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                                Before the
                     Federal Communications Commission
                          Washington, D.C. 20554


In the Matter of:                    )
                                     )
                                     )
FALCON TELECABLE                     )
                                     )
Appeal of a Local Rate Order of      )
the City of Hallsville, TX           )


                      MEMORANDUM OPINION AND ORDER

   Adopted:  February 3, 1998                      Released:  February 5, 1998  

By the Chief, Cable Services Bureau:

I.      INTRODUCTION.

  1.    On February 14, 1995, the City of Hallsville, Texas ("the City") issued a local rate order
based upon its initial review of Falcon Telecable's ("Falcon") Form 1200 finding that Falcon's Form
1200 basic service tier ("BST") rates and certain equipment rates were unreasonable.  However, this
order did not prescribe new rates, nor did it contain an explanation for the City's determination. On April
5, 1995, Falcon filed an appeal of this local order with the Commission.  On June 14, 1995, the Cable
Services Bureau ("Bureau") issued a decision remanding the City's February 14, 1995 local rate order
back to the franchising authority because the City offered no explanation for rejecting Falcon's rates. 
In response to the Bureau's order, the City issued a second rate order on June 13, 1995 ("remand order")
finding that the BST rates and certain related equipment and installation charges submitted by Falcon for
approval were unreasonable based on the City's review of Falcon's FCC Forms 1200 and 1210.  The
City established new rates for the BST and related equipment and installation charges and ordered
refunds.  
  
  2.    Falcon now appeals the City's remand order on two grounds.  First, Falcon asserts that
the City has again failed to explain how Falcon's rates were unreasonable or how the City's recalculated
rates were reasonable.  Second, Falcon asserts that on both its Forms 1200 and 1210, the City revised
the channel line-ups and external costs to include a cable programming service tier ("CPST"), when in
fact no such tier existed at that time.  The City filed an opposition to the appeal and Falcon filed a reply.

 
  II.   STANDARD OF REVIEW.

  3.    Under our rules, rate orders made by local franchising authorities may be appealed to the
Commission.  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 there is a reasonable basis
for that decision.  Therefore, the Commission will reverse a franchising authority's decision only if it
determines that the franchising authority acted unreasonably in applying the Commission's rules in
rendering its local rate order.  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.
  
  III.  BACKGROUND.
  
  4.    FCC Form 1200 is the official form used to determine whether regulated rates for
programming, equipment and installations are reasonable under the revised benchmark rules which apply
to operators beginning May 15, 1994 or upon the expiration of the deferral period provided under our
rules for operators to comply with the revisions to our rules.  Through the use of Form 1200, an
operator calculates three sets of figures: (1)  the operator's actual March 31, 1994 rate level; (2) the
operator's March 31, 1994 benchmark rate level; and (3) the operator's "full reduction" rate level.  These
figures are used to derive an operator's maximum permitted rates.

  5.    The operator first completes Module A of the Form 1200 to calculate its March 31, 1994
per subscriber monthly regulated revenue.  Next, the operator completes Module B to calculate changes
in external costs which the operator is entitled to reflect in its rates but which have not yet been passed
through to its subscribers.  In Module C the operator enters its data with respect to a number of variables
to calculate its March 31, 1994 benchmark rate level on a per subscriber, per month basis.  The
operator's March 31, 1994 actual rate level (Module A plus external costs calculated in Module B) is then
compared to the benchmark rate level derived in Module C, with the operator carrying forward the
smaller of the two.  If the March 31, 1994 actual rate level is smaller, the operator completes Module
D, subtracting the monthly per subscriber equipment cost calculated in Form 1205 and adding external
costs calculated from Module B.  If the benchmark rate level is smaller, the operator completes Module
E, subtracting the monthly per subscriber equipment cost taken from Form 1205.  Depending on which
is used, either Module D or E establishes per-tier rates, which the operator carries forward into Module
F, as its so-called provisional rates.

  6.    In the second part of Form 1200, the operator derives its full reduction rate based on its
September 30, 1992 rates. To compute this rate, in Module G, the operator calculates its September 30,
1992 total monthly regulated revenues per subscriber, reduces that amount by 17% and then adjusts for
inflation.  In Module H, the operator then adjusts the results from Module G for changes since September
30, 1992 with respect to subscribers, regulated channels, and satellite channels.  In Module I, the
operator subtracts a monthly per subscriber equipment cost amount from Form 1205, establishes per-tier
rates, and adjusts for changes in external costs.  In Module J, the operator compares its aggregate
provisional rate with its aggregate full reduction rate.  The maximum permitted rates an operator is
actually allowed to charge are either the provisional rates (Module F) or the full reduction rates (Module
I), depending on whether the aggregate provisional rate is greater or less than the aggregate full reduction
rate, and are entered into Module K. 
  
  7.     FCC Form 1205 is the official form used to determine the costs of regulated cable
equipment and installation.  Form 1205 has two distinct uses.  First, Form 1205 is submitted along with
a Form 1200 and is used to establish equipment and installation costs in determining initial rates for
regulated cable services.  These equipment and installation costs are converted to a monthly per
subscriber cost that is subtracted from figures derived from programming and equipment revenues in the
Form 1200 in order to determine maximum permitted programming service rates.  In following the
mathematical principles embodied in these calculations, lower equipment basket costs lead to higher
programming rates, while higher equipment basket costs lead to lower programming rates.

  8.    The second use for Form 1205 is to update permitted regulated equipment and installation
charges based on equipment basket costs.  Higher equipment basket costs on Form 1205 (resulting in
lower programming rates on Form 1200) correlate with higher equipment and installation rates. 
Conversely, lower equipment basket costs on Form 1205 (resulting in higher programming rates on Form
1200) correlate with lower equipment and installation rates.

  9.    Form 1210 is the official form an operator uses to justify adjustments in the rates it
computed on its FCC Form 1200, which is used to establish an operator's initial maximum permitted
rates, or on a previously filed Form 1210.  In the Form 1200, an operator calculates its provisional rates
and its full reduction rates.  An operator's initial maximum permitted rates are the higher of the two. 
An operator may file a Form 1210 to adjust its rates to reflect changes in external costs, channel additions
and deletions, and inflation.  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.  An operator may file for
changes in external costs for the period beginning at the end of the last quarter for which an adjustment
was previously made through the end of the quarter that has most recently closed preceding the filing of
the Form 1210.  An operator may file a Form 1210 up to quarterly, but must file in the quarter
following a decrease in costs due to channel deletions and within a year following a decrease in other
costs.  An operator must file for a rate increase within a year of the cost increase in order to recover
those costs in its rates.  

  IV.   DISCUSSION.

        1.    Written Decision.
        
        a.    Position of the Parties. 
        
  10.   Falcon argues that, although the City provided copies of the recalculated Forms 1200 and
1210, the City failed to disclose the reason for its recalculations in its remand order.  Falcon asserts that
without the City's basis or rationale for recalculating its rates, it is impossible to substantively challenge
the actions taken by the City.  Consequently, Falcon claims that the remand order is defective on its face
and must be vacated by the Commission.  In response, the City contends that it attached an explanation
of its analysis and conclusions to its remand order.      

  11.   Falcon denies that the City provided an explanation of its analysis and conclusions along
with its remand order.  According to Falcon, the explanation and analysis referred to by the City were
not part of the remand order.  Instead, Falcon asserts that the explanation and analysis were provided the
same day that Falcon filed its appeal of the remand order, almost one month after the City released this
order.  

        b.    Discussion.

  12.   In rate regulation proceedings, the cable operator bears the burden of proving the
reasonableness of its proposed rates.  The local franchising authority must provide the cable operator
with an opportunity to participate in the rate review proceeding and to provide documentation supporting
its proposed rates.  Thereafter, if the local franchising authority determines that the operator's proposed
rate exceeds the maximum permitted level as defined by the Commission's rate standards, it may
prescribe a rate different from the proposed rate provided that the local franchising authority affirmatively
demonstrates in a written decision why the operator's rate is unreasonable and why its prescribed rate is
reasonable.  While there is no requirement that the franchising authority embody its rate order in a
single document, our rules do require that the franchising authority's decision be publicly available and
provide a sufficient basis for its decision to allow an operator and other interested parties to know why
the rate was disapproved so that the operator may appeal the local authority's decision.  Here, the local
authority's written decision is in two parts and consists of:   (1) the remand order, a one-page document
entitled "Ordinance No. 95-04" dictating the maximum permitted rates that the operator may charge for
the BST and equipment and including the City's recalculated Forms 1200 and 1210 and (2) the City's
explanation for its decision.  There is some question about when the City's explanatory information was
available to Falcon.  The City contends that it attached the information to the remand order; Falcon
contends that it did not receive the information until the day that it filed its appeal with the Commission. 
Based upon the detailed, issue-specific appeal petition filed by the operator, we find Falcon knew and
understood the City's reasons for rejecting its rates, and we deny Falcon's appeal with respect to this
issue.

        2.    Revision of Channel Count.

        a.    Positions of the parties.
  
  13.   Falcon alleges that the City improperly revised Falcon's Form 1200 and Form 1210 by: 
(1) constructing a CPST by moving four channels from Falcon's BST to this CPST for the purposes of
determining Falcon's beginning date and March 31, 1994 channel line-up; and (2) allocating a portion
of its beginning date and March 31, 1994 external costs to this CPST.  According to Falcon, neither the
City's remand order nor the remand order's exhibits contain an explanation of why the City created this
CPST.  Falcon states that it did not have a CPST either on the beginning date or on March 31, 1994. 
Falcon states that it did not begin to offer a CPST until July 14, 1994 when it restructured its service tier
offerings by creating a four-channel CPST. 

  14.   The City states that Falcon restructured its service offerings on July 14, 1994 by moving
four channels from the basic service tier to the CPST.  The City asserts that Falcon's Forms 1200 and
1210 should have reflected the restructuring.  The City asserts that it recalculated the Forms 1200 and
1210 to reflect the restructuring because the Commission's rules require an operator to use the most
current information when completing its Forms 1200 and 1210.   The City alleges that, as a result of
the restructuring, Falcon's actual overall rates for (BST and CPST) were both higher than the rates
calculated and submitted to the City by Falcon on its Form 1200 and higher than the rates recalculated
by the City to reflect Falcon's restructuring.  Finally, the City asserts that Falcon's restructuring on July
14, 1994 constituted an attempt to evade the post-May 14, 1994 rate reductions ordered by the
Commission.

  15.   In response, Falcon asserts that the Commission's refund deferral rules do not prohibit
operators from making rates changes during the refund period, rather the rules provide that the deferral
period ends when such changes are made or July 14, 1994; whichever comes first.  Falcon asserts that,
because its restructuring occurred on July 14, 1994, it was not required to reflect the channel adjustments
related to the restructuring until its Form 1210 filing.  With respect to its Form 1210 filing, Falcon
asserts that it correctly completed its Form 1210 by listing 27 channels on Line C because it contends
the instructions for this line required it to enter the number of channels listed on Line A1 of its Form
1200 on which it had listed 27 channels.    
  
        b.    Discussion. 

  16.   The purpose of the Commission's refund deferral rules was to defer exposure to possible
Form 1200 refund liability from March 1994 until July 14, 1994, provided the operator met certain
conditions.  Here, Falcon verifies that its restructuring did not take place until the end of the
Commission's refund deferral period, on July 14, 1994. Falcon's July 14, 1994 restructuring of its
channel line-up does not have any refund deferral implications.  Therefore, the sole issue to be resolved
is whether Falcon correctly completed its Forms 1200 and 1210 (Line C) when it listed only one tier of
service.

  17.   The Form 1200 instructions for all lines of Module A (Monthly Regulated Revenues Per
Subscriber as of March 31, 1994); Lines B8-13 of Module B (Adjustments for Certain to External Costs);
Lines C1-C3 of Module C (Calculating the Benchmark); Line I4 of Module I (Restructured Full
Reduction Rate); and Line J1 of Module J (Comparison of Provisional Rate with Full Reduction Rate)
require operators to enter the number of channels and other associated data as of March 31, 1994. 
Accordingly, Falcon correctly used March 31, 1994 data reflecting only one tier of service when it
completed these sections of its Form 1200.  Similarly, the instructions for Lines B1-B7 of Module B,
Lines I9-I15 require an operator to enter data current as of its "beginning date."  Here, neither party
disputes that the beginning date is February 8, 1994.  Accordingly, Falcon was correct in using data from
February 8, 1994 in completing the sections regarding data current as of the beginning date. 
Additionally, Falcon was correct in using data from March 31, 1994 in completing sections regarding
data current as of March 31, 1994.  In reviewing the sections regarding data current as of the beginning
date and data current as of March 31, 1994, the City erred by revising Falcon's channel line-ups and
external costs to include a CPST, when in fact no such tier at existed at the time.  Instead, the City
should have used Falcon's actual beginning date and March 31, 1994 channel line-ups and external costs
reflecting only one tier, the basic service tier.

  18.   With respect to Falcon's Form 1210, the instructions for Line C of the Form 1210 require
an operator to enter the number of channels on each tier, as listed on the operator's Form 1200, Line A1. 
Falcon was required to carry over the March 31, 1994 channel count from Line A1 of its Form 1200 to
Line C of its Form 1210.  The City was unreasonable in revising Line C to reflect a CPST tier, when
no such tier existed at the time.  The City should have reviewed this section using Falcon's March 31,
1994 channel count.  Moreover, the instructions for the Form 1210, Module A (Transition and Full
Reduction Rates per Tier) require an operator to enter the transition and full reduction rates per tier, as
recorded on its Form 1200.  Falcon correctly entered the data from its Form 1200 reflecting only one
tier of service in completing this Module.  The City erred by revising the data to reflect Falcon's July
14, 1994 tier restructuring and the creation of a CPST tier.  Similarly, the instructions for Module B
(Calculating of Current and Net External Costs) require an operator to enter data as of March 31, 1994
and enter data reflecting changes since March 31, 1994. In accordance with these instructions, Falcon
entered data as of March 31, 1994 and entered data reflecting its post-March 31, 1994 changes (the tier
restructuring) where appropriate. The City erred by revising the March 31, 1994 data to reflect a CPST
tier, when no such tier existed on March 31, 1994.  We remand this issue to the local franchising
authority for further consideration in accordance with this order. 

IV.     ORDERING CLAUSES.

  19.   Accordingly, IT IS ORDERED that the appeal of the local rate order filed by Falcon
Telecable with respect to the issue of the City's written decision is DENIED.

  20.   IT IS FURTHER ORDERED the appeal of the local rate order filed by Falcon Telecable
with respect to the issue of the City's recalculation of Falcon's Forms 1200 and 1210 IS REMANDED
to the local franchising authority for further proceedings consistent with this opinion.  
  21.   IT IS FURTHER ORDERED that the stay request by Falcon Telecable IS DISMISSED
as moot.
  
  22.   This action is taken by the Chief, Cable Services Bureau, pursuant to authority delegated
by Section 0.321 of the Commission's rules.  47 C.F.R.  0.321.

        FEDERAL COMMUNICATIONS COMMISSION



        Meredith J. Jones
        Chief, Cable Services Bureau