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10 <br />-7- <br />5. Cable System Upgrade Costs <br />a.. Add-on Charge <br />(1) Time Warner Cable submitted FCC 1235 Abbreviate Cost of Service Filing <br />for Cable Network Upgrades forms for both franchises. Though the FCC <br />1235 form applicable to NC-0276 was submitted in 1999, the rates established <br />in those FCC 1235 filings were carried forward and used in 2000 and 2001 rate <br />calculations. <br />(2) In September of 2000, Time Warner submitted an updated FCC 1235 for 2001 <br />covering franchise NC 0256. Under the FCC's rules, cable operators are <br />allowed to recover their system upgrade investments from subscribers on a <br />tier-by-tier basis. FCC rules allow capital upgrade costs to be apportioned <br />among the cable tiers, e.g., BST; cable prow-ran-nn- service tier (CPST), new <br />product tiers (NPT), etc. <br />(3) Time Warner's add-on cost of service upgrade rates are $1.81, $2.11, and <br />$1,45, per subscriber, per month, for NC-0276 Chapel Hill system; NC-0276 <br />Durham system; and NC-0256,. Carrboro system subscribers, respectively. <br />These charges are added to the BST selected rate to create the combined rate <br />subscribers will pay.' None of the upgrade, cost is being apportioned to the <br />upper cable tiers. Subscribers will be charged a combined rate, which includes <br />the add-on cost, plus the BST rate. <br />b. Rate of Return <br />(1) Time Warner used a Rate of Return of 13.22% for franchise NC-0256, as <br />opposed to 11.25%, which was used in franchise NC-0276. The 11.251/o is <br />presumed by the FCC to provide a "reasonable" rate of return on the cable <br />operator's investment. The burden of proof is on the cable operator to <br />substantiate a rate of return higher than the FCC's presumptive unitary rate of <br />11.25% a To this end, the consultant requested additional documentation and <br />explanation from Time Warner to substantiate the higher rate of return. Time <br />'This does not include franchise fees and applicable taxes. <br />CC Second ort and order-First Qrder on Reconsid 'o and F rther tice of <br />Pro osed Ruiemakinu, MR, MATHESON Docket No. 93-215 (Zan. 26, 1996). <br />Action Audits, LLC Franchise Fee U -Tax Auditin & Telecommunication Administration <br />101 Pocono Lane, Cary, North Carolina 27513-5316 Voice # 919.467.5392 Fax # 919.460.6868