than a small system operator meets the
minimum specifications if the upgrade increases usable bandwidth to at
least 550 MHz capacity with upgrade capability to 750 MHz, fiber to node
or beyond, and no more than 1,500 homes per node.[^29] If the operator
answers \"yes\", \"the upgrade will be deemed \'significant\' and a
benefit to subscribers of rate-regulated cable services.\"[^30]
Subscribers are presumed to benefit from improved service quality and
reliability when an operator meets the minimum technical specifications.
Only if the operator answers in the negative must it make an affirmative
showing as to how the upgrade will be significant and will benefit
subscribers.

11\. The City's local rate order does not challenge Marcus'
certification on the Form 1235 that it met the Commission's minimum
technical specifications and does not base its conclusion on specific
factual findings relevant under the Commission\'s rate regulations in 47
C.F.R. § 922, such as disputing figures in the Form 1235 or pointing to
mathematical errors. The City merely cites the language of subparagraphs
of 47 C.F.R. § 76.922(j) without elaborating or explaining how the
operator's proposed BST rates are violative of those provisions. As we
noted in *Westmarc Cable Holdings, Inc*.[^31] and *Century
Communications Corporation*[^32], the purpose of requiring a written
order is to protect the due process rights of the cable operator by
explaining why the rate was disapproved and providing a basis to refile
the rate or appeal the decision to the Commission. As stated in *Valley
Cable TV, Inc.*, the Commission has previously rejected local rate
orders that summarily or vaguely rejected an operator\'s proposed
rates.[^33] In *Paragon Communications*,[^34] we stated that the
Commission\'s rules allow periodic rate adjustments for inflation,
changes in external costs, and changes in the number of regulated
channels using either the quarterly or annual adjustment method; the
City\'s authority is to review the reasonableness of the cable
operator\'s rates on the basis of regulations adopted by the Commission;
and the rules do not provide any other basis for rate decisions.[^35]
The City of Wisconsin Rapids failed to affirmatively demonstrate why
Marcus' proposed BST rate adjustments are unreasonable.[^36]

**IV. CONCLUSION**

12\. In view of the above, the City's rate order denying Marcus a rate
increase for the network upgrade costs attributable to the BST is
inconsistent with the *Cost Order* and 47 C.F.R. § 76.922(j) allowing a
cable operator that invests significantly in upgrading its system to
justify an increase in its rates to recover the costs of the network
upgrade without having to make a full cost-of-service showing. The City
appears to have misconstrued the Commission's Form 1235 pre-approval
process, and its finding of no subscriber benefit is unexplained on the
record. Therefore, we find that it acted unreasonably in denying Marcus'
proposed rate increase and are remanding this case to the City for
further proceedings consistent with this decision.

**V. ORDERING CLAUSES**

13\. Accordingly, **IT IS ORDERED** that the Petition for Review filed
by Marcus Cable Partners, L.L.C., on June 18, 1999 **IS GRANTED** and
the local rate order of the City of Wisconsin Rapids, Wisconsin is
remanded to the City for further consideration consistent with the terms
of this Memorandum Opinion and Order.

14\. **IT IS FURTHER ORDERED** that the Request for Emergency Stay of
Local Rate Order by Marcus Cable Partners, L.L.C. filed on June 18, 1999
**IS DISMISSED** as moot.

15\. **IT IS FURTHER ORDERED** that the City of Wisconsin Rapids,
Wisconsin, shall not enforce matters remanded for further consideration
pending further action by the City on those matters.

16\. 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, Cable Services Bureau

[^1]: Appeal of Local Rate Order (June 18, 1999); Rate Order by the City
    denying Marcus' request to increase BST rates, adopted by the Common
    Council on May 11, 1999, and signed by the Mayor and City Clerk on
    May 24, 1999.

[^2]: 47 C.F.R. § 76.944.

[^3]: *See* Implementation of Sections of the Cable Television Consumer
    Protection and Competition Act of 1992: Rate Regulation, Report and
    Order and Further Notice of Proposed Rulemaking in MM Docket No.
    92-266, 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) ("*Third
    Reconsideration*").

[^4]: *Rate Order* at 5732.

[^5]: 47 C.F.R. § 76.937(a).

[^6]: *See* *Rate Order*, 8 FCC Rcd at 5718-19; *Third Reconsideration*,
    9 FCC Rcd at 4348.

[^7]: 47 C.F.R. § 76.936; *see* *Ultracom of Marple Inc.*, 10 FCC Rcd
    6640, 6641-42 (CSB 1995).

[^8]: *See* *Century Cable of Southern California*, 11 FCC Rcd 501 (Cab
    Serv. Bur. 1955); *TCI of Iowa, Inc*., 13 FCC Rcd 12020, 12022 (Cab.
    Serv. Bur. 1998).

[^9]: External costs include the following: state and local taxes
    applicable to the provision of cable television service; franchise
    fees; costs of complying with franchise requirements; retransmission
    consent fees and copyright fees incurred for the carriage of
    broadcast signals; other programming costs; and Commission cable
    system regulatory fees imposed pursuant to 47 U.S.C. § 159. 47
    C.F.R. § 76.922(f).

[^10]: 47 C.F.R. § 76.922(d), (e).

[^11]: 47 C.F.R. § 76.922(j).

[^12]: 47 C.F.R. 76.923.

[^13]: *See TCI of Southeast Mississippi*, 10 FCC Rcd 8728, 8730 (Cab.
    Serv. Bur. 1995*), reconsideration denied on other grounds*, 13 FCC
    11080 (Cab. Serv. Bur. 1998); *TCI Cablevision of Texas, Inc.,* 13
    FCC Rcd 6656, 6658 (Cab. Serv. Bur. 1998); *Century Cable of
    Southern California,* 11 FCC Rcd at 501-502.

[^14]: *See* Letter from Denise M. Jones of Marcus Cable to Vernon
    Borth, City Clerk of City of Wisconsin Rapids, dated March 23, 1999,
    found at Appeal of Local Rate Order, Attachment B.

[^15]: 47 C.F.R. § 76.922(j)(1) states "(1) Cable operators that
    undertake significant network upgrades requiring added capital
    investment may justify an increase in rates for regulated services
    by demonstrating that the capital investment will benefit
    subscribers;" (j)(2) provides "(2) A rate increase on account of
    upgrades shall not be assessed on customers until the upgrade is
    complete and providing benefits to customers of regulated services;"
    and (j)(3) states "(3) Cable operators seeking an upgrade rate
    increase have the burden of demonstrating the amount of the net
    increase in costs, taking into account current depreciation expense,
    likely changes in maintenance and other costs, changes in regulated
    revenues and expected economies of scale."

[^16]: Appeal at 1. Marcus also notes that it is unclear whether the
    City also intended to reject the Form 1240, since the rate order
    focuses on the Form 1235.

[^17]: *Id*. at 2-3.

[^18]: *Id*. at 4.

[^19]: 9 FCC Rcd 4527, 4674-76. *See* 47 C.F.R. § 76.922(j)(5). Unlike
    the benchmark/price cap element of a cable operator\'s rate, the
    upgrade surcharge will not be adjusted for inflation but will be a
    fee charged over the useful life of the improvement determined in
    accordance with the Commission\'s cost-of-service requirements.

[^20]: *Id*. at 4674-75.

[^21]: *Id*. at 4675-76.

[^22]: *Id*. at 4676.

[^23]: *See* Public Notice, Cable Services Bureau Develops System
    Upgrade Form, 11 FCC Rcd 5554 (Cab. Serv. Bur. 1995).

[^24]: *See* FCC Form 1235, Instructions for Completion of Abbreviated
    Cost of Service Filing for Cable Network Upgrades, Purpose and
    Filing Instructions, at 2 (Feb. 1996).

[^25]: *Id*. at 2.

[^26]: 13 FCC Rcd 17653, 17655 para. 8 (Cab. Serv. Bur.1998).

[^27]: *Cost Order*, 9 FCC Rcd at 4674.

[^28]: FCC Form 1235 at 2, Part I. A. 1 (Feb. 1996).

[^29]: FCC Form 1235, Instructions for Completion of Abbreviated Cost of
    Service Filing for Cable Network Upgrades, Instructions for Part I,
    Qualifications for Upgrade Rate Adjustment, at 5 (Feb. 1996).

[^30]: *Id*.

[^31]: 14 FCC Rcd 2110, 2111 para. 5 (Cab. Serv. Bur. 1999).

[^32]: 14 FCC Rcd 6963, 6965 para. 6 (Cab. Serv. Bur. 1999).

[^33]: 13 FCC Rcd 6378, 6379 para. 4 (Cab. Serv. Bur. 1998); *See
    Multimedia Cablevision*, 13 FCC Rcd 4112, 4115 para. 6 (Cab. Serv.
    Bur. 1997) (LFA\'s vague explanation expressing only a general
    concern with channel mix, signal quality, and level of programming
    was insufficient); *Cablevision VII, Inc*., 12 FCC Rcd 2989, 2991-92
    paras. 4-6 (Cab. Serv. Bur. 1997) (one page order stating only that
    the LFA had \"duly considered all information\" provided by the
    operator was insufficient); *Century Cable of Southern California*,
    11 FCC Rcd 501, 501-02 paras. 3-6 (Cab. Serv. Bur. 1995) (one page
    letter specifying LFA\'s general concern about poor quality
    programming and service was insufficient*); Falcon Telecable*, 11
    FCC Rcd 5415, 5415-16 paras. 5-6 (Cab. Serv. Bur. 1995) (one page
    order by LFA stating that rates were found unreasonable in
    accordance with the Commission\'s guidelines was insufficient).

[^34]: 13 FCC Rcd 19557, 19559 para. 6 (Cab. Serv. Bur. 1998).

[^35]: *See* *Enstar Communication*, 11 FCC Rcd 9874, 9877 para. 8 (Cab.
    Serv. Bur. 1996)).

[^36]: *See* 47 C.F.R. § 76.936; *Rate Order*, 8 FCC Rcd at 5715-16
    para. 126, 5731-32 para. 149 (1993) (need for rational basis for
    decision).