[Federal Register Volume 60, Number 16 (Wednesday, January 25, 1995)]
[Rules and Regulations]
[Pages 4863-4866]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-1819]



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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 76

[MM Docket No. 92-266; FCC 95-8]


Cable Act of 1992--Rate Regulation

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: On its own motion, the Commission amends its rules in order to 
provide certain cable operators with further incentives to add new 
channels to cable programming services tiers and to single-tier 
systems. These incentives apply to independent small systems, to small 
systems owned by small multiple system operators, and to independent 
systems and systems owned by small multiple system operators which 
incur additional monthly per subscriber headend costs of one full cent 
or more for an additional channel. These systems may take advantage of 
the streamlined cost-of-service procedure for headend upgrades 
associated with channel additions, as well as the per channel rate 
adjustments and programming expense adjustments available to all cable 
systems adding channels under the existing rule. The Order also 
provides that the streamlined cost-of-service procedure for headend 
upgrades associated with channel additions shall apply to single-tier 
systems.

EFFECTIVE DATE: February 24, 1995.

FOR FURTHER INFORMATION CONTACT:
Joel Kaufman or Meryl S. Icove, Cable Services Bureau, (202) 416-0800.

SUPPLEMENTARY INFORMATION: This is a synopsis of the Commission's 
Seventh Order on Reconsideration in MM Docket 92-266, FCC 95-8, adopted 
January 5, 1995, and released January 5, 1995. The complete text of 
this document is available for inspection and copying during normal 
business hours in the FCC Reference Center, 1919 M St., NW., 
Washington, DC, and also may be purchased from the Commission's copy 
contractor, International Transcription Service, (ITS), at 2100 M St., 
NW., Washington, DC 20037, (202) 857-3800.

Synopsis of the Seventh Order on Reconsideration

A. Background

    In the Second Order on Reconsideration, Fourth Report and Order, 
and Fifth Notice of Proposed Rulemaking (``Fourth Report and Order'') 
in this docket, 59 FR 17943 (April 15, 1994), the Commission specified 
a ``going-forward'' mechanism under which price-capped rates are 
adjusted for changes in the number of channels offered on the basic 
service tier (``BST'') and on cable programming service tiers 
(``CPSTs''). Under this mechanism, operators first remove all external 
costs from the tier charge and then adjust the residual component of 
the tier charge by a per channel adjustment which declines as the 
number of channels on the system increases. Operators were also allowed 
[[Page 4864]] to pass through to subscribers the programming costs 
associated with new channels as well as a mark-up of 7.5% on new 
programming expense.
    In the Sixth Order on Reconsideration and Fifth Report and Order 
(``Sixth Reconsideration Order''), 59 FR 62614 (December 6, 1994), the 
Commission inter alia, supplemented its existing going forward rules by 
creating an alternative channel adjustment methodology. Cable operators 
adding channels to CPSTs or single-tier systems may recover from 
subscribers (a) a flat per channel mark-up of up to 20 cents per 
subscriber per month, subject to a cap on the total amount recovered 
through December 31, 1997, and (b) programming costs, subject to a cap 
that applies through December 31, 1996. Operators adding channels to 
CPSTs or single-tier systems on and after May 15, 1994 may use either 
the new rules or the existing rules to adjust rates after December 31, 
1994, but must use either the existing rules or the new rules 
consistently with respect to all channels added after December 31, 
1994.
    In the Sixth Reconsideration Order, the Commission also adopted a 
special streamlined cost-of-service procedure that permits independent 
small systems and small systems owned by small multiple system 
operators (``MSOs'') to recover the costs of upgrading their headend 
equipment when they add new channels to CPSTs. A small system is a 
cable system that serves 1,000 or fewer subscribers from the system's 
principal headend, including any technically integrated headends and 
microwave receive sites. See 47 CFR 76.901(c). A small MSO is defined 
as a MSO that has 250,000 or fewer total subscribers, owns only systems 
with less than 10,000 subscribers each, and has an average system size 
of 1,000 or fewer subscribers. See 47 CFR 76.922(b)(5). To prevent the 
potential for unreasonably sharp rate increases to small system 
subscribers, the amount a small system can recover for each channel 
added was limited to programming costs incurred plus the lesser of the 
actual cost of the headend equipment or $5,000. Headend costs that are 
to be recovered through increased rates must be depreciated over the 
useful life of the equipment. In addition, the rate of return the small 
system may earn on such headend costs may not exceed 11.25%. Small 
systems that increase rates as a result of any channel additions 
pursuant to this methodology may be reimbursed for the addition of a 
maximum of seven channels to CPSTs between May 15, 1994 and December 
31, 1997. Qualifying small systems adding channels to CPSTs were 
allowed to choose between this streamlined cost-of-service procedure 
and the going forward rules applicable to all systems.

B. Discussion

    On our own motion, we find our requirement that qualifying small 
systems elect between the per channel adjustment methodology and the 
streamlined cost-of-service procedure for upgrading headend equipment 
insufficient to give qualifying systems an appropriate incentive to add 
new channels. Although the return of up to 11.25% on the cost of 
headend equipment was intended to allow small systems a profit when 
they added channels, we now believe that our formula as a whole may 
give such systems an insufficient incentive to add channels. This is 
the case because, except for very small systems, the per subscriber 
rate adjustment associated with the streamlined cost-of-service showing 
would be less than the 20 cents per subscriber per month allowed under 
our general going forward regulations. If the maximum $5,000 in headend 
costs is depreciated by a 1,000 subscriber system with an 11.25% rate 
of return, for example, the monthly per subscriber cost would be just 
over five cents, assuming a 15 year depreciation period. The Commission 
has not prescribed depreciation rates for headend equipment, but 
requires cable operators to follow reasonable depreciation practices in 
depreciating equipment over its useful life. The Cable Services Bureau, 
acting on delegated authority in examining cost-of-service rate 
justifications, concluded that operators generally assign 15-year 
useful lives to headend equipment and adjusted cable operator's 
proposed useful lives upward to reflect that norm.
    Accordingly, independent small systems and small systems owned by 
small MSOs will not be required to choose between the per channel 
adjustment methodology and the streamlined cost-of-service procedure 
for upgrading headend equipment. Instead, we will allow independent 
small systems and small systems owned by small MSOs to recover for each 
channel added by using both the per channel adjustment methodology and 
the streamlined cost-of-service procedure for upgrading headend 
equipment in the following manner. First, such operators may recover 
the lesser of the actual cost of the headend equipment or $5,000 
associated with the channel addition. The recovery of the lesser of the 
actual cost of the headend equipment or $5,000 shall otherwise remain 
subject to the conditions set forth in the Sixth Reconsideration Order, 
namely that the headend costs be depreciated over the useful life of 
the equipment, the rate of return on this investment not exceed 
11.25%,\1\ and the headend costs may be recovered for no more than 
seven channels through December 31, 1997. Second, in addition to 
recovery of headend upgrade costs in a streamlined cost-of-service 
proceeding, such operators may make rate adjustments to reflect channel 
additions and programming expenses that all other operators are 
permitted to make under the existing going forward rules. Specifically, 
operators may make per channel adjustments under either the new or the 
``old'' going forward rules. As explained in the Sixth Reconsideration 
Order, operators that elect the new going forward rules are allowed to 
recover programming expenses associated with adding channels subject to 
the License Fee Reserve and the Operator's Cap. Of course, headend 
costs are not included in the Operator's Cap.

    \1\Operators are permitted to recover an 11.25% rate of return 
on the lesser of the actual cost of the headend equipment associated 
with adding a channel or $5,000. Therefore, if the cost of the 
headend equipment associated with adding a channel is $5,000 or 
more, the operator is entitled to recover $5,000 plus an 11.25% rate 
of return on the $5,000 investment.
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    In addition, we believe that limiting eligibility to use the 
streamlined cost-of-service procedure for upgrading headend equipment 
to independent small systems and small systems owned by small MSOs may 
fail to give slightly larger systems an appropriate incentive to add 
channels. Accordingly, we have decided to allow larger systems to use 
the streamlined cost of service approach subject to the same conditions 
as independent small systems and small systems owned by small MSOs 
provided that (a) the systems are either independently owned or owned 
by small MSOs and (b) the monthly per subscriber cost of the additional 
headend equipment necessary to receive an additional channel is one 
cent or more.\2\ We are providing this relief for systems that are 
slightly larger than those that fall under the definition of a small 
system because we believe that such operators may have higher than 
average costs and may not always have access to the financial resources 
or other purchasing discounts of larger companies. However, since 
average equipment costs were built into the per [[Page 4865]] channel 
adjustment of up to 20 cents, we believe that it is unnecessary to 
allow systems with additional per subscriber headend equipment costs of 
less than one cent for each channel added to use the streamlined cost-
of-service procedure for upgrading headend equipment. We believe that 
such operators may have sufficient resources to add channels without 
the additional incentive created by the streamlined cost-of-service 
procedure. However, we note that we may reconsider this issue in light 
of the comments we have received in response to our Fifth Order on 
Reconsideration and Further Notice of Proposed Rulemaking, 59 FR 51,869 
(10/13/94). In that notice, the Commission solicited comments on 
whether it should retain its current definitions of small operators and 
small systems owned by small MSOs and whether it should employ the 
current Small Business Administration definition of small cable 
company. The definitions of these terms in the instant item may be 
affected by the outcome of the Further Notice.

    \2\The monthly per subscriber cost of the additional headend 
equipment necessary to receive the additional channel must be one 
full cent or more. For this purpose, operators may not round up 
monthly per subscriber costs of less than one cent. Additionally, 
operators must depreciate these costs at the same rate as they 
depreciate all similar equipment.
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    In the Sixth Reconsideration Order, the Commission provided that 
rates for the BST will continue to be governed exclusively by our 
current rules, except that where a system offered only one tier on May 
14, 1994, the cable operator will be allowed to use the revised per 
channel adjustment of up to 20 cents. We did not, however similarly 
provide that the streamlined cost-of-service procedure for headend 
upgrades by eligible small systems would be available to operators of 
single-tier systems. We did not intend to exclude single-tier systems 
from this procedure and, therefore, on our own motion, we reconsider 
the limitation of the streamlined cost-of-service procedure for headend 
upgrades to CPSTs. We conclude that the streamlined cost-of-service 
procedure should also apply to single-tier systems because we recognize 
that qualifying systems have the same small customer base over which to 
spread the cost of new equipment associated with providing channels, 
whether or not they have CPSTs. We also recognize that single-tier 
systems are commonly smaller systems. Accordingly, we believe that the 
streamlined cost-of-service procedure for headend upgrades associated 
with channel additions should apply to single-tier systems as well as 
CPSTs.

Regulatory Flexibility Act Analysis

    Pursuant to the Regulatory Act of 1980, 5 U.S.C. 601-612, the 
Commission's final analysis with respect to the Seventh Order on 
Reconsideration is as follows:
    Need and purpose of this action. The Commission, in compliance with 
Sec. 3 of the Cable Television Consumer Protection and Competition Act 
of 1992, 47 U.S.C. Sec. 543 (1992), pertaining to rate regulation, 
adopts revised rules and procedures intended to ensure that cable 
services are offered at reasonable rates with minimum regulatory and 
administrative burdens on cable entities.
    Summary of issues 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 Report 
and Order and Further Notice of Proposed Rulemaking, 58 FR 29769 (5/21/
93). Consistent with our rules, the SBA also filed an ex parte letter 
on August 3, 1994.
    Significant alternatives considered and rejected. In the course of 
this proceeding, petitioners representing cable interest and 
franchising authorities submitted several alternatives aimed at 
minimizing administrative burdens. The Commission has attempted to 
accommodate the concerns expressed by these parties. In this order, the 
Commission is providing additional incentives to qualifying small 
systems to add channels to CPSTs and single-tier systems.

Paperwork Reduction Act

    The requirements adopted herein have been analyzed with respect to 
the Paperwork Reduction Act of 1980 and found not to impose a new or 
modified information collection requirement on the public.

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 Seventh Order on 
Reconsideration, 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 
Order to the Chief Counsel for Advocacy of the Small Business 
Administration in accordance with paragraph 603(a) of the Regulatory 
Flexibility Act. Public Law No. 96-354, 94 Stat. 1164, 5 U.S.C. 
Secs. 601 et seq. (1981).
    It Is Further Ordered that the requirements and regulations 
established in this decision shall become effective 30 days following 
publication in the Federal Register.

List of Subjects in 47 CFR Part 76

    Cable television.

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

    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 76.922 is amended by revising paragraph (e)(7) to read 
as follows:


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

* * * * *
    (e) * * *
    (7) Headend upgrades. When adding channels to CPSTs and single-tier 
systems, cable systems that are either independently owned or owned by 
small MSOs and incur additional monthly per subscriber headend costs of 
one full cent or more for an additional channel or are either 
independently owned or owned by small MSOs as defined in paragraph 
(b)(5) of this section, may choose among the methodologies set forth in 
paragraphs (e)(2) and (e)(3) of this section. In addition, such systems 
may increase rates to recover the actual cost of the headend equipment 
required to add up to seven such channels to CPSTs and single-tier 
systems, not to exceed $5,000 per additional channel. Rate increases 
pursuant to this paragraph may occur between January 1, 1995, and 
December 31, 1997, as a result of additional channels offered on those 
tiers after May 14, 1994. Headend costs shall be depreciated over the 
useful life of the headend equipment. The rate of return on this 
investment shall not exceed 11.25 percent. In order to recover costs 
for headend equipment pursuant to this paragraph, systems must certify 
to the Commission their eligibility to use this paragraph, the level of 
costs they have actually incurred for adding the [[Page 4866]] headend 
equipment and the depreciation schedule for the equipment.
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[FR Doc. 95-1819 Filed 1-24-95; 8:45 am]
BILLING CODE 6712-01-M