[Federal Register Volume 59, Number 73 (Friday, April 15, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-8998]


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[Federal Register: April 15, 1994]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 76

[MM Docket No. 92-266, FCC 94-38]

 

Cable Television Act of 1992

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: The Commission has adopted a Second Order on Reconsideration 
and Fourth Report and Order to revise, clarify, and in certain 
instances, adopt further, Commission cable rate regulations. The Second 
Order on Reconsideration primarily (1) adopts a revised ``competitive 
differential''--the average difference that exists between the rates of 
competitive and non-competitive cable systems--of 17 percent; (2) 
requires all regulated cable systems to establish rates based on the 
revised competitive differential unless they justify other rates 
through a cost-of-service showing; and (3) establishes special 
transition rules that relieve ``low-priced'' systems (as measured by a 
revised benchmark that incorporates the 17 percent competitive 
differential) and cable systems owned by small operators from reducing 
their rates by the full competitive differential pending completion of 
an industry cost study to be conducted by the Commission. The Fourth 
Report and Order establishes a ``going-forward'' mechanism to govern 
future rate adjustments resulting from channel additions or deletions, 
or system upgrades. The rules and procedures adopted in this decision 
are intended to ensure that subscribers pay reasonable rates for 
regulated cable services while encouraging the continued expansion of 
cable service offerings.
    The Commission has also adopted a Fifth Notice of Proposed Rule 
Making, which may be found elsewhere in this Federal Register.

EFFECTIVE DATE: May 15, 1994, except the amendments to Sec. 76.964 will 
become effective April 15, 1994.

FOR FURTHER INFORMATION CONTACT:
Joel Kaufman, (202) 416-1164, Aliza Katz (202) 416-0939, Edward Hearst, 
(202) 416-0862, or Kathy Franco (202) 416-0956.

SUPPLEMENTARY INFORMATION: This is a synopsis of the Second Order on 
Reconsideration and Fourth Report and Order portions of the 
Commission's Second Order on Reconsideration, Fourth Report and Order, 
and Fifth Notice of Proposed Rulemaking in MM Docket No. 92-266, FCC 
94-38, adopted February 22, 1994, and released March 30, 1994.
    The complete text of this Second Order on Reconsideration, Fourth 
Report and Order, and Fifth Notice of Proposed Rulemaking is available 
for inspection and copying during normal business hours in the FCC 
Reference Center (room 239), 1919 M Street, NW., Washington, DC, and 
also may be purchased from the Commission's copy contractor, 
International Transcription Service at (202) 857-3800, 2100 M Street, 
NW., suite 140, Washington, DC 20037.

Synopsis of the Second Report and Order on Reconsideration

A. Introduction

    In the Report and Order and Further Notice of Proposed Rulemaking 
(``Rate Order'') in MM Docket No. 92-266, 58 FR 29736, May 21, 1993, 
the Commission adopted cable rate regulation rules and policies 
implementing the Cable Television Consumer Protection and Competition 
Act of 1992. The Commission's September 1992 Competitive Survey of 
cable rates supported Congress' findings that the rates for cable 
systems not subject to effective competition reflect pervasive market 
power. Congress had defined three types of cable systems subject to 
``effective competition'': (1) Cable systems that face head-to-head 
competition (``overbuilds''); (2) cable systems operated by 
municipalities (``municipal''); and (3) cable systems with low 
penetration (``low penetration''). Using the results of its Competitive 
Survey, the Commission adopted a ``benchmark'' approach for setting 
initial rates for regulated cable service. Under the benchmark 
approach, regulated cable systems were required to use a formula 
established in the Rate Order to calculate an applicable benchmark--an 
estimate of the rate that a cable system subject to effective 
competition with similar characteristics would charge. Rates of cable 
systems at or below the benchmark were presumed to be reasonable; rates 
above the benchmark were presumed to be unreasonable. Cable systems 
whose rates exceeded the applicable benchmark were required to set 
rates based on September 30, 1992 rate levels reduced either to the 
benchmark or by ten percent, the ``competitive differential,'' 
whichever reduction was less. Alternatively, they could justify their 
higher rates with a cost-of-service showing. In our First 
Reconsideration Order, the Commission affirmed its decision to use a 
benchmark approach, based on rates charged by systems subject to 
effective competition, as the primary method for determining the 
reasonableness of regulated cable rates.
    The petitions for reconsideration filed in this proceeding allowed 
the Commission to undertake a comprehensive review of its rate 
regulation scheme for cable service. The Second Order on 
Reconsideration, which modifies the benchmark approach in several key 
respects, amends the Commission's cable rate regulations to ensure both 
that the rates consumers pay for regulated cable services are 
reasonable and that the Commission's rules continue to promote economic 
growth in the cable industry. The specific changes made on 
reconsideration are described below.

B. Regulation Governing Rates of Basic and Cable Programming Service 
Tiers

1. Impact on the National Economy
    The Second Reconsideration Order analyzes the impact of the revised 
rate regulations on the Nation's economy, and more specifically, the 
effect on innovation, investment, and growth in the cable industry. The 
Second Reconsideration Order concludes that the Commission's refined 
approach is expected to increase demand for cable services, increase 
operators' motivation to invest in advanced technology and to introduce 
new services that are not subject to rate regulation, and to protect 
subscribers from the burdens of financing new, unregulated offerings 
through potential cross-subsidization by the cable industry.
2. Estimating the Competitive Differential
    The Second Reconsideration Order strengthens the Commission's 
statistical and economic model for estimating the difference between 
the rates charged by competitive and noncompetitive cable systems. In 
the April 1993 Rate Order, the Commission estimated the competitive 
differential to be approximately ten percent. Numerous petitioners 
challenged the methodology for deriving that figure on a variety of 
grounds. In response to those challenges, the Commission reviewed and 
refined its methodology.
    Addressing statistical issues identified by commenters and 
Commission staff, the Commission used a corrected data set and revised 
the treatment of equipment and installation revenues. In calculating 
the new competitive differential the Commission also utilized a more 
refined economic analysis that reflects more accurate assessments of 
the three types of systems that Congress defined as being subject to 
``effective competition''--low penetration systems, overbuilds, and 
municipals. The Commission also considered other statutory factors, the 
facts of record, and the comments of interested parties.
    Statistical analysis reveals that each of the three types of 
systems has its own competitive differential. Because the three classes 
of systems differ from each other, the Commission concluded that it is 
more appropriate to consider the competitive differential for each type 
of system individually than it is to average the data relating to all 
three system types as the Commission previously did. The Commission 
also concluded that the statute does not require the Commission to 
compute the competitive differential simply by averaging, without 
evaluation, the rates charged by the three different types of systems. 
Rather, the Act requires the Commission to ``take into account'' or 
``consider'' the rates charged by each type in determining reasonable 
rates.
    The Commission conducted an economic analysis that considered the 
competitive differential for each of the three categories of systems 
that Congress defined as facing ``effective competition.'' This 
analysis revealed that the rates of low penetration systems are not 
statistically different as a group from the rates of systems subject to 
rate regulation. The Commission concluded that there may be a variety 
of reasons other than competitive pressures that account for low 
penetration rates, and thus that low penetration systems may not 
provide the best basis for determining the competitive differential 
that should apply to noncompetitive systems.
    The Commission further concluded that systems in the overbuild 
sample provide the most informative data with regard to estimating 
reasonable rates. The Commission's best estimate of the difference 
between the rates charged by overbuilds and noncompetitive systems is 
16 percent. That figure takes into account the fact that cable 
operators generally do not compete head-to-head in the entire franchise 
area they serve. The data revealed that rates decrease as the extent of 
competition increases. The Commission corrected for the lack of full 
competition throughout an entire franchise area when computing the 
competitive differential for overbuild systems.
    The Commission also adjusted upward the 16 percent figure to take 
into account the fact that because cable operators serving the same 
area may adopt parallel or coordinated pricing practices, prices 
observed in an overbuild situation may be above the purely competitive 
level. The data indicated that the rates charged by overbuild systems 
are lowest at the outset of competition and then rise over time. This 
is consistent with parallel pricing behavior and strengthens the 
conclusion that the best estimate of the overall competitive 
differential is greater than the overbuild differential of 16 percent.
    The largest differential, 37 percent, arose in the comparison of 
the rates charged by noncompetitive systems with the rates charged by 
municipal systems and the privately owned systems that compete with 
them. While this differential may be the most accurate measure of the 
competitive differential because government-operated entities may be 
presumed to charge reasonable rates and have no incentive to engage in 
parallel or tacitly coordinated pricing practices, municipal systems 
may not be earning a profit. The record evidence on this point is 
inconclusive. Because of these concerns, the Commission separately 
examined the rates charged by the privately-owned cable systems in the 
sample of ``municipal'' systems. The competitive differential is 
equally large for these private systems, which suggests that the rates 
charged by the public and private systems in our municipal sample are 
reasonable. However, in view of the small number of systems in the 
municipal category (only eleven), the Commission did not rely as 
heavily on municipals as it otherwise might have in estimating the 
overall competitive differential.
    After reviewing the data from all three types of non-regulated 
systems, but giving the most emphasis to the data relating to 
overbuilds, the Commission selected 17 percent as the revised 
competitive differential. The Commission was guided by the 16 percent 
competitive differential between noncompetitive systems and overbuilds 
accounting for full head-to-head competition. The Commission moved 
upward from 16 percent to reflect the conclusion that cable operators 
in an overbuild situation are likely over time to develop a tacit 
understanding of rate levels that may limit the intensity of rate 
competition. However, the Commission did not depart upward as far as it 
might have, despite the evidence relating to municipal systems, on 
account of concerns about the interpretation of the data in the 
municipal subsample, on account of its consideration of low penetration 
systems, and its belief that consumer welfare is best served by 
financially sound cable operators.
    This 17 percent rate reduction is not in addition to the prior ten 
percent rate reduction that some operators already have applied. 
Rather, those operators that have already established rates based on a 
ten percent competitive differential will only be required to adjust 
rates by approximately seven percent, according to the methodology 
specified by the Commission.
3. Applying the Competitive Differential
    The April 1993 Rate Order required some, but not all, 
noncompetitive cable operators to lower their rates to avoid refund 
liability. Only those regulated operators with rates ten percent or 
more above the benchmark were required to come down ten percent. 
Operators with rates less than ten percent above the benchmark were 
required to reduce their rates only to the benchmark which was the 
average per-channel rate charged by similar effectively competitive 
systems. Those cable operators with rates below the benchmark were not 
required to reduce their rates at all. This approach implicitly assumed 
that all cable operators' costs are similar, so that only high 
subscriber rates reflect the exercise of market power.
    Based on its refined statistical analysis, and as confirmed by 
numerous economic studies, the Commission, on reconsideration, 
concluded that generally noncompetitive cable systems, not just systems 
charging relatively higher rates, exercise market power. Given the 
absence of industry-wide data, however, the Commission has not been 
able to identify the underlying cost and demand factors with sufficient 
precision to allow constructing an estimate of market power on a 
system-by-system basis.
    The Second Reconsideration Order applies the same 17 percent 
adjustment to all regulated cable systems rather than assigning 
different adjustments to different systems. To avoid refund liability, 
regulated cable systems, that are not eligible for transition relief as 
discussed below, are required by May 15, 1994 either (1) to set their 
rates so that their regulated revenues per subscriber do not exceed 
September 30, 1992 levels reduced by the revised competitive 
differential of 17 percent (with certain adjustments described below), 
or (2) to submit a cost-of-service showing supporting higher rates. Two 
limited classes of noncompetitive cable systems, small operators 
(defined as cable companies serving 15,000 or fewer subscribers) and 
systems charging relatively low prices (as measured by a revised 
benchmark) are not required to adjust their rates in this manner until 
the Commission completes an industry cost study. These two categories 
of systems are entitled to ``transition relief.'' The specific 
calculations a regulated cable system will need to use to apply the 
revised benchmark system are set forth in new FCC Form 1200.
    For all cable systems subject to regulation, the rates permitted 
for the period from September 1, 1993 until May 15, 1994 (the effective 
date of these new rules), and refund liability with respect to such 
rates, will be determined by our initial rate regulations adopted on 
April 1, 1993. The lawfulness of rates in effect on or after May 15, 
1994, and refund liability with respect to such rates, will be 
determined in accordance with the new rules adopted in the Second 
Reconsideration Order.
    Systems not entitled to transition relief. Regulated cable systems 
that are not entitled to transition relief are those systems (1) owned 
by an operator serving more than 15,000 total subscribers or affiliated 
with a larger operator, and (2) whose rates, after applying the full 17 
percent competitive differential, with certain adjustments, are above 
the revised benchmark. These systems will be required to set their 
rates at a level that equals their September 30, 1992 regulated 
revenues per subscriber reduced by the revised 17 percent competitive 
differential and adjusted forward as described below. Regulated systems 
wishing to support higher rate levels must submit a cost-of-service 
showing.
    After reducing its regulated September 30, 1992 rate levels by the 
17 percent competitive differential, regulated systems are allowed to 
include in their permitted regulated rates: (1) The inflation occurring 
between October 1, 1992 and September 30, 1993; (2) changes in external 
costs that have occurred since the system became subject to initial 
regulation at either the local or federal level (or February 28, 1994, 
whichever was earlier); and (3) changes that have resulted from the 
addition or deletion of program channels to regulated service tiers 
since September 30, 1992. The resulting rate is referred to as the 
``full reduction rate.''
    A system whose rate level being justified is above its full 
reduction rate level must reduce its rate to the full reduction rate 
level, (measured by the system's average regulated revenue per 
subscriber) unless it qualifies for transition treatment, as discussed 
below. By contrast, a system whose rate level being justified is below 
the full reduction rate will be permitted to raise its rate level up to 
the full reduction rate level. This is because the full reduction level 
establishes the reasonable rate level for that system under our rate 
regulations. Any cable system that sets its rates at the full reduction 
rate level will be entitled to adjust those rates in the future for 
annual inflation, changes in external costs, and changes in the number 
of regulated channels. Operators will use FCC Form 1210 to make these 
adjustments. Relevant dates for calculating these adjustments are 
discussed below.
    (i) Inflation adjustment. Cable systems are eligible to file for an 
inflation adjustment for the period beginning October 1, 1993 and 
ending June 30, 1994 once the final Gross National Product Fixed Weight 
Price Index (GNP-PI) for the quarter ending June 30, 1994 is released. 
The Commission uses the June 30 cycle for inflation because the final 
GNP-PI is generally released 90 days after the end of each quarter. 
Thus, operators will have the final GNP-PI figure for June 30, 1994 by 
September 30, 1994, the time for the first annual rate adjustment.
    (ii) Changes in external costs. To simplify operators' external 
cost calculations and to enable regulators to better monitor future 
rate increases, the Commission modifies its rules on its own motion to 
provide for a single start date for the accrual of permitted external 
costs. That date will be the earliest of (1) the date of initial 
regulation for the basic service tier, (2) the date of initial 
regulation for cable programming services, or (3) February 28, 1994.
    (iii) Changes resulting from the addition or deletion of channels. 
Permitted changes in rate to reflect changes in the number of channels 
on regulated tiers are governed as follows: Channels added to or 
deleted from regulated tiers between September 30, 1992 and the date of 
initial regulation (or February 28, 1994, whichever occurs earlier) are 
handled through application of the old benchmark methodology pursuant 
to the calculations set forth in FCC Form 393. Channel changes that 
occur between the date of initial regulation (or February 28, 1994, 
where applicable) and the effective date of the new rules are accorded 
external cost treatment only (to reflect changes in programming costs), 
since going-forward rules to govern those changes had not yet been 
adopted. Channel changes occurring after the effective date of the new 
rules will be governed by the going-forward methodology adopted in The 
Fourth Report and Order, discussed below.
    System entitled to transition relief. Systems eligible for 
transition relief will not be required to make the full reduction 
otherwise required until the Commission has conducted an industry 
price/cost study, and determined whether such a reduction is not 
inappropriate. The relevant price/cost data will be aggregated and 
analyzed so that it can be applied on an industry-wide, rather than a 
system-by-system, basis. Systems entitled to transition relief may 
elect to make a cost-of-service showing to justify higher rates at the 
end of the transition period. At the conclusion of the Commission's 
analysis, systems eligible for transition relief will be required to 
make the full 17 percent reduction unless the analysis reveals that the 
17 percent differential is inappropriate for these systems.
    (i) Systems owned by small operators. The first category of system 
eligible for transition relief consists of systems owned by ``small 
operators,'' defined as cable operators that have a total subscriber 
base of 15,000 or fewer customers and that are not affiliated with a 
larger operator. Systems owned by ``small operators'' will not be 
required to reduce rates to the full reduction level immediately. 
Instead, they will be allowed to cap their rates at their March 31, 
1994 levels until completion of the Commission's price/cost study.
    As with other operators subject to transition relief, systems owned 
by small operators will be required to apply the full 17 percent 
competitive differential unless the price/cost data the Commission 
collects demonstrates that a smaller competitive differential should be 
applied to them. Systems owned by small operators will not be required 
to apply more than the full 17 percent competitive differential, 
regardless of the results of the Commission's price/costs analysis.
    For purposes of determining eligibility for transition relief, 
systems owned by ``small operators'' are defined as systems that are 
owned by operators with a total subscriber base of 15,000 or less as of 
March 31, 1994, and that are not affiliated with or controlled by 
larger operators. For purposes of determining whether a larger company 
has a sufficiently significant interest in, or control over, a small 
operator, transition treatment is withheld from small operators in 
which a larger company holds more than a 20 percent equity interest 
(active or passive) or over which a larger company exercises de jure 
control (such as through a general partnership or majority voting 
shareholder interest).
    If a small operator subsequently purchases, or is purchased by, 
another cable operator so that the combined subscriber base of the two 
operators exceeds 15,000, the small operator will not be required to 
forfeit its transition treatment simply because an acquisition has 
occurred. The Commission will grandfather the rate treatment of the 
small operator pending completion of its cost analysis. The 
grandfathered treatment will apply only to the systems originally owned 
by the small operator, and will not extend to the new systems it has 
acquired (or with which it has been merged).
    A system owned by a small operator on March 31, 1994 entitled to 
transition treatment will not lose its eligibility simply because the 
operator's business grows above the 15,000 subscriber limit prior to 
completion of the price/costs analysis. Similarly, an operator that 
exceeds the 15,000 subscriber cut-off on March 31, 1994 will not gain 
eligibility for transition relief if it subsequently loses sufficient 
subscribers to bring it below the 15,000 subscriber limit.
    Operators whose subscriber base exceeds 15,000 total subscribers by 
no more than 1,000 subscribers may petition the Commission for 
emergency relief entitling them to transition treatment. Such petitions 
should be based on a showing that not treating the operator as a 
``small operator'' will cause substantial hardship. A major factor in 
making this determination will be evidence regarding the operator's 
price/cost margin.
    (ii) Low-price systems. The second class of regulated cable systems 
entitled to transition treatment are (1) those whose March 31, 1994 
rates are below the revised benchmark, and (2) those whose March 31, 
1994 rates are above the revised benchmark but whose full reduction 
rates are below the revised benchmark. These systems are charging 
comparatively low prices when measured against other noncompetitive 
systems, as indicated by their position relative to the new benchmark.
    Because their prices are significantly lower than those charged by 
most noncompetitive systems, systems in this second class may face 
unusual demand, costs or other factors that have not been captured in 
our analysis to date. Accordingly, to study this issue further, the 
Commission will grant transition treatment to the above described cable 
systems with relatively low prices. However, the record evidence to 
date is insufficient to conclude that these systems should ultimately 
be exempted from the requirement to apply the full revised competitive 
differential. Thus, as with small operators subject to transition 
relief, systems with relatively low prices will be required to apply 
the full 17 percent competitive differential if additional analysis of 
their costs fails to demonstrate that a smaller competitive 
differential should be applied to them. Low-priced systems will not be 
required to apply more than the 17 percent competitive differential at 
the conclusion of the price/cost analysis.
    In order to determine whether they are ``low-price'' systems 
entitled to transition relief, all systems that do not qualify for 
transition treatment under the ``small operator'' definition will be 
required to compare their March 31, 1994 rates to the new benchmark and 
to their full reduction rates using FCC Form 1200. Systems whose March 
31, 1994 rates are below the revised benchmark, or whose March 31, 1994 
rates are above the revised benchmark but whose full reduction rate is 
below the revised benchmark, will be eligible for transition treatment.
    To compare its rates to the new benchmark, a cable system will 
first calculate its ``regulated revenue per subscriber'' for the 
franchise area at issue as of March 31, 1994. The ``regulated revenue 
per subscriber'' is the cable system's revenue from its basic and cable 
programming service tiers, plus its regulated equipment revenue, 
divided by its number of subscribers. The cable system will then 
calculate its ``benchmark regulated revenue per subscriber'' using the 
revised benchmark formula. FCC Forms 1200 (Setting Maximum Initial 
Rates) and 1205 (costs of regulated cable equipment and installation) 
will be available on a computer disk. The benchmark rate will be based 
on the system's characteristics as of March 31, 1994. The benchmark 
rate will incorporate the 17 percent competitive differential and will 
be adjusted for inflation to enable the cable system to make a proper 
comparison between its March 31, 1994 rates and the benchmark. This 
inflation adjustment is necessary because the benchmark formula is 
based on data reflecting industry rates as of September 30, 1992.
    Application of transition relief. Regulated cable systems eligible 
for transition relief, either because they are owned by small operators 
or because they are low-price systems, will not be required to adjust 
their rates to the full reduction rate level pending completion of the 
Commission's price/cost analysis. Rather, systems that are owned by 
small operators and systems whose March 31, 1994 rates are below the 
revised benchmark will not have to make any reductions at this time. 
Systems whose March 31, 1994 rates are above the revised benchmark but 
whose full reduction rates are below the revised benchmark will only be 
required to reduce those rate levels to, and not below, the revised 
benchmark during the transition period.
    For purposes of applying the new rate rules, a system's March 31, 
1994 rate is the rate that the system was permitted to charge under the 
old benchmark system, which in turn would consist of its initial 
permitted rate plus any external costs that it is permitted to accrue 
up to March 31, 1994. Some systems have already become subject to 
regulation at the local or federal level, and some have not. If, on 
March 31, 1994, a system is involved in a pending rate proceeding 
before either its local franchising authority or the FCC, its March 31, 
1994 rate will be the rate that the regulator ultimately decides is 
reasonable. This reasonable rate must include the external costs to 
which the system was entitled between the date of initial regulation 
for any tier (or February 28, 1994, whichever is earlier) and March 31, 
1994. If the March 31, 1994 rates used by the operator on FCC Form 1200 
are subsequently found not to be lawful by a local or federal 
regulator, the operator will be required to update the rates submitted 
in the form to reflect the proper rates.
    The operator also will be subject to refund liability for the 
period during which its March 31, 1994 rate may have been unlawfully 
high as measured under the Commission's current rules. The system's 
refund liability will cover any period during which it had such 
liability under application of the Commission's initial benchmark 
regulations. It will also, however, exist after May 15, 1994 under the 
revised rules and will be measured by the difference between the 
system's actual March 31, 1994 rate and the rate that the regulator 
ultimately determines was reasonable under the old benchmark rules. Any 
refund liability under the revised regulations will terminate when the 
system adjusts its rates to reflect the regulator's determination.
    Systems entitled to transition treatment from immediate application 
of the full competitive differential are not relieved of other 
requirements concerning the restructuring of equipment and program 
service offerings. Thus, all regulated systems except those excused by 
specific provisions in the Commission's rules remain required to (1) 
set equipment rates at cost (including a reasonable profit), (2) 
unbundle equipment charges from programming rates, and (3) apply an 
average rate per channel when setting program tier charges. These 
requirements will not apply, however, to small systems serving 1,000 or 
fewer subscribers that are eligible for, and elect to implement, 
streamlined rate reductions, as long as they implement a 14 percent 
line-item reduction for each regulated rate component that appears on 
subscribers' bills.
    Systems eligible for transition relief will be subject to a 
modified price cap pending completion of the Commission's price/cost 
analysis. These systems will have to compute their full reduction rate 
and their transition rate. For systems owned by small operators and 
systems with below-benchmark rates, their ``transition rate'' will be 
their March 31, 1994 rate, as appropriately updated since that date. 
For systems whose March 31, 1994 rate is above the benchmark, but whose 
full reduction rate is below the benchmark, their ``transition rate'' 
will be the benchmark rate, as appropriately updated. Systems entitled 
to transition treatment may increase their rates to reflect increases 
in external costs and increases caused by channel changes that accrue 
after March 31, 1994. Such systems may not increase their transition 
rates due to increases in inflation until the transition rate equals 
their full reduction rate. Under the revised rules, a system's full 
reduction rate--which, unlike its transition rate, rises with inflation 
as well as with changes in external cost and channel changes--may 
eventually exceed the transition rate. At the point when the transition 
rate and the full reduction rate become equal (if such a point occurs 
during the transition period), the system will be entitled to adjust 
its rate upward to take advantage of all future inflation adjustments.
    Regulated rates at the end of the transition period. In the near 
future, the Commission will initiate an industry cost study pursuant to 
its cost-of-service rulemaking proceeding. Information about the prices 
and costs of small operators and low-price systems will be collected as 
part of that effort. In addition, the Commission will shortly issue a 
further notice in this proceeding to enable these systems to submit 
additional evidence to us concerning their prices and costs.
    Based on this information, the Commission will determine what 
competitive differentials ultimately are most appropriate for the two 
classes of systems eligible for transition relief. The Commission will 
apply the differentials for each category on a classwide basis, unless 
operators elect to make cost-of-service showings. Neither class will be 
subject to a competitive differential greater than 17 percent. Subject 
to that limitation, the Commission will apply the largest competitive 
differential that is consistent with the average operator in each class 
earning no more than 11.25 percent rate of return.
    Once the appropriate competitive differential has been applied to a 
system, that system will be entitled to an ``aggregate inflation 
adjustment'' equal to all GNP-PI inflation adjustments for the period 
beginning October 1, 1992 through the most recent June 30. To the 
extent a system has already received some inflation adjustment for that 
period, the system will receive the net of the aggregate inflation 
adjustment minus any inflation adjustment already received. In either 
case, after the end of the transition period, a system will be eligible 
for additional inflation adjustments on an annual basis, but no earlier 
than September 30 of each year, when the final GNP-PI through June 30 
of each year is released.
    Calculation of refund liability. In general, regulated systems who 
select the benchmark approach to setting rates will be required to 
comply with the revised rules by May 15, 1994 in order to avoid refund 
liability. However, to reduce the burden on cable systems that cannot 
conform their regulated rates to the new benchmark approach by the 
effective date of the revised rules, the Commission will not impose 
refund liability on such systems for an additional 60 days after May 
15, 1994 (i.e., until July 14, 1994), as along as certain conditions 
are met. First, systems wishing to take advantage of this deferral of 
refund liability may not change any rate for regulated service or 
equipment, or restructure any regulated service or equipment offering 
(by, for example, removing program channels from what would be 
regulated service tiers and placing them into an ``a la carte'' 
package), during the period that runs from March 30, 1994, the release 
date of this Order, to July 14, 1994. Moreover, a cable system that 
does restructure its rates and service offerings, even in compliance 
with the Commission's rules, before July 14, 1994 will have its refund 
liability triggered on the date the restructuring occurs.
    Second, cable systems taking advantage of the refund deferral 
period must still give at least 30 days notice to subscribers of any 
rate or service changes they ultimately make in response to the new 
rules, as required under the Commission's revised notification 
provisions, discussed below.\1\ Also, if the operator elects to take 
advantage of the deferral of refund liability period, it must notify 
the local franchising authority by June 14, 1994 (the date on which its 
rate justification is due) that it is electing that option. The system 
will then have 30 days from the date on which it ultimately 
restructures its rates to submit the relevant FCC forms, although in no 
event will such forms be filed more than 30 days after July 14, 1994, 
the last date of the refund liability deferral period.
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    \1\The Commission is preempting any local and state requirements 
that require cable systems to give more than 30 days notice of rate 
and service changes to subscribers where application of the local 
and state provisions would serve to prevent a system from bringing 
its rates into compliance with the new benchmark rules by the end of 
the refund deferral period.
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    Third, all rate and service restructuring must be completed by July 
14, 1994 (the end of the 60-day deferral period) in order to avoid 
refund liability. Restructuring is considered to be completed when 
bills reflecting the rate and service changes have been issued to 
subscribers. If an operator has a staggered billing cycle, the relevant 
date will be the date on which the first cycle of bills is mailed, as 
long as the billing cycle is completed within 30 days from that date. 
An additional two months beyond the effective date of the Commission's 
new rules provides cable systems adequate time in which to familiarize 
themselves with the regulations and take the necessary actions to 
comply.
    Notice to Subscribers. The Second Reconsideration Order modifies 
current rate regulations to require that cable systems give 30 days 
notice to both subscribers and franchising authorities before 
implementing any rate or service changes. Cable systems will have to 
identify on subscriber bills to precise amount of any rate change and 
briefly explain its cause (e.g., inflation, changes in external costs 
or the addition/deletion of channels (identified by name)). This 
information must be presented in a way that enables the average 
subscriber to understand readily why his or her rates have increased or 
decreased.
    In addition, systems are required to notify subscribers of their 
right to file complaints with the Commission about rate changes for 
cable programming services and associated equipment. This notice shall 
(1) indicate that subscribers may file such complaints within 45 days 
of the change being reflected in their bill, and (2) provide the 
address and phone number of the local franchising authority and the 
Commission.\2\
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    \2\The address of the Commission is Federal Communications 
Commission, Cable Services Bureau, Consumer Protection Division, 191 
M Street, NW., Washington, DC 20554. The phone number is 202-416-
0856.
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    These notice requirements are effective immediately upon 
publication of the revised rules in the Federal Register. The 
Commission finds good cause to make these requirements effective on 
less than 30 days notice in the Federal Register. See 5 U.S.C. Section 
553(d)(3). Good cause exists because it is important that the notice 
provisions set forth above apply to rate changes made pursuant to this 
Order. Were the normal 30-day period to apply, it would be possible for 
cable operators to revise their rates pursuant to this Order without 
complying with the notice provisions. For example, a cable operator 
would send a notice of rate changes pursuant to this Order on May 13, 
1994, complying only with the notice requirements previously in effect 
and not providing, for example, the address and phone number of the 
Commission.
    In addition, the Commission is requiring that all cable system 
bills to subscribers contain the address and phone number of the local 
franchising authority and the Commission.
    Procedural issues for franchising authorities. With one exception, 
franchising authorities and cable operators shall follow timeframes 
already established in Secs. 76.930 and 76.933 of the Commission's 
Rules for proceedings that were initiated before the effective date of 
this Order. Adoption of this Order generally does not affect the basic 
deadlines to which local authorities and operators must adhere for 
resolving pending rate cases under the Commission's initial benchmark 
regulations. Moreover, as detailed below, all operators involved in a 
pending case will be required to submit a rate justification on the 
required FCC Forms within 30 days after the revised rules take effect 
on May 15, 1994.
    There are generally five points in the rate-setting process that a 
local franchising authority and cable operator may be on May 15, 1994. 
The first is where the franchising authority has not certified to 
regulate basic rates by that date, or has certified but has not yet 
notified the operator that it is commencing basic rate regulation. In 
this case, the cable system will be required to file both an FCC Form 
393 and new FCC Form 1200 30 days after the local authority notifies it 
that the authority is initiating rate regulation of the basic service 
tier. It will be not be necessary to file an FCC Form 393, however, if 
the one-year time limit on the operator's refund liability precludes 
any possibility of refund for the period before the effective date of 
the revised rules. FCC Form 393 will be used to determine the 
operator's permitted rates from September 1, 1993 until May 15, 1994, 
and FCC Form 1200 will be used to determine its permitted rates after 
May 15, 1994. The franchising authority will then be expected to 
examine both filings within the timeframes established in section 
76.933 of the Commission's Rules.
    Second, if, by May 15, 1994, a franchising authority has notified 
the cable operator that it has become certified, but the operator has 
not yet submitted the required FCC form (e.g., because the 30 day 
response period has not lapsed), the Commission will require the cable 
operator to file both FCC Form 393 and new FCC Form 1200 within 30 days 
after May 15, 1994. This limited deviation from Sec. 76.930 of the 
Commission's rules, which requires the cable operator to file its 
schedule of rates within 30 days of the date of a written request from 
the franchising authority, is justified because it will allow the 
operator to complete both forms simultaneously, with minimal disruption 
to the franchising authority. The franchising authority will be 
expected to examine both filings within the time periods established in 
Sec. 76.933. There is one exception to this rule. In the Commission's 
Third Reconsideration Order in this docket, the Commission makes clear 
that franchising authorities have the power to impose sanctions, 
including findings of default, on cable operators who fail to file 
documents relevant to a rate determination in response to requests from 
the franchising authority. The Commission will permit any cable 
operator who has not filed a requested FCC Form 393 within the 30 day 
time period established in Sec. 76.930 to do so by the effective date 
of these rules. If the operator fails to do so, the franchising 
authority will be permitted to apply the sanctions outlined in the 
Commission's Third Reconsideration Order in this docket.
    Third, if, by May 15, 1994, a franchising authority has received 
the cable operator's filing for justifying rates under the old 
benchmark system but has not reached a final decision pursuant to 
Secs. 76.933 or 76.936 of the Commission's rules, the Commission 
expects the franchising authority to follow all existing timeframes 
with respect to that part of the proceeding.\3\ The cable operator in 
this situation will also be required to file new FCC Form 1200 with the 
franchising authority within 30 days of May 15, 1994. The franchising 
authority will then resolve the second portion of the proceeding, in 
which it will evaluate the cable operator's rates under the revised 
rules, within the timeframes established in Sec. 76.933.
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    \3\Franchising authorities are reminded that they may issue an 
accounting order requesting that the cable operator keep a record of 
its rates if the authority is unable to reach a rate determination 
within the prescribed time period. See 47 CFR 76.933(c). If the 
authority later determines that the operator's basic rates were 
unlawfully high, the operator's refund liability will extend from 
the date the accounting order was issued up to the date on which the 
operator eventually adjusts its rate in response to the franchising 
authority's decision, and then back for a period not to exceed one 
year. See 47 CFR 76.942(c); Rate Order at para. 142, n. 376.
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    Fourth, if, by May 15, 1994, a franchising authority has reached a 
final decision about the lawfulness of an operator's basic rates under 
the Commission's initial rate rules, the Commission will require the 
cable operator to file new FCC Form 1200 within thirty days of May 15, 
1994. The franchising authority will then examine the form pursuant to 
the time frames established in Sec. 76.933.
    Finally, if a franchising authority has reached a final decision on 
the cable operator's rates, and a rate increase request is pending as 
of May 15, 1994, the cable operator will be required to file new FCC 
Form 1200 within thirty days of May 15, 1994. The rate increase request 
will then be evaluated pursuant to the data submitted on the FCC Form 
1200, rather than by any data that had already been submitted by the 
operator in support of its rate increase request. Operators will be 
able to file rate justifications after June 30, 1994 to reflect 
external costs incurred during the second quarter of 1994.
    Pending complaints before the commission. Unless the Commission has 
issued a decision on a pending complaint before May 15, 1994, the 
operator about whom the complaint was made must file an FCC Form 1200 
in addition to the FCC Form 393 it either has filed or must file. Such 
operators will be subject to refund liability calculated under the 
Commission's initial regulations for rates that were in effect from 
September 1, 1993 until May 15, 1994 (although any refund liability 
will not start until the complaint was filed). Refund liability with 
respect to rates charged on and after May 15, 1994 will be calculated 
pursuant to the revised rules adopted in this Order. As with basic tier 
regulation, if the operator elects to take advantage of the deferral of 
refund liability period, it must notify the Commission by the date on 
which its rate justification on an FCC Form is due that it is electing 
that option. The system will then have 30 days from the date on which 
it ultimately restructures its rates to submit the relevant FCC forms, 
although in no event will such forms be filed more than 30 days after 
July 14, 1994, the last date of the refund liability deferral period.
    To the extent there is a complaint regarding cable programming 
service tier rates pending before the Commission, the Commission will 
continue to require the cable operator in question to file notice of 
any changes in rates with the Commission. This notice must be filed at 
least 30 days before such rates are proposed to be effective. This 
notice is necessary to allow the Commission to ensure that the cable 
service tier rate is not unreasonable.
4. Commission Authority to Adopt the Modified Ratemaking Approach
    The Second Reconsideration Order concludes that the modified 
ratemaking approach the Commission adopts is consistent with its 
statutory authority under the Cable Act of 1992. Section 623(b)(1) of 
the Communications Act, 47 U.S.C. section 543(b)(1), mandates that the 
Commission ensure that rates for the basic service tier are 
``reasonable.'' In addition, regulated upper tier rates may not be 
``unreasonable.'' Section 623(c)(1), 47 U.S.C. section 543(c)(1). The 
Cable Act does not compel the use of a specific ratemaking model to 
ensure that rates are reasonable; while setting forth various factors 
the Commission must consider in establishing its ratemaking approach, 
the statute leaves to the Commission the way in which these factors 
should be taken into account. Congress specifically rejected mandating 
use of a formulaic approach to cable rate regulation.
    Affording wide latitude to the Commission in discharging its 
ratemaking functions is consistent with legal precedent. The courts 
recognize that regulatory agencies generally have broad discretion to 
choose methods and procedures in ratemaking determinations, provided 
the rates are within a ``zone of reasonableness.''\4\ By choosing to 
require that basic rates be ``reasonable'' and that upper tier rates 
not be ``unreasonable,'' Congress has invoked this general body of law 
for application under the Cable Act. The Commission was instructed to 
consider the factors enumerated in the Cable Act and to its expertise 
to achieve Congress's overall goal of ensuring ``reasonable'' rates for 
subscribers.
---------------------------------------------------------------------------

    \4\See Permian Basin, 390 U.S. at 800; FTC V. Natural Gas 
Pipeline Co., 315 U.S. 575, 586 (1942); United States v. FCC, 707 F. 
2d at 618.
---------------------------------------------------------------------------

    In response to NYNEX's petition for reconsideration, the Commission 
revisited and refined its approach to analyzing the competitive sample 
for purposes of estimating the competitive differential. While 
rejecting NYNEX's recommendation to exclude the rates of low 
penetration systems from the competitive samples, the Commission's 
revised approach more appropriately considers the rates charged by all 
three categories of systems (low penetration systems, overbuilds, and 
municipals) that are deemed to be subject to effective competition 
under section 623(1)(1) of the Act, 47 U.S.C. section 543(l)(l).
    The revised competitive differential of 17 percent is a more 
accurate reflection of the overall competitive differential, and based 
on a sounder methodology, than the previous figure of ten percent. The 
previous approach simply averaged the data from all systems subject to 
effective competition. The Second Reconsideration Order more closely 
analyzes the data from all three types of systems, and uses a 
qualitative, rather than arithmetic, analysis to determine the 
differential whose application best approximates the ``reasonable'' 
rate that would be charged by a system that faces effective 
competition. The revised competitive differential of 17 percent also 
reflects the Commission's analysis of the various factors that Congress 
instructed the Commission to take into account.
    While modifying the way in which the three statutory classes of 
systems deemed to be subject to effective competition are taken into 
account in arriving at the competitive differential, the Commission 
continued to consider all three categories to accomplish the goal of 
setting ``reasonable'' rates that are no higher than the rates of 
systems subject to ``effective competition'' as defined by Congress. 
The modified competitive differential establishes ``reasonable'' rates, 
that is, rates approximating what would be charges if cable systems 
faced effective competition.
    The refined approach is consistent with the previous determination 
that ``cable systems with less than 30 percent penetration should 
continue to be included in the sample of systems subject to effective 
competition.'' While the Commission determined that it may not exclude 
from the competitive sample the rates of one of the category of systems 
that Congress deemed to be subject to ``effective competition,'' 
nothing in the Cable Act of 1992 mandates estimating a competitive 
differential simply by averaging the per-channel rates charged by all 
of the systems included in the competitive sample and comparing that 
average to the average per-channel rate charged by the systems in the 
noncompetitive sample. In addition, giving more weight to the data 
relating to overbuild systems--systems that actually compete against 
one another to some extent--is consistent with Congress's finding that 
``[w]ithout the presence of another multi-channel video programming 
distributor, a cable system faces no local competition,'' and ``[t]he 
result is undue market power for the cable operator as compared to that 
of consumers.''\5\
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    \5\That finding was set out in section 2(a)(2) of the Cable Act 
of 1992, 106 Stat. 1460, which was not codified.
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    The Cable Act requires the Commission to take into account several 
factors in prescribing its rate regulations for the basic and cable 
tiers, many of which are cost based. Because the Commission recognizes 
that application of the competitive differential would not result in a 
reasonable rate for every cable system, but would instead set the rates 
of some systems below the amount that a cable operator without market 
power would charge, the Commission, in a separate proceeding, also 
adopts revised ``cost-of-service'' regulations that will permit cable 
operators to choose not to apply the competitive differential, but 
instead to have their rates set according to procedure analogous to 
those used to set the rates of public utilities. The optional ``cost-
of-service'' rules are based largely on the costs and revenues of cable 
companies. The existence of the cost-of-service ``safety valve'' 
affects the Commission's determination of the competitive differential 
by allowing us to estimate it most accurately, secure in the knowledge 
that those operators for whom the Commission's competitive differential 
is inaccurate may choose not to use it.
    In certain respects, the revised approach is analogous to the 
judicially approved manner in which the Commission prescribes a rate of 
return for telephone companies. In the telephone context, the 
Commission selects a prescribed rate of return from within a broad 
``zone of reasonableness'' that is bounded generally on the upper end 
by rates that would be unreasonably high from the perspective of 
consumers and on the lower end by rates that would not sufficiently 
protect the interests of investors in the regulated enterprise. In 
selecting the prescribed rate of return within this broad range of 
permissible rates, the Commission considers numerous factors that go 
into the ratemaking decision, according greater or lesser weight to 
individual factors on the basis of the record and in the exercise of 
its judgment and expertise. This is what the Commission did in 
selecting the revised competitive differential.
    In addition to adjusting the competitive differential, the other 
key change made with respect to rate calculations in this Order is the 
decision to apply the competitive differential to all non-competitive 
cable systems, although the full 17 percent rate reduction will not be 
required for operators with relatively low rates or for small operators 
while the Commission studies the prices and costs these operators 
experience. This decision reflects a reasonable balancing of various 
policy and legal considerations. Nothing in the statute suggests that 
the Commission was required to use a benchmark approach. Nor does 
anything in the current record suggest that the competitive 
differential should not be applied to all regulated operators, and 
economic theory suggests that cable operators with market power will 
exercise it. However, cable operators with relatively low rates may not 
be exercising market power to the same degree as those with higher 
rates, and small operators may be more vulnerable to harm than larger 
operators by the application of the competitive differential. Absent 
cost data, the Commission cannot determine whether a revision of the 
competitive differential for cable operators with relatively low rates 
and small operators is warranted. In those circumstances, it is 
reasonable ultimately to apply the competitive differential to all 
regulated operators unless cost data indicates otherwise.
5. The Price Cap Governing Cable Service Rates
    Calculation of external costs. The April 1993 Rate Order determined 
that rates for regulated cable services would be governed by a price 
cap once initial regulated rates were set, and that cable operators 
could adjust capped rates annually for inflation based on the gross 
national product fixed weight price index (GNP-PI). The Rate Order also 
provided that cable operators could pass through to subscribers 
increases in certain categories of external costs, including new 
retransmission consent fees incurred after October 6, 1994, other 
programming cost increases, taxes, franchise fees, and the costs of 
other franchise requirements. External cost recovery (except for 
franchise fees)\6\ was permitted only to the extent that the increases 
exceed the rate of inflation. Cable operators could pass through to 
subscribers any changes in external costs that accrued after the 
earlier of the initial date of regulation of the tier at issue or 180 
days after the effective date of the Commission's initial regulations.
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    \6\Changes in franchise fees were allowed to result in an 
adjustment to permitted charges, but were to be calculated 
separately as part of the maximum monthly charge per subscriber for 
a tier of regulated programming service. See 47 CFR 76.922(d)(2)(v).
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    The Commission subsequently decided that operators could file rate 
increases no more than quarterly on account of external cost increases, 
and that operators must reduce permitted rates to reflect any decreases 
in external costs. Such decreases must be reflected in any filings the 
operator makes for inflation or increases in external costs and, in any 
event, all decreases must be reflected in the operator's rates within 
one year from when they occurred. The Commission established special 
rules for adjusting quarterly external cost increases for annual 
inflation. Thus, operators may adjust their regulated rates annually by 
inflation and up to quarterly by the net change in external costs, but 
any change in external costs must also be measured against inflation 
and adjusted for the corrected inflation rate.
    In order to simplify making these rate adjustments, the Second 
Reconsideration Order reconsiders the rules in this area. First, the 
Second Reconsideration Order separates the inflation adjustment from 
the external cost adjustment. Under the new approach, an operator will 
determine the actual level of its external costs, and then remove this 
amount from the total charge for the affected service tier, leaving a 
``residual.'' The ``residual'' will be adjusted for inflation on an 
annual basis, but no earlier than September 30 of each year, when the 
final GNP-PI through June 30 of each year is released, and no later 
than December 31 of each year.\7\ By contrast, the external cost 
component that does not include the ``residual'' may be adjusted 
quarterly for net changes in external costs.
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    \7\An operator must make its inflation adjustment by the end of 
the calendar year if it wishes to change its rates for the changes 
in inflation that have occurred.
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    Because the residual rate that is adjusted for inflation does not 
reflect the operator's external costs, there is no possibility of 
double recovery of external cost increases. Therefore, operators need 
not compare changes in external costs to inflation, as under the 
Commission's initial approach, nor later adjust external cost increases 
based on the annual inflation rate. The Commission adopts this approach 
because it will produce the same rates as that specified in the Rate 
Order, but should be simpler to apply.
    In the absence of a showing that a rate increase is necessary to 
avoid confiscation, operators may file rate increases no more 
frequently than quarterly to reflect increases in external costs. 
However, to simplify the filing procedures, all systems are required to 
use calendar year quarters, rather than quarters that begin on the date 
the tier at issue became subject to regulation. This change is 
reflected in the new forms operators are required to support their 
rates under the revised rules. The forms also ensure that operators are 
compensated for all changes in external costs that have occurred since 
the relevant starting date. The Commission also modifies its rules to 
permit operators to accrue external costs for any program service tier 
from the date on which the first of the operator's tiers became subject 
to regulation (or February 28, 1994, whichever was earlier). Operators 
may file for a rate increase on account of changes in external costs as 
soon as the information necessary to make the change is available. The 
Second Reconsideration Order retains the requirement that any filing to 
reflect increases in external costs or the annual inflation adjustment 
must also reflect any decreases in such costs that have occurred over 
the same period, and will continue to require operators to file revised 
rates to reflect decreases in external costs that are reflected in 
other rate filings no later than one year from when such decreases 
occur. Operators that wish to adjust rates for external costs that 
occurred during a particular period also must include any rate 
adjustments needed to reflect changes that have occurred in the number 
of channels on regulated tiers and, if an annual change, inflation. FCC 
Form 1210 and associated instructions set forth the specific steps for 
making these calculations.
    Copyright fees. Several petitioners request treatment of copyright 
fees incurred by the carriage of distant broadcast signals as external 
costs, and that the Commission allow systems to recover copyright fees 
from September 30, 1992, forward, separate and apart from the 
operators' permitted rates. They make a variety of arguments in support 
of this request, including that these fees constitute taxes. While the 
Commission is unpersuaded by petitioners' argument that copyright fees 
are ``taxes'' that should be given external cost treatment, to the 
extent that petitioners' argument is that increases in compulsory 
copyright fees incurred by carrying distant broadcast signals should be 
treated in a fashion parallel to increases in the contractual costs for 
nonbroadcast programming, the argument has merit. Section 76.922(d)(2) 
of the Commission's regulations, subject to specified limitations, 
permits subscriber rates to be adjusted to take into account changes in 
certain ``external costs,'' including ``programming costs.'' Copyright 
fee increases, whether they result from the addition of new broadcast 
signals to a tier, adjustments to the fee levels by the arbitration 
panels under the aegis of the Copyright Office, or from adjustments in 
tier structures, appear to fit logically within the programming costs 
category.
    Pole attachment fees. Some cable operators argue that costs 
associated with pole attachment fees should be treated as external 
costs, for such reasons as the costs are beyond operators' control. 
Although pole attachment fees are to some extent beyond the control of 
system operators, they are not sufficiently unique to warrant external 
treatment. Unlike increases in franchise fees or taxes, pole attachment 
fees are not imposed by the government nor are they, like programming 
expenses, an area with respect to which the legislative history of the 
1992 Cable Act expresses explicit concern. In addition, some pole 
attachment fees are regulated under the 1978 Pole Attachment Act, which 
should provide operators some recourse against unreasonable pole 
attachment fee increases. Operators may not treat pole attachment fees 
as external costs. The Commission, however, will consider waivers in 
instances of significant hardship resulting from unusually large pole 
attachment fee increases imposed by pole providers not subject to 
regulation under the Pole Attachment Act. Such showings may include 
both the magnitude of the increases in pole attachment fees and the 
impact of the increases on the operator.
6. Other Rate Issues
    Commercial rates. The Second Reconsideration Order rejects some 
petitioners' requests to establish provisions authorizing special, 
presumably higher, rates for regulated cable services provided to 
commercial establishments. The Commission will consider, on a case-by-
case basis, however, specific proposals that cable operators may want 
to make that would produce savings for consumers. In addition, the 
Commission is further exploring this issue in a Further Notice of 
Proposed Rulemaking found elsewhere in this Federal Register.
    Rate relief for Alaska and Hawaii. Some petitioners request that 
the Commission establish special higher rates for cable systems located 
in Alaska and Hawaii. Petitioners have failed to present any evidence, 
however, showing that rates for cable service provided by operators 
subject to regulation in Alaska and Hawaii do not reflect their market 
power. The Commission was unable, in any event under the present 
record, to fashion adjustments to rates to address allegedly higher 
costs of providing cable service in Alaska and Hawaii. The Second 
Reconsideration Order rejects petitioners' requests on this issue.
    Basic tier access charge. The Second Reconsideration Order rejects 
a petitioner's request that the Commission adopt a ``subscriber line 
charge'' that would be paid by subscribers who purchase only the basic 
tier.
    ``A La Carte'' packages. Under the 1992 Cable Act, video 
programming offered on a per channel or per program (``a la carte'') 
basis is not subject to rate regulation. In the Rate Order, the 
Commission held that it would not regulate collective offerings of 
otherwise exempt per channel or per program services so long as: (1) 
The price for the combined package does not exceed the sum of the 
individual charges for each component of service, and (2) the cable 
operator continues to provide the component parts of the package to 
subscribers separately. The second condition would be met only when the 
per channel offering provides subscribers with a realistic service 
choice. The Commission stated that it would retain jurisdiction to 
review individual offerings of ``a la carte'' channels to determine 
whether the attempted offering constituted an evasion of rate 
regulation.
    However, since the adoption of the Rate Order, a number of 
operators have restructured service offerings so that channels that 
could have been subject to regulation have been removed from a 
regulated tier and are now offered on an ``a la carte'' basis as well 
as on a package basis.\8\ Since the rates of the collective offerings 
of the ``a la carte'' channels are unregulated, operators may raise 
their overall rates for the same service by removing channels from 
regulated tiers and offering them on a package and an ``a la carte'' 
basis. This practice may not be consistent with the purposes of the 
1992 Cable Act. Numerous complaints have been filed by local 
franchising authorities and subscribers concerning the terms and 
conditions of ``a la carte'' offerings of channels. Some of these 
offerings may not comply with the Commission's requirement that 
subscribers must have a realistic option to purchase channels that are 
not subject to regulation on an ``a la carte'' basis. Some of the 
repackagings of channels may also constitute prohibited evasions of 
rate regulation.
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    \8\On November 17, 1993, the Commission issued 16 letters of 
inquiry to various cable operators, and on December 13, 1993, it 
issued another 35 letters of inquiry, most of which addressed the 
issue of removal and repackaging of channels. More recently, on 
February 22, 1994, the Commission issued 11 letters of inquiry to 
cable operators, which, among other things, asked operators to 
justify ``a la carte'' offerings that may be inconsistent with the 
Commission's rate regulations.
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    On reconsideration, the Second Reconsideration Order finds that the 
public interest will be served by generally permitting nonregulated 
treatment of collective offerings of ``a la carte'' channels if the 
offering enhances consumer choice and does not constitute an evasion of 
rate regulation. These objectives will be achieved if operators comply 
with the safeguards of the Commission's initial rules. However, to 
address the concerns discussed above, the Second Reconsideration Order 
provides interpretive guidelines for determining whether an operator's 
collective offering of ``a la carte'' channels should be accorded 
regulated or unregulated treatment. These guidelines will enable 
operators to better determine what collective offerings of ``a la 
carte'' channels will be considered an evasion of rate regulation and/
or a realistic service offering, and will help local authorities and 
the Commission to assess expeditiously the appropriate regulatory 
status of individual offerings. In evaluating offerings in individual 
cases, the Commission will consider whether consumers are being offered 
a greater variety of programming choices and options and whether the 
price for those choices is generally increasing or decreasing from 
previous levels. In addition, packages of `'a la carte'' channels 
offered prior to April 1, 1993, the date the Commission adopted the 
Rate Order, will be accorded nonregulated treatment. This limited 
``grandfathering'' of packages available on April 1, 1993 will avoid 
elimination of discounts that were available to consumers at that time 
and that may continue to be available.
    The Second Reconsideration Order identifies factors that local 
authorities and the Commission should consider in assessing in an 
individual case whether an ``a la carte'' package enhances consumer 
choice and does not constitute an evasion of rate regulation. If 
present, several of the following factors would suggest that the rates 
for the offering should be unregulated. These factors are: (1) The 
operator had offered (or begun to explore offering) ``a la carte'' 
packages consisting of non-premium channels prior to rate regulation; 
(2) the operator has conducted market research that suggests 
introducing an ``a la carte'' package'' would be profitable, other than 
as a means of evading rate regulation; (3) the subscriber is free to 
select which channels will be included in the package; (4) subscribers 
are given notice that fully discloses their options, as well as fully 
discloses the total price (including related equipment charges) 
associated with exercising any of these options; and (5) an 
insignificant percentage or number of channels in the package (as 
determined on a case-by-case basis) has been removed from regulated 
tiers.
    On the other hand, the following factors would weigh against 
allowing unregulated treatment of collective offerings of ``a la 
carte'' channels: (1) The introduction of the ``a la carte'' package 
results in avoiding rate reductions that otherwise would have been 
required under the Commission's rules; (2) a significant percentage or 
number of channels in the package were removed from regulated tiers 
(considering whether including some previously regulated channels may 
have been necessary for the successful marketing of the new package); 
(3) the package price is so deeply discounted when compared to the 
price of an individual channel or the sum of the prices of the 
individual channels (and considering traditional discounting practices) 
that it does not constitute a realistic set of service choice because 
subscribers will not have any realistic options other than subscribing 
to the package; (4) the channels taken from regulated tiers have not 
traditionally been marketed ``a la carte''; (5) an entire regulated 
tier has been eliminated and turned into an ``a la carte'' package; (6) 
the subscriber must pay a significant equipment charge to purchase an 
individual channel in the package; (7) the subscriber must pay a 
``downgrade charge'' (an additional charge) to purchase an individual 
channel in the package; (8) the ``a la carte'' package includes 
channels that were removed from lower tiers of channels, so that 
subscribers to those lower tiers are required to buy one or more 
intermediate tiers in order to receive the same channels; (9) 
subscribers are automatically subscribed to the ``a la carte'' package 
through, for example, such means as negative option billing; and (10) 
the affected programmers object to the restructuring of their services 
into ``a la carte'' packages. No single factor will necessarily be 
dispositive in any case. Rather, the Commission will assess the 
totality of the circumstances, analyze whether one or more of the 
foregoing factors is present, and determine whether the offering 
intentionally, or in effect, constitutes an evasion of rate regulation.
    To assess initial rates and future rate adjustments, local 
authorities will need to determine the total number of regulated 
channels offered by a cable operator. This will require a determination 
of whether any collective offerings of ``a la carte'' channels should 
be considered a regulated tier. FCC Form 1215 requires that operators 
fully describe any collective offerings of ``a la carte'' channels 
offered in the franchise area. FCC Form 1215 must be filed along with 
each Form 1200 setting initial rates and Form 1210 updating rates.
    Local authorities are permitted to make initial determination as to 
whether a collective offering of ``a la carte'' channels should be 
considered a regulated tier, even if the collective offering would be a 
cable programming service tier if it were regulated. Local authorities 
may, at their option, make an initial decision addressing only the 
regulatory status of any ``a la carte'' package at issue. The 
franchising authority must make this initial decision within the 30 day 
period for reviewing basic cable rates and equipment costs, or within 
the first 60 days of an extended 120 day period (if the franchising 
authority has requested an additional 90 days). The franchising 
authority shall provide public notice of its initial decision within 
seven days pursuant to local procedural rules for public notice. 
Operators or consumers may make an interlocutory appeal of this initial 
decision to the Commission within 14 days of the initial decision. 
(Within 14 days of the initial ruling, an operator shall provide notice 
to the franchising authority whether it will, or will not, make such an 
appeal.) The Commission will rule expeditiously on these appeals, and 
the local authority may then proceed with its local rate case in light 
of the Commission's decision on the interlocutory appeal.
    A limited initial decision by a franchising authority will toll the 
periods under the Commission's rules within which local authorities 
must decide rate cases. The time period will then begin running again 
seven days after the Commission rules on the interlocutory appeal, or 
seven days following the expiration of the period in which an 
interlocutory appeal may be filed.
    Alternatively, local authorities may make any necessary ``a la 
carte'' determination as part of their final decision setting rates for 
the basic service tier. That decision may then be appealed to the 
Commission as provided under current rules concerning appeals of local 
decisions to the Commission. In any appeal of a local decision, the 
Commission will defer to the local authority's findings of fact if 
there is a reasonable basis for the local findings. The Commission will 
then apply FCC rules and precedent to those facts to determine the 
appropriate regulatory status of the tier in question. Local 
authorities may also request that the Commission make the initial ``a 
la carte'' decision by means of a petition for declaratory ruling. 
Filing such a request for declaratory ruling will also toll the time 
periods in which the local authority must make its decisions.
    These provisions for local determination of ``a la carte'' issues 
will facilitate local authorities setting rates for the basic service 
tier while providing for Commission oversight of local decisions that 
could affect the regulatory status of cable programming services tiers. 
In addition, the Commission will monitor treatment of collective 
offerings of ``a la carte'' channels.
    Small system administrative relief. The Cable Act of 1992 requires 
the Commission to develop and prescribe cable rate regulations designed 
``to reduce the administrative burdens and cost of compliance for cable 
systems with 1,000 or fewer subscribers.''
    The Rate Order authorizes franchising authorities to permit small 
systems to certify that their rates for basic service and equipment are 
reasonable under the Commission's rate standards, and permits (and 
encourages) franchising authorities regulating the same small system to 
file joint certifications. The Commission subsequently stayed rate 
regulation for small systems pending a review of the regulatory 
requirements applicable to them.
    For a variety of reasons, petitioners argued that the Commission 
did not take sufficient steps to ease the burdens of complying with 
rate regulation for small systems.
    The Second Reconsideration Order adopts rules in addition to those 
established in the Rate Order that will provide administrative relief 
for small systems but that will also, as described below, achieve 
substantial compliance with rate regulation requirements.
    (i) Streamlined rate reductions. The Second Reconsideration Order 
permits eligible small systems, as defined below, to reduce their rates 
under a streamlined approach instead of using the benchmark methodology 
set forth in FCC Form 1200. Specifically, small systems owned by 
eligible operators may elect to make rate reductions by reducing each 
billed item of regulated cable service by the competitive differential. 
Thus, eligible operators may reduce the billed charge for each tier of 
regulated service by the competitive differential. The reduction will 
be from charges in effect as of March 31, 1994. The amount of the 
reduction will be 14 percent. This percentage reduction roughly 
approximates what the required rate reduction would be if the small 
system were required to reduce its September 30, 1992 rates by the full 
competitive differential of 17 percent and those rates had then been 
adjusted forward by the roughly three percent inflation that occurred 
between September, 1992 and September, 1993. Small systems electing to 
reduce rates in this manner must apply the 14 percent reduction to each 
regulated equipment charge appearing on subscribers' bills. Under this 
approach, eligible small systems are not required to unbundle equipment 
and installation charges from their programming service charges, or to 
set equipment and installation charges at actual cost.
    Small systems ultimately can and should establish regulated rates 
on the same basis as other operators. Thus, this streamlined 
alternative to implementing rate reductions will be a temporary 
approach to setting rates prior to full compliance. In the Cost of 
Service Report and Order, discussed elsewhere in this Federal Register, 
the Commission examines whether it should establish average cost 
schedules for the provision of equipment, as well as average cost 
schedules generally for provision of regulated program service. These 
schedules could be used by small systems to set rates instead of 
requiring them to identify and evaluate their own costs or make the 
calculations required under the benchmark rules. When average cost 
schedules for equipment are developed, small systems that have elected 
to make streamlined rate reductions should be required to develop rates 
based on September 30, 1992 rates with specified adjustments as 
required of cable systems generally.
    If a small system elects streamlined rate reductions, the permitted 
rate for a tier will be the rate for the tier in effect on March 31, 
1994 minus 14 percent. However, a small system that has violated the 
rate freeze and subsequently makes a 14 percent streamlined rate 
reduction from rates established in violation of the freeze, will be 
required to later adjust rates to account for any overcharges that 
resulted from the freeze violation. A small system's lawful initial 
rate will be subject to the price cap requirements applicable to cable 
systems generally. Thus, capped rates may be adjusted annually for 
inflation, quarterly for external costs, and quarterly for additions 
and deletions of channels. Small systems must use FCC Form 1210 when 
justifying such rate changes to local or federal regulators. While 
rates set under the streamlined rate reduction approach will not be 
based on average rates across all regulated tiers as is the case for 
setting initial regulated rates for cable operators generally, the 
price cap requirements, including adjustments for inflation, external 
costs, and adjustments for changes in regulated channels, will 
nonetheless be applied to the resulting tier charge.
    Streamlined rate reductions will only be available to independent 
small systems (i.e., those that are not owned by or affiliated with 
other cable systems) and to small systems owned by those MSOs that have 
250,000 or fewer total subscribers, own only systems with less than 
10,000 subscribers each, and have an average system size of 1,000 or 
fewer subscribers. For purposes of measuring affiliation, the 
Commission employs the same criteria used for determining eligibility 
for transition relief. Streamlined rate reductions are not permitted by 
companies in which a larger company holds more than a 20 percent equity 
interest (active or passive) or over which a larger company exercises 
de jure control (such as through a general partnership or majority 
voting shareholder interest). Eligibility for streamlined rate 
reductions will be determined by application of the Commission's 
eligibility criteria to the company as it existed on March 31, 1994. 
This will eliminate incentives for operators to change affiliation in 
order to become eligible for streamlined rate reductions. Streamlined 
rate reductions will not be available to any system that has already 
restructured its rates in an effort to comply with Commission rules, 
since such a system has demonstrated that it does not need the 
administrative relief that the streamlined rates reduction process is 
intended to provide.
    Small systems electing to implement streamlined rate reductions 
must provide written notice to that effect to their subscribers, as 
well as to the local franchising authority with respect to the basic 
service tier and the Commission with respect to a cable programming 
service tier. This notice must be provided within 30 days after the 
small system becomes subject to regulation. The small system must then 
implement the streamlined rate reductions within 30 days after the 
notification has been provided.
    (ii) Company-wide averaging of equipment. Under the Commission's 
existing rules, operators are required to aggregate expenses and 
revenues, including equipment and installation costs, at the franchise, 
system, regional or company level in accordance with the operator's 
practices as of April 3, 1993. In order to reduce administrative 
burdens associated with setting unbundled rates for equipment based on 
actual costs, operators of small systems are permitted to average the 
equipment costs of its small systems at any level, or combination of 
levels, regardless of the operator's practices as of April 3, 1993, 
subject to safeguards designed to protect subscribers from unusual rate 
changes.
    Setting equipment charges at a different level of cost averaging 
than the operator was employing on April 3, 1993 could involve rate 
changes both for equipment and programming service charges, since 
permitted rates for equipment and programming service charges are based 
on aggregate programming service and equipment charges as of September 
30, 1992. In order to prevent sudden rate changes that could harm 
subscribers, the Second Reconsideration Order establishes several 
safeguards that operators of small systems must follow when developing 
average equipment costs for those systems. First, the flexibility in 
averaging equipment costs will apply only to the operator's small 
systems, rather than the larger systems it owns. Second, it will only 
be permitted for equipment, as opposed to installation charges. Third, 
operators may establish average charges only for similar types of 
equipment. Thus for example, average charges may be established only 
for similar types of remotes or converters. Finally, when justifying 
equipment charges averaged across the operator's small systems, the 
operator must present a general description of the averaging 
methodology employed and a justification that it produces reasonable 
equipment rates. Based on the showing, local franchising authorities 
and the Commission may, for good cause, require that the operator set 
equipment rates in accordance with existing rules. The Commission will 
additionally monitor the impact of this action to assure that it does 
not harm subscribers.
    The Communications Act requires that equipment charges be based on 
actual cost. Permitting operators to set equipment charges based on 
average costs comports with the statutory mandate that equipment 
charges be based on actual costs. As such, it will be available to all 
cable operators owning small systems. There is no reason to limit the 
eligibility for this small system relief to operators of a certain 
size. Moreover, this relief is not intended as an interim measure. 
Rather, operators may set equipment rates based on company-wide average 
costs subject, as indicated, to any decision on cost averaging the 
Commission may establish in the Cost Proceeding.
    The Second Reconsideration Order finds that the 1992 Cable Act 
affords the Commission sufficient discretion to adopt the dual approach 
described above, which is designed to ``reduce administrative burdens 
and costs of compliance'' for all systems that have 1,000 or fewer 
subscribers.
    (iii) Other proposals for administrative relief. The Second 
Reconsideration Order rejects several proposals for administrative 
relief, including exempting from rate regulation all systems classified 
as small systems; the ``reasonable net revenue'' test, which would 
exempt systems with a net income margin of less than 15.5% from rate 
regulation; delaying small system rate regulation pending a study of 
the effects of the benchmark; and permitting small systems to charge a 
rate within some percentage of the average national charge.
    Headend vs. Franchise area definition of small systems. The Second 
Reconsideration Order rejects commenters arguments that the definition 
of a small system should be changed from a ``headend'' to a ``franchise 
area'' basis. The Commission reinstates its belief that determining 
small system size based on a system's principal headend, including any 
other headends or microwave receive sites that are technically 
integrated to the system's principal headend, best harmonizes the small 
system rule with most of the Commission's existing regulations on cable 
system size.
    Termination of rate regulation stay for small systems. The Second 
Reconsideration Order terminates the stay for small systems as of May 
15, 1994, the effective date of the rules adopted herein. Local 
authorities may provide initial notices of regulation to small systems 
as of that date, and the Commission will accept newly filed complaints 
concerning cable programming services tiers provided by small systems 
as of that date. Local authorities may have provided initial notices of 
regulation to operators during the stay and the Commission has accepted 
complaints for cable programming services tiers provided by small 
system since September 1, 1993. These notices and complaints will be 
considered as having been made or filed, respectively, as of May 15, 
1994, the effective date of the Commission's new rules. Small systems 
must then submit a rate justification (or otherwise file a permitted 
response, such as a written notification that it intends to use the 
streamlined rate reduction process) within the 30 days prescribed in 
the Commission's rules. In addition, the statutory 180-day window for 
filing complaints concerning rates for cable programming services tiers 
in effect on May 15, 1994 will commence running on that date for small 
systems.
    Small system operators previously subject to the stay may obtain an 
extension of time to establish compliance with rate regulations if they 
can show that timely compliance would result in severe economic 
hardship. Requests for extension of time should be addressed to the 
local franchising authority concerning rates for the basic service 
rates and to the Commission concerning rates for a cable programming 
services tier. Possible circumstances showing severe economic harm 
might be based on prior commitments with regard to programming 
contracts or actual plans in progress for significant improvements to 
its plant and equipment, or an unusually severe impact on the financial 
condition of the company that could be caused by rate reductions. 
However, an extension of time to comply will not toll the effective 
date of rate regulation for small systems or eliminate refund liability 
for rates that exceed permitted levels after the effective date of the 
Commission's rules.

Synopsis of the Fourth Report and Order

A. Introduction

    The Fourth Report and Order adopts a methodology for adjusting 
capped rates when channels are added to, or deleted from, a tier of 
regulated cable service. The Commission also declines to modify its 
benchmark requirements to account for system upgrades initiated or 
completed shortly before the onset of rate regulation of cable service.
    Adjustments to capped rates for addition and deletion of channels. 
In the Third Further NPRM, the Commission sought comment on what 
methodology should be adopted for applying the benchmark system to 
adjust capped rates when channels are added or deleted from regulated 
tiers. Specifically, the Commission sought comment on regulatory goals 
and three possible methodologies for adjusting capped rates when adding 
or deleting channels from a particular regulated tier.
    Under the first proposed method for adjusting capped rates when 
adding or deleting channels from a particular regulated tier, the new 
charge for the tier would consist of the sum of: (1) The current 
permitted charge for the tier, and (2) a charge calculated by 
multiplying the benchmark rate by the number of new channels on the 
tier. Under this approach, the declining rate per channel reflected in 
the benchmark would be applied only to additional channels. The per 
channel charge for existing channels would not be adjusted downward to 
reflect the benchmark curve. The Commission tentatively concluded that 
this approach should not be adopted for a variety of reasons, including 
that it would permit significantly higher rates.
    Under the second methodology, the new permitted rate for a 
regulated tier when channels are added or deleted would be the 
benchmark per-channel rate multiplied by the new number of channels on 
the tier. The Commission tentatively concluded that this approach 
should not be adopted because it would create substantial disincentives 
for cable operators with rates above the benchmark to add channels and 
because it could create undue incentives for systems with below 
benchmark rates to add channels, permitting substantially increased 
rates for such operators.
    Under the third methodology, the ``parallel track'' approach, 
programming costs would be removed from an operator's permitted charge 
per tier. The remaining charge would then be adjusted to reflect the 
proportionate increase or decrease observed in the benchmark curve 
based on the new number of channels offered across all regulated tiers. 
The new level of programming expense for the tier would then be added 
back to the adjusted tier charge to obtain the new charge for the tier.
    The goals adopted for the going-forward methodology adopted 
include: Preserving the competitive rates produced by the Commission's 
requirements for setting initial regulated rates, encouraging the cable 
industry to continue to grow and provide new and additional services to 
subscribers, and to further the statutory goal of reducing 
administrative burdens on subscribers, operators, and regulators.
    In addition to revealing a significant competitive differential 
that the Commission will use to implement its revised benchmark 
approach, the Competitive Survey of industry rates as of September 30, 
1992, established that, on average, charges per channel decreases as 
the number of channels offered by a system increases. This downward 
``curve'' in per-channel rates may well reflect economies of scope and 
scale in the provision of regulated cable service. Accordingly, the 
Fourth Report and Order adopts a methodology for adjusting capped rates 
that incorporates the downward curve of per-channel rates observed in 
the Commission's Competitive Survey. Operators who believe that the 
rates determined under the new benchmark approach and the going-forward 
methodology are inadequate when channels are added may make a cost-of-
service showing in order to attempt to justify a higher rate.
    The Fourth Report and Order finds the third alternative methodology 
proposed in the Third Further NPRM are adjusting capped rates for 
channel adjustments most compatible with the revised benchmark formula 
and approach for setting regulated rates. In this Fourth Report and 
Order, operators are required to first remove all external costs from 
the tier charge and then adjust the residual component of the tier 
charge by a specified amount per channel when the total number of 
regulated channels increases. Should the total number of regulated 
channels decrease, the residual component of tier charge will be 
reduced by a specified amount. The per-channel adjustment factors used 
to calculate changes in permitted tier charges are derived from the 
Commission's benchmark equation.
    This approach is consistent with the requirements that were adopted 
in the Second Reconsideration Order for calculating all external costs 
and inflation adjustments. This treatment will achieve identical 
results as the method specified in the Rate Order but will be simpler 
to administer. At the same time, the operator will be able to fully 
recover in going-forward rate calculations the actual level of 
programming expense incurred. This approach will assure that operators 
may respond to demand for programming and recover their costs when 
adding channels.
    To help promote the growth and diversity of cable programming 
services, operators are permitted a mark-up on new programming expense 
of 7.5%, which may be revised based on on-going experience. The mark-up 
will apply only to any additional programming cost for a tier, measured 
on a per subscriber basis, occurring after May 15, 1994. Programming 
costs for purposes of external costs include any new or additional 
retransmission consent fees incurred after October 6, 1994 or 
compulsory copyright fees paid for carriage of distant broadcast 
signals. Operators must also reduce rates by any decreases in 
programming expense plus an additional 7.5% after that date. This will 
reduce incentives for operators to delete programming in order to 
replace it with new programming to which the mark-up could then be 
applied.
    When a cable system changes the number of regulated channels 
offered, it must average the initial and final number of channels and 
find the adjustment factor in the table corresponding to that average. 
For any service tier, the total permitted adjustment is the product of 
the per channel adjustment factor and the change in the number of 
regulated channels on that tier. The adjustment is positive if the 
number of regulated channels has increased and negative if the total 
number of regulated channels has decreased. If a cable operator is 
merely restructuring tiers and there is no change in the total number 
of regulated channels, then the operator would find its total number of 
regulated channels in the table, note the corresponding per channel 
adjustment factor, and calculate adjustments in network costs per tier 
as explained earlier in this paragraph. After the residual component of 
the tier charge is adjusted in this fashion, all external costs, 
including programming expenses, will be combined with the adjusted 
residual to determine the final tier charge. As stated, any increased 
level of programming expense will be entitled to a 7.5 percent mark-up.
    The foregoing methodology for adjusting capped rates when channels 
are added or deleted from a regulated tier is set forth in detail in 
the Commission's new rule Sec. 76.922(e). FCC Form 1210 and associated 
instructions also sets forth in detail this methodology for adjusting 
capped rates when channels are added to, or deleted from, a regulated 
tier, as well as for external cost and inflation adjustments generally.
    Upgrades initiated shortly before rate regulation. The Third 
Further NPRM sought comment on (1) whether operators with rates below 
benchmark levels which initiated or completed system upgrades shortly 
before rate regulation should be permitted to raise rates to benchmark 
levels without any cost showing; and (2) alternatives to full cost-of-
service showings that could permit recovery of such upgrade costs, such 
as whether the streamlined cost-of-service showing proposed in the 
Cost-of-Service NPRM should be applied to these situations.
    Because the Second Reconsideration Order, with certain exceptions, 
requires that all rates be reduced by the competitive differential to 
avoid refund liability, it is no longer necessary or appropriate to 
address these issues. The Fourth Report and Order does not permit 
operators to raise rates above otherwise permitted levels on account of 
upgrades initiated or completed before regulation without any cost 
showings, and additionally does not establish special streamlined cost-
of-service showings for past upgrades. Operators for whom the general 
rate regulations do not permit adequate recovery of upgrades initiated 
or completed shortly before rate regulation took effect may file cost-
of-service showings.

Administrative Matters

Regulatory Flexibility Act Analysis

    Pursuant to the Regulatory Flexibility Act of 1980, 5 U.S.C. 601-
612, the Commission's final analysis with respect to the Fourth Report 
and Order and Second Order on Reconsideration is as follows:
    Need and purpose of this action. The Commission, in compliance with 
section 3 of the Cable Television Consumer Protection and Competition 
Act of 1992, 47 U.S.C. 543 (1992) pertaining to rate regulation, adopts 
revised rules and procedures intended to ensure cable subscribers of 
reasonable rates for cable services within minimum regulatory and 
administrative burden on cable entities.
    Summary of issues raised by the public in response to the Initial 
Regulatory Flexibility Analysis. There were no comments submitted in 
response to the Initial Regulatory Flexibility Analysis. The Chief 
Counsel for Advocacy of the United States Small Business Administration 
(SBA) filed comments in the original rulemaking order. The Commission 
addressed the concerns raised by the Office of Advocacy in the Rate 
Order.
    Significant alternatives considered and rejected. Petitioners 
representing cable interests and franchising authorities submitted 
several alternatives aimed at minimizing administrative burdens. In the 
present Order on Reconsideration, the Commission has attempted to 
accommodate the concerns addressed by these suggestions. For example, 
the Commission has chosen a more sophisticated economic model from 
among a number of statistical options to recalculate the competitive 
differential, and has reconsidered the benchmark approach such that all 
regulated cable systems will be required to establish rates based on 
the revised competitive differential. However, the Commission has 
determined that certain systems will not have to reduce rates by the 
full competitive differential immediately. Rather, the Commission will 
conduct cost studies of cable operators to allow systems with 
relatively low rates and operators with 15,000 or fewer subscribers to 
present evidence that the new competitive differential should not apply 
in full to them. These decisions will better ensure that regulated 
cable service rates are reasonable while reducing administrative 
burdens. In addition, the Commission provides administrative relief in 
the rate-setting process, and adopts simplified procedures concerning 
the requirements for calculating equipment costs and revenues for cable 
systems of 1,000 of fewer subscribers.
    The Third Further NPRM in this proceeding presented three 
alternative methodologies for the adjustment of capped rates when 
channels are added or deleted from regulated service tiers. Many 
commenters supported, with some suggesting modifications, the approach 
the Commission tentatively endorsed in the Third Further NPRM. The 
Commission considered alternative methodologies and found on the basis 
of the record that the ``parallel track'' approach adopted in this 
Order, as well as the variety of revisions to its rate rules adopted 
here, will best achieve the goals of ensuring reasonable rates for 
consumers, promoting the growth and diversity of cable programming 
services, and facilitating ease of administration.

Paperwork Reduction Act

    The requirements adopted herein have been analyzed with respect to 
the Paperwork Reduction Act of 1980 and found to impose a new or 
modified information collection requirement on the public. 
Implementation of any new or modified requirement will be subject to 
approval by the Office of Management and Budget as prescribed by the 
Act.

Ordering Clauses

    Accordingly, it is ordered That, pursuant to sections 4(i), 4(j), 
303(r), 612, 622(c) and 623 of the Communications Act of 1934, as 
amended, 47 U.S.C. 154(i), 154(j), 303(r), 532, 542(c) and 543 the 
rules, requirements and policies discussed in this Second Order on 
Reconsideration and Fourth Report and Order, are adopted and part 76 of 
the Commission's rules, 47 CFR part 76 is amended as set forth below.
    It is further ordered That, the Secretary shall send a copy of this 
Report and Order, including the Initial Regulatory Flexibility 
Analysis, to the Chief Counsel for Advocacy of the Small Business 
Administration in accordance with paragraph 603(a) of the Regulatory 
Flexibility Act. Public Law 96-354, 94 Stat. 1164, 5 U.S.C. 601 et seq. 
(1981).
    It is further ordered That, the requirements and regulations 
established in this decision shall become effective May 15, 1994 with 
the exception of the 30 day notice requirement for rate changes\9\ to 
be codified at 47 CFR 76.964 which shall be effective upon publication 
in the Federal Register.
---------------------------------------------------------------------------

    \9\As discussed above, the Commission finds good cause for 
making these notice provisions effective on less than 30 days notice 
in the Federal Register. See 5 U.S.C. section 533(d)(3).
---------------------------------------------------------------------------

List of Subjects in 47 CFR Part 76

    Cable television.

Federal Communications Commission.
William F. Caton,
Acting Secretary.

Rule Changes

    Part 76 of title 47 of the Code of Federal Regulations is amended 
as follows:

PART 76--CABLE TELEVISION SERVICE

    1. The authority citation for part 76 continues to read as follows:

    Authority: Secs. 2, 3, 4, 301, 303, 307, 308, 309, 48 Stat. as 
amended, 1064, 1065, 1066, 1081, 1082, 1083, 1084, 1085, 1101; 47 
U.S.C. secs. 152, 153, 154, 301, 303, 307, 308, 309, 532, 535, 542, 
543, 552 as amended, 106 Stat. 1460.

    2. Section 76.901 is amended to revise paragraph (c) to read as 
follows:


Sec. 76.901  Definitions.

* * * * *
    (c) Small system. A small system is a cable television system that 
serves 1,000 or fewer subscribers. The service area of a small system 
shall be determined by the number of subscribers that are served by the 
system's principal headend, including any other headends or microwave 
receive sites that are technically integrated to the principal headend.

    3. Section 76.922 is amended to revise paragraphs (b), (c) and (d), 
and to add new paragraphs (e) and (f) to read as follows:


Sec. 76.922  Rates for the basic service tier and cable programming 
services tiers.

* * * * *
    (b) Permitted charge on May 15, 1994. (1) The permitted charge for 
a tier of regulated program service shall be, at the election of the 
cable system, either:
    (i) A rate determined pursuant to a cost-of-service showing;
    (ii) The full reduction rate;
    (iii) The transition rate, if the system is eligible for transition 
relief; or
    (iv) A rate based on a streamlined rate reduction, if the system is 
eligible to implement such a rate reduction. Except where noted, the 
term ``rate'' in this subsection means a rate measured on an average 
regulated revenue per subscriber basis.
    (2) Full reduction rate. The ``full reduction rate'' on May 15, 
1994 is the system's September 30, 1992 rate, measured on an average 
regulated revenue per subscriber basis, reduced by 17 percent, and then 
adjusted for the following:
    (i) The establishment of permitted equipment rates as required by 
Sec. 76.923;
    (ii) Inflation measured by the GNP-PI between October 1, 1992 and 
September 30, 1993;
    (iii) Changes in the number of program channels subject to 
regulation that are offered on the system's program tiers between 
September 30, 1992 and the earlier of the initial date of regulation 
for any tier or February 28, 1994; and
    (iv) Changes in external costs that have occurred between the 
earlier of the initial date of regulation for any tier or February 28, 
1994, and March 31, 1994.
    (3) March 31, 1994 benchmark rate. The ``March 31, 1994 benchmark 
rate'' is the rate so designated using the calculations in Form 1200.
    (4) Transition rates. Systems owned by small operators and systems 
with low prices shall be eligible to establish a transition rate for a 
tier, pending a further order of the Commission.
    (i) System owned by small operators. (A) For purposes of 
determining eligibility to establish a transition rate, a system owned 
by a small operator is a system owned by an operator that has a total 
subscriber base of 15,000 or fewer subscribers as of March 31, 1994. 
Systems owned by cable operators with between 15,000 and 16,000 
subscribers may, upon a showing of substantial hardship, obtain a 
waiver from the Commission of the foregoing 15,000 subscriber limit.
    (B) A system owned by a small operator shall not be eligible to 
establish a transition rate if the operator is owned or controlled by, 
or is under common control or affiliated with, a cable operator serving 
more than 15,000 subscribers. For purposes of this rule, a small cable 
operator will be considered affiliated with an operator serving more 
than 15,000 subscribers if such an operator holds a 20 percent or 
greater equity interest in the small operator.
    (C) The transition rate for systems owned by small operators on May 
15, 1994 shall be the system's March 31, 1994 rate, adjusted:
    (1) To establish permitted rates for equipment as required by 
Sec. 76.923 if such equipment rates have not already been established; 
and
    (2) For changes in external costs incurred between the earlier of 
the initial date of regulation for any tier or February 28, 1994, and 
March 31, 1994, to the extent such external cost changes are not 
already reflected in the system's March 31, 1994 rate.
    (ii) Low-price systems. (A) A low-price system is a system. (1) 
Whose March 31, 1994 rate is below its March 31, 1994 benchmark rate, 
or
    (2) Whose March 31, 1994 rate is above its March 31, 1994 benchmark 
rate, but whose March 31, 1994 full reduction rate is below its March 
31, 1994 benchmark rate, as defined in paragraph (b)(2) of this 
section.
    (B) The transition rate on May 15, 1994 for a system whose March 
31, 1994 rate is below its March 31, 1994 benchmark rate is the 
system's March 31, 1994 rate. The March 31, 1994 rate is in both cases 
adjusted:
    (1) To establish permitted rates for equipment as required by 
Section 76.923 if such rates have not already been established; and
    (2) For changes in external costs incurred between the earlier of 
initial date of regulation of any tier or February 28, 1994, and March 
31, 1994, to the extent changes in such costs are not already reflected 
in the system's March 31, 1994 rate. The transition rate on May 15, 
1994 for a system whose March 31, 1994 adjusted rate is above its March 
31, 1994 benchmark rate, but whose March 31, 1994 full reduction rate 
is below its March 31, 1994 benchmark rate, is the March 31, 1994 
benchmark rate, adjusted to establish permitted rates for equipment as 
required by Section 76.923 if such rates have not already been 
established.
    (iii) Notwithstanding the foregoing, the transition rate for a tier 
shall be adjusted to reflect any determination by a local franchising 
authority and/or the Commission that the rate in effect on March 31, 
1994 was higher (or lower) than that permitted under applicable 
Commission regulations. A filing reflecting the adjusted rate shall be 
submitted to all relevant authorities within 30 days after issuance of 
the local franchising authority and/or Commission determination. A 
system whose March 31, 1994 rate is determined by a local franchising 
authority or the Commission to be too high under the Commission's rate 
regulations in effect before May 15, 1994 will be subject to any refund 
liability that may accrue under those rules. In addition, the system 
will be liable for refund liability under the rules in effect on and 
after May 15, 1994. Such refund liability will be measured by the 
difference in the system's March 31, 1994 rate and its permitted March 
31, 1994 rate as calculated under the Commission's rate regulations in 
effect before May 15, 1994. The refund liability will accrue according 
to the time periods set forth in Secs. 76.942, and 76.961 of the 
Commission's rules.
    (5) Streamlined rate reductions. (i) Small systems that are not 
owned by or affiliated with any other system (``independent systems''), 
and small systems owned by small multiple system operators (``small 
MSOs''), that have not already restructured their rates to comply with 
the Commission's rules may establish rates for regulated program 
services and equipment by making a streamlined rate reduction. ``Small 
MSOs'' are those multiple system operators that:
    (A) Serve 250,000 or fewer total subscribers,
    (B) Own only systems with less than 10,000 subscribers each, and
    (C) Have an average system size of 1,000 or fewer subscribers. 
Independent small systems and small systems owned by small MSOs shall 
not be eligible for streamlined rate reductions if they are owned or 
controlled by, or are under common control or affiliated with, a cable 
operator that exceeds these subscriber limits. For purposes of this 
rule, a small system will be considered ``affiliated with'' such an 
operator if the operator holds a 20 percent or greater equity interest 
in the small system.
    (ii) The streamlined rate for a tier on May 15, 1994 shall be the 
system's March 31, 1994 rate for the tier, reduced by 14 percent. A 
small system that elects to establish its rate for a tier by 
implementing this streamlined rate reduction must also reduce, at the 
same time, each billed item of regulated cable service, including 
equipment, by 14 percent. Regulated rates established using the 
streamlined rate reduction process shall remain in effect until:
    (A) Adoption of a further order by the Commission establishing a 
schedule of average equipment costs;
    (B) The system increases its rates using the calculations and time 
periods set forth in FCC Form 1211; or
    (C) The system elects to establish permitted rates under another 
available option set forth in paragraph (b)(1) of this section.
    (iii) Implementation and notification. An eligible small system 
that elects to use the streamlined rate reduction process must 
implement the required rate reductions and provide written notice of 
such reductions to subscribers, the local franchising authority and the 
Commission according to the following schedule:
    (A) Where the franchising authority has been certified by the 
Commission to regulate the small system's basic service tier rates as 
of May 15, 1994, the system must notify the franchising authority and 
its subscribers in writing that it is electing to set its regulated 
rates by the streamline rate reduction process. Such notice must be 
given by June 15, 1994, and must also describe the new rates that will 
result from the streamlined rate reduction process. Those rates must 
then be implemented within 30 days after the written notification has 
been provided to subscribers and the local franchising authority.
    (B) Where the franchising authority has not been certified to 
regulate basic service tier rates by May 15, 1994, the small system 
must provide the written notice to subscribers and the franchising 
authority, described in paragraph (b)(5)(iii)(A) of this section, 
within 30 days from the date it receives the initial notice of 
regulation from the franchising authority. The system must then 
implement the streamlined rate reductions within 30 days after the 
written notification has been provided to subscribers and the local 
franchise authority.
    (C) Where the Commission is regulating the small system's basic 
service tier rates as of May 15, 1994, the system must notify the 
Commission and its subscribers in writing that it is electing to set 
its regulated rates by the streamlined rate reduction process. Such 
notice must be given by June 15, 1994, and must also describe the new 
rates that will result from the streamlined rate reduction process. 
Those rates must then be implemented within 30 days after the written 
notification has been provided to subscribers and the Commission.
    (D) Where the Commission begins regulating basic service rates 
after May 15, 1994, the small system must provide the written notice to 
subscribers and the Commission, described in paragraph (b)(5)(iii)(C) 
of this section, within 30 days from the date it receives an initial 
notice of regulation. The system must then implement the streamlined 
rate reductions within 30 days after the written notification has been 
provided to subscribers and the Commission.
    (E) If a complaint about its cable programming service rates has 
been filed with the Commission on or before May 15, 1994, the small 
system must provide the written notice described in paragraph 
(b)(5)(iii)(A) of this section, to subscribers, the local franchising 
authority and the Commission by June 15, 1994. If a cable programming 
services complaint is filed against the system after May 15, 1994, the 
system must provide the required written notice to subscribers, the 
local franchising authority or the Commission within 30 days after the 
complaint is filed. The system must then implement the streamlined rate 
reductions within 30 days after the written notification has been 
provided.
    (F) A small system is required to give written notice of, and to 
implement, the rates that are produced by the streamlined rate 
reduction process only once. If a system has already provided notice 
of, and implemented, the streamlined rate reductions when a given tier 
becomes subject to regulation, it must report to the relevant regulator 
(either the franchising authority or the Commission) in writing within 
30 days of becoming subject to regulation that it has already provided 
the required notice and implemented the required rate reductions.
    (6) Establishment of initial regulated rates. (i) Cable systems, 
other than those eligible for streamlined rate reductions, shall file 
FCC Forms 1200, 1205, and 1215 for a tier that is regulated on May 15, 
1994 by June 15, 1994, or thirty days after the initial date of 
regulation for the tier. A system that becomes subject to regulation 
for the first time on or after July 1, 1994 shall also file FCC Form 
1210 at the time it files FCC Forms 1200, 1205 and 1215.
    (ii) A cable system will not incur refund liability under the 
Commission's rules governing regulated cable rates on and after May 15, 
1994 if:
    (A) Between March 31, 1994 and July 14, 1994, the system does not 
change the rate for, or restructure in any fashion, any program service 
or equipment offering that is subject to regulation under the 1992 
Cable Act; and
    (B) The system establishes a permitted rate defined in paragraph 
(b) of this section by July 14, 1994. The deferral of refund liability 
permitted by this subsection will terminate if, after March 31, 1994, 
the system changes any rate for, or restructures, any program service 
or equipment offering subject to regulation, and in all events will 
expire on July 14, 1994. Moreover, the deferral of refund liability 
permitted by this paragraph does not apply to refund liability that 
occurs because the system's March 31, 1994 rates for program services 
and equipment subject to regulation are higher than the levels 
permitted under the Commission's rules in effect before May 15, 1994.
    (7) For purposes of this section, the initial date of regulation 
for the basic service tier shall be the date on which notice is given 
pursuant to Sec. 76.910, that the provision of the basic service tier 
is subject to regulation. For a cable programming services tier, the 
initial date of regulation shall be the first date on which a complaint 
on the appropriate form is filed with the Commission concerning rates 
charged for the cable programming services tier.
    (8) For purposes of this section, rates in effect on the initial 
date of regulation or on September 30, 1992 shall be the rates charged 
to subscribers for service received on that date.
    (c) Subsequent permitted charge. The permitted charge for a tier 
after May 15, 1994 shall be, at the election of the cable system, 
either:
    (1) A rate determined pursuant to a cost-of-service showing, or
    (2) A rate determined by application of the Commission's price cap 
requirements set forth in paragraph (d) of this section to a permitted 
rate determined in accordance with paragraph (b) of this section.
    (d) Price cap requirements. The Commission's price cap requirements 
allow a system to adjust its permitted charges for inflation and 
changes in external costs. After May 15, 1994, adjustments for changes 
in external costs shall be calculated by subtracting external costs 
from the system's permitted charge and making changes to that 
``external cost component'' as necessary. The remaining charge, 
referred to as the ``residual component,'' will be adjusted annually 
for inflation. Cable systems shall use FCC Form 1210 (or FCC Form 1211, 
where applicable) to justify changes in permitted rates made pursuant 
to the price cap requirements.
    (1) Calendar year quarters. All systems must use a calendar year 
quarter when adjusting rates under the price cap requirements. The 
first quarter shall run from January 1 through March 31 of the relevant 
year; the second quarter shall run from April 1 through June 30; the 
third quarter shall run from July 1 through September 30; and the 
fourth quarter shall run from October 1 through December 31.
    (2) Inflation adjustments. The residual component of a system's 
permitted charge may be adjusted annually for inflation. The annual 
inflation adjustment shall be based on inflation occurring from June 30 
of the previous year to June 30 of the year in which the inflation 
adjustment is made, except that the first annual inflation adjustment 
shall cover inflation from September 30, 1993 until June 30 of the year 
in which the inflation adjustment is made. The adjustment may be made 
after September 30, but no later than August 31 of the next calendar 
year. Adjustments shall be based on changes in the Gross National 
Product Price Index as published by the Bureau of Economic Analysis of 
the United States Department of Commerce. Cable systems that establish 
a transition rate pursuant to paragraph(b)(4) of this section shall not 
be permitted to adjust rates on account of inflation until the 
transition rate adjusted for external costs and changes in numbers of 
regulated channels is less than, or equal to, the system's full 
reduction rate adjusted for inflation, external costs and changes in 
numbers of regulated channels.
    (3) External costs. (i) Permitted changes for a tier may be 
adjusted up to quarterly to reflect changes in external costs 
experienced by the cable system. In all events, the system must adjust 
its rates annually to reflect any decreases in external costs that have 
not previously been accounted for in the system's rates. A system must 
also adjust its rates annually to reflect any changes in external 
costs, inflation and the number of channels on regulated tiers that 
occurred during the year if the system wishes to have such changes 
reflected in its regulated rates. A system that does not adjust its 
permitted rates annually to account for these changes will not be 
permitted to increase its rates subsequently to reflect the changes.
    (ii) A system must adjust its rates in the next calendar year 
quarter for any decrease in programming costs that results from the 
deletion of a channel or channels from a regulated tier.
    (iii) Any rate increase made to reflect an increase in external 
costs must also fully account for all other changes in external costs, 
inflation and the number of channels on regulated tiers that occurred 
during the same period. Rate adjustments made to reflect changes in 
external costs shall be based on any changes in those external costs 
that occurred from 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 FCC Form 1210 (or FCC Form 
1211, where applicable). A system may adjust its rates after the close 
of a quarter to reflect changes in external costs that occurred during 
that quarter as soon as it has sufficient information to calculate the 
rate change.
    (iv) External costs shall consist of costs in the following 
categories:
    (A) State and local taxes applicable to the provision of cable 
television service;
    (B) Franchise fees;
    (C) Costs of complying with franchise requirements, including costs 
of providing public, educational, and governmental access channels as 
required by the franchising authority;
    (D) Retransmission consent fees and copyright fees incurred for the 
carriage of broadcast signals; and
    (E) Other programming costs.
    (v) The permitted charge for a regulated tier shall be adjusted on 
account of programming costs, copyright fees and retransmission consent 
fees only for the program channels or broadcast signals offered on that 
tier.
    (vi) The permitted charge shall not be adjusted for costs of 
retransmission consent fees or changes in those fees incurred prior to 
October 6, 1994.
    (vii) The starting date for adjustments on account of external 
costs for a tier of regulated programming service shall be the earlier 
of the initial date of regulation for any basic or cable service tier 
or February 28, 1994.
    (viii) Changes in franchise fees shall not result in an adjustment 
to permitted charges, but rather shall be calculated separately as part 
of the maximum monthly charge per subscriber for a tier of regulated 
programming service.
    (ix) Adjustments to permitted charges to reflect changes in the 
costs of programming purchased from affiliated programmers, as defined 
in Sec. 76.901, shall be permitted as long as the price charged to the 
affiliated system reflects either prevailing company prices offered in 
the marketplace to third parties (where the affiliated program supplier 
has established such prices) or the fair market value of the 
programming.
    (x) Adjustments to permitted charges on account of increases in 
costs of programming shall be further adjusted to reflect any revenues 
received by the operator from the programmer.
    (xi) In calculating programming expense, operators may add a mark-
up of 7.5% for new programming added after May 15, 1994 and shall 
reduce rates by decreases in programming expense plus an additional 
7.5% for decreases occurring after May 15, 1994.
    (e) Changes in the number of channels on regulated tiers. (1) A 
system may adjust the residual component of its permitted rate for a 
tier to reflect changes in the number of channels offered on the tier 
on a quarterly basis. Cable systems shall use FCC Form 1210 (or FCC 
Form 1211, where applicable) to justify rate changes made on account on 
changes in the number of channels on a regulated tier. Such rate 
adjustments shall be based on any changes in the number of regulated 
channels that occurred from 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 FCC Form 1210 (or FCC 
Form 1211, where applicable). However, when it deletes channels in a 
calendar quarter, a system must adjust the residual component of the 
tier charge in the next calendar quarter to reflect that deletion. The 
following table shall be used to adjust permitted rates for a tier for 
changes in the number of channels offered on the tier. The entries in 
the table provide the cents per channel per subscriber per month by 
which cable operators will adjust the residual component using FCC Form 
1210 (or FCC Form 1211, where applicable).

------------------------------------------------------------------------
                                                            Per-channel 
          Average number of regulated channels              adjustment  
                                                              factor    
------------------------------------------------------------------------
7.......................................................           $0.52
7.5.....................................................            0.45
8.......................................................            0.40
8.5.....................................................            0.36
9.......................................................            0.33
9.5.....................................................            0.29
10......................................................            0.27
10.5....................................................            0.24
11......................................................            0.22
11.5....................................................            0.20
12......................................................            0.19
12.5....................................................            0.17
13......................................................            0.16
13.5....................................................            0.15
14......................................................            0.14
14.5....................................................            0.13
15-15.5.................................................            0.12
16......................................................            0.11
16.5-17.................................................            0.10
17.5-18.................................................            0.09
18.5-19.................................................            0.08
19.5-21.5...............................................            0.07
22-23.5.................................................            0.06
24-26...................................................            0.05
26.5-29.5...............................................            0.04
30-35.5.................................................            0.03
36-46...................................................            0.02
46.5 and above..........................................            0.01
------------------------------------------------------------------------

    (2) In order to adjust the residual component of the tier charge 
when there is a change in the number of channels on a tier, the 
operator shall perform the following calculations:
    (i) Take the sum of the old total number of channels on tiers 
subject to regulation (i.e., tiers that are, or could be, regulated) 
and the new total number of channels and divide the resulting number by 
two;
    (ii) Consult the table in paragraph (e)(1) of this section to find 
the applicable per channel adjustment factor for the number of channels 
produced by the calculations in paragraph (e)(2)(i) of this section. 
For each tier for which there has been a change in the number of 
channels multiply the per-channel adjustment factor times the change in 
the number of channels on that tier. The result is the total adjustment 
for that tier. It is positive if the number of channels on the tier has 
increased and negative if the number of channels has decreased.
    (f) Permitted charges for a tier shall be determined in accordance 
with forms and associated instructions established by the Commission.

    4. Section 76.923 is amended by adding paragraph (l) to read as 
follows:


Sec. 76.923   Rates for equipment and installation used to receive the 
basic service tier.

* * * * *
    (l) Company-wide averaging of equipment costs. For the purpose of 
developing unbundled equipment charges as required by paragraph (b) of 
this section, a cable operator may average the equipment costs of its 
small systems at any level, or several levels, within its operations. 
This company-wide averaging applies only to an operator's small systems 
as defined in Sec. 76.901(c); is permitted only for equipment charges, 
not installation charges; and may be established only for similar types 
of equipment. When submitting its equipment costs based on average 
charges to the local franchising authority or the Commission, an 
operator that elects company-wide averaging of equipment costs must 
provide a general description of the averaging methodology employed and 
a justification that its averaging methodology produces reasonable 
equipment rates. The local authority or the Commission may require the 
operator to set equipment rates based on the operator's level of 
averaging in effect on April 3, 1993, as required by Sec. 76.924(d).

    5. Section 76.934 is amended by redesignating the existing text as 
paragraph (a) and by adding new paragraphs (b), (c) and (d) to read as 
follows:


Sec. 76.934  Small Systems.

* * * * *
    (b) Initial regulation of small systems. (1) If certified by the 
Commission, a local franchising authority may provide an initial notice 
of regulation to a small system, as defined by Sec. 76.901(c), on May 
15, 1994. Any initial notice of regulation issued by a certified local 
franchising authority prior to May 15, 1994 shall be considered as 
having been issued on May 15, 1994.
    (2) The Commission will accept complaints concerning the rates for 
cable programming service tiers provided by small systems on or after 
May 15, 1994. Any complaints filed with the Commission about the rates 
for a cable programming service tier provided by a small system prior 
to May 15, 1994 shall be considered as having been filed on May 15, 
1994.
    (3) A small system that receives an initial notice of regulation 
from its local franchising authority, or a complaint filed with the 
Commission for its cable programming service tier, must respond within 
the time periods prescribed in Secs. 76.930 and 76.956.
    (c) Statutory period for filing initial complaint. A complaint 
concerning a rate for cable programming service or associated equipment 
provided by a small system that was in effect on May 15, 1994 must be 
filed within 180 days from May 15, 1994.
    (d) Petitions for extension of time. Small systems may obtain an 
extension of time to establish compliance with rate regulations 
provided they can demonstrate that timely compliance would result in 
severe economic hardship. Requests for extension of time should be 
addressed to the local franchising authority concerning basic service 
and equipment rates and to the Commission concerning rates for a cable 
programming service tier and associated equipment. The filing of a 
request for an extension of time to comply with the rate regulations 
will not toll the effective date of rate regulation for small systems 
or alter refund liability for rates that exceed permitted levels after 
May 15, 1994.

    6. Section 76.952 is amended by revising paragraph (a) to read as 
follows:


Sec. 76.952  Information to be provided by cable operator on monthly 
subscriber bills.

    (a) The name, mailing address and phone number of the local 
franchising authority and the Cable Services Bureau of this Commission.
* * * * *
    7. Section 76.953 is amended by revising paragraph (a) to read as 
follows:


Sec. 76.953  Limitation on filing a complaint.

    (a) Complaint regarding a rate in effect on September 1, 1993. 
Notwithstanding paragraph (b) of this section, a complaint regarding a 
rate for cable programming service or associated equipment in effect on 
September 1, 1993, must be filed by February 28, 1994, except as 
provided in Sec. 76.934(c) with respect to small systems.
* * * * *
    8. Section. 76.958 is added to Subpart N to read as follows:


Sec. 76.958  Notice to Commission of rate change while complaint 
pending.

    A regulated cable operator that proposes to change any rate while a 
cable service tier complaint is pending before the Commission shall 
provide the Commission at least 30 days notice of the proposed change.

    9. Section 76.964 is amended by revising the section heading, 
redesignating the existing text as paragraph (a) and adding new 
paragraphs (b) and (c) to read as follows:


Sec. 76.964  Notices to subscribers.

* * * * *
    (b) Cable systems shall give 30 days written notice to both 
subscribers and local franchising authorities before implementing any 
rate or service change. Such notice shall state the precise amount of 
any rate change and briefly explain in readily understandable fashion 
the cause of the rate change (e.g., inflation, changes in external 
costs or the addition/deletion of channels). When the change involves 
the addition or deletion of channels, each channel added or deleted 
must be separately identified. Notices to subscribers shall inform them 
of their right to file complaints about changes in cable programming 
service tier rates and services with this Commission within 45 days of 
the rate or service change being reflected in their bill, and shall 
provide the address and phone number of both the local franchising 
authority and the Cable Services Bureau of this Commission.
    (c) Cable systems shall provide written notice to subscribers of 
subscribers' right to file with the Commission complaints concerning 
rate changes for cable programming service or associated equipment. 
This notice shall be provided at the same time as the notice required 
under paragraph (b) and additionally with the first bill reflecting the 
rate change. The notice shall state that the subscriber may file the 
complaint within forty-five days of the date the complainant receives 
the bill that reflects the rate change, and shall provide the address 
and phone number of the local franchising authority and the Commission. 
For rate changes becoming effective before July 15, 1994, operators may 
provide this notice by any reasonable and feasible means (such as on 
screen programming or newspaper publication) rather than the written 
notice otherwise required by this paragraph.

    10. A new Sec. 76.986 is added to Subpart N to read as follows:


Sec. 76.986  ``A la carte'' offerings.

    (a) Collective offerings of unregulated per-channel or per-program 
(``a la carte'') video programming shall not be regulated if:
    (1) The price for the combined package does not exceed the sum of 
the individual charges for each component of service, and
    (2) The cable operator continues to provide the component parts of 
the package to subscribers separately in addition to the collective 
offering. The second condition will be met only when the per channel 
offering provides consumers with a realistic service choice. Collective 
offerings available on April 1, 1993 shall not be regulated if 
subsequently offered on the same terms and conditions as were in effect 
on that date.
    (b) In reviewing a basic service rate filing, local franchising 
authorities may make an initial decision addressing whether a 
collective offering of ``a la carte'' channels will be treated as an 
unregulated service or a regulated tier. The franchising authority must 
make this initial decision within the 30 day period established for 
review of basic cable rates and equipment costs in Sec. 76.933(a), or 
within the first 60 days of an extended 120 day period (if the 
franchise authority has requested an additional 90 days) pursuant to 
Sec. 76.933(b). The franchising authority shall provide notice of its 
decision to the cable system and shall provide public notice of its 
initial decision within seven days pursuant to local procedural rules 
for public notice. Operators or consumers may make an interlocutory 
appeal of the initial decision to the Commission within 14 days of the 
initial decision. Operators shall provide notice to franchise 
authorities of their decision whether or not to appeal to the 
Commission within this period. Consumers shall provide notice to 
franchise authorities of their decision to appeal to the Commission 
within this period.
    (c) A limited initial decision under paragraph (b) of this section 
shall toll the time periods under Sec. 76.933 within which local 
authorities must decide local rate cases. The time period shall resume 
running seven days after the Commission decides the interlocutory 
appeal, or seven days following the expiration of the period in which 
an interlocutory appeal pursuant to paragraph (b) of this section may 
be filed.
    (d) A local franchising authority alternatively may decide whether 
a collective offering of ``a la carte'' channels will be treated as an 
unregulated service or a cable programming services tier as part of its 
final decision setting rates for the basic service tier. That decision 
may then be appealed to the Commission as provided for under 
Sec. 76.945.

[FR Doc. 94-8998 Filed 4-14-94; 8:45 am]
BILLING CODE 6712-01-M