Before the

**Federal Communications Commission**

**Washington, D.C. 20554**

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| In the Matter of                 | * |                              |
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| Time Warner Cable                | ) |                              |
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| Appeal of Local Rate Order of    | * |                              |
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| the Town of Smithfield, North    | * |                              |
| Carolina                         | * |                              |
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**MEMORANDUM OPINION AND ORDER**

**Adopted: January 17, 2003 Released: January 23, 2003**

By the Deputy Chief, Policy Division, Media Bureau:

# introduction

1.  Time Warner Cable ("TWC" or the "Company"), has filed an appeal of
    the local rate order resolution adopted by Smithfield, North
    Carolina (the "Town" or "Smithfield") on February 5, 2002. The City
    filed an opposition to the appeal, and TWC filed a reply. For the
    reasons set forth herein, we grant the appeal, in part, and remand
    the rate order for further proceedings.

# background

2.  Rate orders issued by franchising authorities may be appealed to the
    Commission pursuant to Commission rules.[^1] In ruling on appeals of
    local rate orders, the Commission will not conduct a *de novo*
    review, but instead will sustain the franchising authority\'s
    decision as long as a reasonable basis for that decision exists.[^2]
    The Commission will reverse a franchising authority\'s rate decision
    only if it determines that the franchising authority acted
    unreasonably in applying the Commission\'s rules.[^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.  In the rate filing at issue in this case, TWC used Form 1205
    and 1240. FCC Form 1205 is the form operators use to update and
    adjust regulated cable equipment and installation rates. Operators
    using the annual rate adjustment method submit their role
    justifications on FCC Form 1240. These rate adjustments reflect
    inflation, changes in the number of regulated channels offered, and
    changes in certain external costs. External costs include the
    following categories of costs: state and local taxes specifically
    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
    regulatory fees.[^5]

# Discussion

## Summary of Appeal Petition 

4.  In its appeal petition, TWC states that on October 1, 2001, it
    submitted to the Town a set of rate forms to justify its BST and
    basic equipment and installation charges for the year beginning
    January 1, 2002, and by letter dated November 14, 2001, the Town's
    consultant responded by requesting additional information regarding
    TWC's Form 1205 equipment and installation rate justification.[^6]
    TWC indicates that it was asked to provide a description of the
    averaging methodology that it used in preparing its Form 1205 and a
    justification that such averaging methodology produces reasonable
    rates.[^7] TWC points out that by letter dated December 6, 2001, it
    told Smithfield that the Form 1205 was completed on a company-wide
    basis using the sum from all of its divisions and that its national
    aggregation approach produces reasonable equipment rates because
    actual divisional data is used.[^8] TWC also told the town that
    national aggregation tends to mitigate dramatic equipment rate
    increases associated with new equipment introduction.[^9] TWC
    explains that after reviewing its letter, the Town's consultant
    recommended rejecting the HSC calculated on TWC's Form 1205 because
    TWC failed to establish that the aggregation process produced just
    and reasonable rates.

5.  The consultant's report also recommended that the Town approve TWC's
    BST rate on condition that TWC submit a refreshed 2002-2003
    Form 1240. TWC asserts that in a February 5, 2002 meeting with the
    Town, it argued that Commission rules provide that absent a finding
    disputing the accuracy of a cable operator's rate calculations,
    local franchising authorities are required to approve the rates
    reflected on the forms.[^10] Despite its presentation, TWC states
    that the Town directed TWC to submit a refund plan to distribute
    refunds to subscribers.[^11] The Town also ordered TWC to refresh
    the inflation rates in the 2002 filing prior to calculating its 2003
    FCC 1240.[^12] Because the Town ignored the Commission's rules and
    established precedent, TWC argues that the Commission should impose
    sanctions on the Town, including the payment of TWC's attorney's
    fees.[^13]

## TWC's Company-wide Form 1205 Rate Calculations. 

6.  TWC argues that Sections 76.923(c)(1) and (3) state that when a
    cable operator submits installation and equipment costs based on
    average charges, the operator must provide a general description of
    the averaging methodology employed and a justification that the
    averaging methodology produces reasonable rates.[^14] TWC indicates
    that its December 6, 2001 letter to the Town clearly indicated that
    the individual data from all of the company's divisions had been
    added together in preparing a single, aggregate Form 1205 and that
    this statement satisfied TWC's obligation under Sections
    76.923(c)(1) and (3) to describe and justify the averaging
    methodology underlying the aggregate Form 1205.[^15] Moreover, TWC
    asserts that Commission decisions establish that cable operators are
    permitted to aggregate costs at the level of their choosing.[^16]
    Given the fact that the Town does not dispute either TWC's assertion
    that it used actual cost data from all of its divisions in
    completing Form 1205 or the mathematical calculations reflected on
    the form, TWC argues that the Town's rejection of TWC's HSC was
    arbitrary and must be reversed.[^17] TWC cites two cases supporting
    its argument, *Cabarrus* and *Bainbridge*, which conclude that one
    of the fundamental guidelines governing the local rate review
    process is that if a local franchising authority does not dispute
    the bases for the figures presented in a cable operator's rate forms
    and has not discovered any mathematical errors in the forms, the LFA
    should approve the operator's rate as derived from those forms.[^18]

7.  In its opposition, the Town explains that TWC was seeking to
    increase its hourly service charge from \$28.39 to \$35.83, an
    increase of 26 percent, and that pursuant to Sections 76.923(c)(1)
    and (3), TWC was required to provide a general description of the
    averaging methodology employed and a justification that its
    averaging methodology produces reasonable equipment rates.[^19] The
    Town asserts that TWC provided a general description of the
    averaging methodology employed but failed to provide a justification
    that its averaging methodology produced reasonable rates.[^20]
    Moreover, the Town concluded that the proposed HSC rate increase was
    eight times the rate of inflation and excessive.[^21] The Town
    asserts that although TWC argues that an LFA's authority is limited
    to checking the math on the cable operator's 1205 rate form,
    Sections 76.923(c)(1) and (3) require a franchising authority to
    evaluate whether the operator has justified that its aggregated rate
    is both accurate and reasonable.[^22] The Town also argues that the
    *Cabarrus* and *Bainbridge* decisions, which TWC cites for support,
    are inapplicable to this case because the facts differ so
    noticeably.[^23] Smithfield points out that in those cases the
    franchising authority issued brief orders rejecting the operator's
    rate request based on concerns relating to signal quality issues and
    customer service performance, which the Town asserts was the reason
    for the Commission's rejection of the franchising authority's
    ruling, as such issues should have been addressed using other
    Commission regulations, not the rate regulation process.[^24] The
    Town asserts that such circumstances are in contrast to the present
    case because the Town of Smithfield issued a "fully documented
    written order and rejected TWC's 2002 proposed HSC rate based on
    appropriate rate regulation grounds."[^25] Moreover, the Town
    asserts that in *TCI of Richardson, Inc.* the Commission instructed
    the City of Richardson to focus its rate review on whether the rates
    at issue were accurately calculated pursuant to the Commission's
    rules, and also stated that if the City determined that the rates
    were not reasonable, the City should clearly state its reasons for
    such conclusion in its written decision.[^26] Smithfield therefore
    makes the argument that the accuracy of submitted rate data cannot
    be the only measurement of reasonableness.[^27]

8.  In reply, TWC asserts that the flaw in the Town's argument is that
    it is based on a misunderstanding of the relevant rules and
    precedents governing the regulation of basic cable equipment and
    installation rates.[^28] It states that in Section 623(b)(3) of the
    Communications Act, regulated equipment and installation charges are
    to be based on the operator's actual cost and the rules do not
    empower LFAs to apply an essentially subjective test in assessing
    the reasonableness of equipment and installation charges.[^29] TWC
    states that the Town's reading of Sections 76.923(c)(1) and (c)(3)
    is mistaken, in that while the provisions require that a cable
    operator explain and justify its averaging methodology, they also
    serve to ensure that a cable operator's aggregated equipment and
    installation rates reflect actual costs.[^30] TWC maintains that TWC
    satisfied its obligations under Sections 76.923(c)(1) and (c)(3) by
    explaining that the entries in its company-wide Form 1205 simply
    reflected the sum of actual divisional cost data.[^31] TWC adds that
    the Town's review of TWC's HSC should have focused on whether the
    rates at issue are accurately calculated and not on whether the
    rates were higher than those charged by systems subject to effective
    competition.[^32] In addition, TWC indicates that the Commission has
    concluded that the magnitude of a rate increase alone is not
    determinative of reasonableness.[^33] Because there is no dispute
    that TWC's HSC was accurately calculated on the bases of actual
    costs, TWC argues that the Town's decision to reject the HSC as
    unreasonable was arbitrary and must be reversed.[^34]

9.  The Town must follow the Commission's rate regulations when
    reviewing an operator's rate filing.[^35] As the Cable Services
    Bureau stated in *Falcon Cable Media*, if a local franchising
    authority does not dispute the bases for the figures presented in a
    cable operator's rate forms and has not discovered any mathematical
    errors in the forms, the LFA should approve the operator's rates as
    derived from those forms.[^36] If an LFA rejects an operator's
    proposed rates, it must issue a written decision affirmatively
    demonstrating why the rates are unreasonable.[^37] The LFA may
    address other, non-rate concerns through our rules on technical
    standards,[^38] our rules on customer service obligations,[^39] the
    LFA's own cable regulations, and the franchise agreement.

10. Sections 76.923(c)(1) and (3) provide that a cable operator may
    aggregate equipment and installation costs on a franchise, system,
    regional, or company level. In addition, when submitting its
    equipment and installation costs based on average charges, the cable
    operator must provide a general description of the averaging
    methodology employed and a justification that its averaging
    methodology produces reasonable rates.[^40] Smithfield asserts that
    TWC did not satisfactorily justify that its averaging methodology
    produced a reasonable rate. The information before us indicates
    otherwise. There is no dispute that TWC accurately calculated its
    HSC on the basis of actual costs.[^41] Based upon the December 6,
    2001 letter from TWC to the Town it appears that TWC provided a
    detailed description of its averaging methodology, adequate
    justification of the considerations and variables used in
    calculating a reasonable rate, and a reasonable justification for
    the arrived-at rate. The information TWC supplied appears to have
    been sufficiently informative as a basis for identifying the costs
    claimed on its aggregated Form 1205. The local franchising
    authority's concern about the rate level does not provide a
    legitimate basis for rejecting TWC's Form 1205 calculations. As we
    have stated, although the magnitude of a rate increase may be reason
    closely to examine supporting information, the magnitude of a rate
    increase alone is not determinative of its reasonableness.[^42]

## Refreshing Trued-up Inflation Calculation.

11. TWC indicates that the "true-up"[^43] period on its 2002-2003 Form
    1240 ran from October 2000 through September 30, 2001, but because
    by October 1, 2001, the Commission had only released quarterly
    inflation data through the first quarter of 2001, TWC used the first
    quarter 2001 inflation update as the true-up inflation rate for the
    second and third quarters of 2001.[^44] TWC argues that this
    approach is supported by Commission precedent, citing *TCI
    Cablevision of Ohio, Inc.,* in which the Cable Services Bureau
    rejected a local franchising authority's contention that it may
    require a cable operator to update the estimated inflation figure
    used in a true-up calculation.[^45] TWC points out that the Town's
    consultant acknowledged that TWC's inflation true-up calculations
    were consistent with the Commission's rules. Moreover the consultant
    pointed out that TWC could not be compelled to update its Form 1240
    to reflect inflation updates released subsequent to October 1, 2001.
    Notwithstanding these circumstances, the Town directed TWC to
    refresh its inflation true-up calculation prior to calculating its
    2003-2004 Form 1240.[^46]

12. The Town states that its decision requiring TWC to refresh the
    inflation rates by incorporating more accurate, updated inflation
    figures, was reasonable and in the public interest.[^47] It
    maintains that by refreshing the 2002 rates and replacing the
    inflation figures of 3.23% for the last two quarters with the FCC's
    more accurate figures of 2.08% and 2.25%, the maximum permitted
    basic service tier rate for 2003 would be lowered for consumers.
    [^48]

13. In reply, TWC asserts that the Commission has held that LFAs may not
    require a cable operator to update estimated inflation figures used
    in the true-up calculation where there are no other changes being
    made to the Form 1240.[^49] TWC also points out that the Commission
    has recognized that the public interest is also served by providing
    cable operators with a measure of finality and by reducing the
    administrative expenses associated with the rate regulation
    process.[^50] Moreover, TWC makes the argument that if LFAs are
    allowed to require a new true-up calculation when the inflation rate
    is declining, cable operators would have to be allowed to perform a
    similar update when inflation rates are on the rise.[^51]

14. Operators using Form 1240 may adjust rates once per year to reflect
    reasonable certain and quantifiable changes in external costs,
    inflation, and the number of regulated channels that are projected
    for the 12 months following the rate change.[^52] An operator using
    Form 1240 true-ups the inflation information on the rate form by
    using the quarterly inflation figures published by the
    Commission.[^53] If the true-up on the worksheet includes months for
    which the Commission has not released an inflation figure, the
    operator must use the figure for the most recent quarter for which a
    figure is available.[^54] The operator then computes an average
    inflation factor for the true-up period, which is used in
    calculating the maximum permitted rate for the true-up period.[^55]
    The inflation factor most recently released by the Commission is
    also used to compute the current inflation factor for the projected
    period.[^56] A franchising authority should not find a rate
    unreasonable solely because more current inflation data has become
    available by the time the franchising authority reviews a cable
    operator's submission.[^57] However, if a rate is unreasonable on
    its face or has to be adjusted for reasons other than the
    availability of a more current inflation figure, the franchising
    authority may recalculate the maximum permitted basic service tier
    rate using the most accurate inflation information for the period at
    issue that is available at the time of its review.[^58] The Town has
    not shown that TWC's rate is unreasonable on its face or that the
    rate has to be adjusted for any other reason. Thus, the Town should
    accept the Form 1240 and the data TWC submitted and TWC should not
    be required to refresh its inflation true-up calculation.

15. We decline to assess sanctions on the Town as TWC requested.
    Although we have previously addressed the issues raised in this
    appeal, that fact alone is not an adequate basis to justify our
    assessing sanctions.

# ordering clauses

16. Accordingly, **IT IS ORDERED** that the Appeal of Time Warner Cable
    from a Rate Order of the Town of Smithfield, North Carolina **IS
    GRANTED IN PART** and **DENIED IN PART** as provided above and the
    Rate Order of the Town of Smithfield **IS REMANDED** for further
    consideration consistent with this Memorandum Opinion and Order.

17. This action is taken pursuant to authority delegated by § 0.283 of
    the Commission's rules. 47 C.F.R. § 0.283.

FEDERAL COMMUNICATIONS COMMISSION

John B. Norton

Deputy Chief, Policy Division

Media Bureau

[^1]: ^?^ *See* 47 C.F.R. § 76.944; 47 U.S.C. § 543(b)(5)(B).

[^2]: ^?^ *Implementation of Sections of the Cable Television Consumer
    Protection and Competition Act of 1992: Rate Regulation*, 8 FCC Rcd
    5631, 5731-32 (1993) (\"*Rate Order*\"); 9 FCC Rcd 4316, 4346 (1994)
    (\"*Third Reconsideration Order*\").

[^3]: *Id.*

[^4]: *Id.*

[^5]: 47 C.F.R. § 76.922(c) and (f).

[^6]: *Id.* at 2.

[^7]: *Id.*

[^8]: *Id. See* Exhibit C, December 6, 2001 Letter from TWC to the Town
    of Smithfield.

[^9]: *Id.*

[^10]: *Id.* at 3.

[^11]: *Id.*

[^12]: *Id.*

[^13]: *Id.* at 7-8.

[^14]: *Id.* at 4.

[^15]: *Id.* at 5.

[^16]: *Id.* at 5, 6. *See TCI of Richardson, Inc.,* 14 FCC Rcd 11700,
    11706 (CSB 1999).

[^17]: *Id.*

[^18]: *Id.* at 3-4. *See Time Warner Cable (Cabarrus County, NC)*, 16
    FCC Rcd 16457 (CSB 2001); *TCI TKR of Georgia, Inc., (Bainbridge,
    GA*), 15 FCC Rcd 9123, 9124 (CSB 2000).

[^19]: Opposition at 2.

[^20]: *Id.* Regarding whether the cable operator's methodology produces
    reasonable equipment rates, the Town states that because the burden
    of proof on this issue is on the cable operator one of the factors
    to be considered in prescribing the rate regulations is the rates
    for cable systems, if any, subject to effective competition. The
    Town notes that TWC did not provide evidence of its rates on its
    cable systems subject to effective competition. Opposition at 5.

[^21]: *Id.* at 11.

[^22]: *Id.* at 6.

[^23]: *Id.* at 7.

[^24]: *Id.* at 7.

[^25]: *Id.*

[^26]: *Id.* at 9, *citing TCI of Richardson*, 14 FCC Rcd at11710.

[^27]: *Id.* at 9.

[^28]: Reply at 3.

[^29]: *Id.* at 3, 4.

[^30]: *Id.*

[^31]: *Id.*

[^32]: *Id.* at 4.

[^33]: *Id.* at 5. *See TCI of Pennsylvania, Inc.* (*Shaler Twp*.), 13
    FCC Rcd 5119, 5120-21 (CSB 1998).

[^34]: *Id.* at 5.

[^35]: *See TCI of Southeast Mississippi,* 10 FCC Rcd 8728 (CSB 1995)
    (The Bureau concluded that neither signal quality issues nor
    concerns about equipment compatibility may be remedied through
    application of the Commission's rate regulations. Rather, signal
    quality is subject to the Commission's rules of technical standards
    (47 C.F.R. §§ 76.601-630) and equipment-related problems are
    addressed by the Commission's equipment compatibility rules (47
    C.F.R. § 76.630). The Order noted that a franchising authority may
    not arbitrarily reduce prices for programming and equipment below
    maximum permitted rate levels in an effort to address signal quality
    or equipment compatibility issues).

[^36]: 13 FCC Rcd 11996, 11998 (CSB 1998).

[^37]: 47 C.F.R. § 76.936; *Rate Order*, 8 FCC Rcd at 5715-16.

[^38]: *See* 47 C.F.R. §§ 76.601-630.

[^39]: *See* 47 C.F.R. § 76.309.

[^40]: *See* 47 C.F.R. § 76.923(c)(1) and (3).

[^41]: *See* Opposition at 10.

[^42]: *See TCI of Richardson, Inc.,* 14 FCC Rcd at 11710.

[^43]: As part of the annual rate change, the Commission's rules include
    a "true-up" mechanism which permits an operator to correct projected
    cost changes with actual cost changes associated with external
    costs, inflation, and the number of regulated channels. The true-up
    requires operators to decrease their rates or permits them to
    increase their rates to adjust for over-or-under estimations of
    these cost changes. *See Implementation of Sections of the Cable
    Television Consumer Protection and Competition Act of 1992: Rate
    Regulation, Thirteenth Order on Reconsideration,* 11 FCC Rcd 388,
    420-21 (1995).

[^44]: Appeal Petition at 6*.* The Smithfield Rate Order indicates that
    the Commission published inflation figures of 2.8% and 2.25% in
    October 2001, subsequent to TWC's FCC 1240 rate filing. The Town
    ordered TWC to refresh the inflation rates in TWC's 2002 FCC 1240
    filing prior to calculating a 2003 FCC 1240 filing by incorporating
    updated inflation figures for 2001 and 2002. *See* Exhibit A,
    February 5, 2002 Rate Order.

[^45]: *Id. See TCI Cablevision of Ohio, Inc.*, (*Warren, OH)*, 13 FCC
    Rcd 11954, 11958 (CSB 1998).

[^46]: *Id.*

[^47]: Opposition at 12.

[^48]: *Id.*

[^49]: Reply at 6. *See TCI Cablevision of Ohio, Inc. (Warren, OH),* 13
    FCC Rcd at 11958.

[^50]: *Id.* at 6*.*

[^51]: *Id.* at 6.

[^52]: 47 C.F.R. § 76.922(e)(3).

[^53]: *See Comcast Cablevision of Detroit, Inc.,* 15 FCC Rcd 24022,
    24027 (CSB 2000) citing Form 1240 Instruction at 13, 24-25.

[^54]: *Id.*

[^55]: *Id.*

[^56]: *Id.*

[^57]: *Id.*

[^58]: *Id.*