[Federal Register Volume 60, Number 133 (Wednesday, July 12, 1995)]
[Rules and Regulations]
[Pages 35854-35868]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16515]



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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 76

[MM Dockets Nos. 92-266 and 93-215; FCC 95-196]


Cable Act of 1992--Small Systems

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: Based on comments filed in response to the Further Notice of 
Proposed Rulemaking, 59 FR 51934 (October 13, 1994) and in order to 
implement the provisions of the Cable Television Consumer Protection 
and Competition Act of 1992, this Sixth Report and Order and Eleventh 
Order on Reconsideration amends the Commission's rules regarding rates 
for small cable systems in order to ease the burdens of rate regulation 
on small systems.

EFFECTIVE DATE: The requirements and regulations established in this 
decision shall become effective upon approval by OMB of the new 
information collection requirements adopted herein, but no sooner than 
August 11, 1995. The Commission will issue a notice indicating the 
effective date.

FOR FURTHER INFORMATION CONTACT:
Tom Power or Meryl S. Icove, Cable Services Bureau, (202) 416-0800. 
Form 1230 information: Alex Byron, Cable Services Bureau, (202) 416-
0800.

SUPPLEMENTARY INFORMATION: This is a synopsis of the Commission's Sixth 
Report and Order and Eleventh Order on Reconsideration in MM Docket 
Nos. 92-266 and 93-215, FCC 95-196, adopted May 5, 1995, and released 
June 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.

I. Introduction

    In this Sixth Report and Order and Eleventh Order on 
Reconsideration we amend our definitions of small cable entities to 
encompass a broader range of cable systems that will be eligible for 
special rate and administrative treatment. In addition to amending our 
definitions, we make available to this expanded category a new 
regulatory scheme that will be available immediately for use by certain 
small cable companies. This new form of regulation should provide both 
rate relief and reduced administrative burdens.

II. Summary

    1. The Commission issued the Further Notice of Proposed Rulemaking, 
59 FR 51934 (October 13, 1994), seeking to establish a more complete 
record for purposes of promulgating final rate rules applicable to 
small operators, independent small systems, and small systems owned by 
small MSOs by soliciting comment on possible alternative definitions 
that we could use for purposes of determining eligibility for special 
rate or administrative treatment. We sought comment on whether we 
should retain current definitions or use different definitions for 
purposes of establishing special rate or administrative treatment for 
small systems and small operators. We specifically sought comment on 
these issues in light of section 3(a) of the Small Business Act, and on 
whether we should employ the current SBA definition of a small cable 
company in our cable rules.
    2. In amending our definitions and introducing a new, simplified 
form of small system rate relief in this Order, the Commission 
continues its ongoing efforts to offer small cable companies 
administrative relief from rate regulation in furtherance of 
congressional intent. In each of the orders that we have adopted in 
this rate proceeding, small cable companies have been afforded 
flexibility in how they can comply with rate regulations while reducing 
burdens on themselves and providing good service to subscribers. 
Through our actions today, the Commission expands the category of 
systems eligible for such opportunities to include approximately 66% of 
all cable systems in the nation serving approximately 12.1% of all 
cable subscribers.
    3. Specifically, we amend our definitions so that systems serving 
15,000 or fewer subscribers that are owned by small cable companies of 
400,000 or fewer subscribers are eligible to elect small system cost-
of-service relief, as well as certain other relief previously made 
available to small systems and operators. The new cost-of-service 
approach will involve a very simple, five element calculation based 
upon a system's costs. The calculation will produce a per channel rate 
for regulated services that will be presumed reasonable if it is no 
higher than $1.24 per channel. If the formula generates a higher rate, 
the operator still will be permitted to charge that rate if not 
challenged by the franchising authority or, upon being challenged, if 
the operator meets its burden of proving that the rate is reasonable. 
This new regulation will accord these small substantial flexibility in 
establishing the types of costs to be included and in allocating those 
costs among services. Our analysis of cost data, when combined with our 
understanding of the many unique challenges facing small cable 
companies, leads us to conclude that a simplified approach will best 
serve a segment of the cable industry that needs assistance in coping 
with rate regulation in order to serve subscribers better and to grow 
its business. In addition, this approach should facilitate regulation 
of cable rates by small local franchising authorities who wish to have 
a procedure for doing so that is simpler than existing forms of 
regulation.

[[Page 35855]]


III. Discussion

A. The New Category of Systems and Operators Eligible for Relief

    4. We acknowledge that a large number of smaller cable operators 
face difficult challenges in attempting simultaneously to provide good 
service to subscribers, to charge reasonable rates, to upgrade 
networks, and to prepare for potential competition. Since passage of 
the 1992 Cable Act, the Commission has worked continuously with the 
small cable industry to learn more about their legitimate business 
needs and how our rate regulations might better enable them to provide 
good service to subscribers while charging reasonable rates. Based on 
the record in this proceeding and our analysis of the rate 
justifications that have been submitted since our revised rate rules 
became effective in May 1994, we conclude that our definitions of small 
operators and small MSOs need to be changed to encompass the broader 
range of operators in need of rate relief. Therefore, we will expand 
upon the definition of a small system to include any system that serves 
15,000 or fewer subscribers. Furthermore, we significantly expand upon 
the definition of a small operator, redefining it and renaming it as a 
``small cable company'' serving a total of 400,000 or fewer subscribers 
over all of its systems. Finally, we will eliminate the existing 
definitions of a small operator and small MSO. We will extend to the 
expanded category of small systems owned by small cable companies 
certain rate and administrative relief as discussed below, and also the 
small system rate relief provisions adopted in the accompanying 
Eleventh Order on Reconsideration.
    5. In the 1992 Cable Act and its legislative history, Congress made 
clear its belief that small systems would be in need of administrative 
and rate relief as a consequence of the re-regulation of the cable 
industry.\1\ We are convinced, however, that systems of up to 15,000 
subscribers are likewise in need of relief and that we have the 
authority to extend relief to them. As more fully explained below, the 
comments in this proceeding and our review of benchmark and cost-of-
service rate justifications leads us to conclude that these larger 
systems generally face many of the same challenges that systems 1,000 
or fewer subscribers do in providing cable service. In view of this 
finding, we believe the relaxation of certain rate rules that we hereby 
order is consistent with the 1992 Cable Act. We note in particular the 
Statement of Policy contained in the statute in which Congress 
expressed its intent, inter alia, to:

    \1\ To the extent we refer herein to systems of up to 15,000 
subscribers as ``small systems,'' we do so for purposes of 
convenience. We are not using that term to refer to the class of 
systems described in section 623(i) of the Communications Act.
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    (1) Promote the availability to the public of a diversity of views 
and information through cable television * * *;
    (2) Rely on the marketplace, to the maximum extent feasible, to 
achieve that availability;
    (3) Ensure that cable operators continue to expand, where 
economically justified, their capacity and the programs offered over 
their cable systems * * *.

Relaxing regulatory burdens should free up resources that affected 
operators currently devote to complying with existing regulations and 
should enhance those operators' ability to attract capital, thus 
enabling them to achieve the goals of Congress cited above. Moreover, 
in prescribing rules governing basic service rates, the Communications 
Act requires us to ``seek to reduce the administrative burdens on 
subscribers, cable operators, franchising authorities, and the 
Commission * * *.'' We believe this mandate authorizes us to expand the 
category of small systems and provide them with rate and administrative 
relief. Section 303(r) of the Communications Act further supports our 
decision to take Congress's goals into account in extending relief to 
systems with up to 15,000 subscribers. The action we take today should 
also ease burdens for local franchising authorities and the Commission, 
in furtherance of congressional intent. In particular, as we simplify 
matters for smaller cable companies, we do the same for smaller local 
franchising authorities, who we understand to be just as concerned as 
smaller cable operators with the potential burdens and costs of 
regulation.
    6. The staff evaluated the 15,000 subscriber standard on the basis 
of shared economic, physical, and financial characteristics for systems 
above and below this size, in order to determine the significance of 
that breakpoint. To evaluate this standard, the staff used data from 
Warren Publishing Inc.'s cable services database, which was obtained by 
the Commission in the fall of 1994. This database contains detailed 
information on most of the country's 11,200 cable systems and 1,500 
cable companies. Staff determined that systems with fewer than 15,000 
subscribers differ from systems with more than 15,000 subscribers with 
respect to the following characteristics:
    (a) The average monthly regulated revenue per channel per 
subscriber is $0.86 for systems with fewer than 15,000 subscribers and 
$0.44 for systems with more than 15,000 subscribers;
    (b) The average number of subscribers per mile is 35.3 for systems 
with fewer than 15,000 subscribers and 68.7 for systems with more than 
15,000 subscribers;
    (c) The average annual premium revenue per subscriber is $41.00 for 
systems with fewer than 15,000 subscribers and $73.13 for systems with 
more than 15,000 subscribers.

This confirms that the use of the 15,000 subscriber standard does 
result in two groups of systems that have significant distinctions 
between them.
    7. As we have observed previously, our relief for smaller cable 
entities is aimed at those that do not have access to the financial 
resources, purchasing discounts, and other efficiencies of larger 
companies. Therefore, relief will be available only to small systems, 
as now defined, that are owned by small cable companies serving 400,000 
or fewer subscribers over all of its systems. In defining a small cable 
company as one serving no more than 400,000 subscribers, we accepted 
the recommendations of commenters who urged that we define a small 
cable company as one that earns $100 million or less in annual 
regulated revenues. As explained below, establishing the company size 
in terms of subscribers, rather than dollars, will advance regulatory 
simplicity; in the cable context, $100 million in annual regulated 
revenues equates to approximately 400,000 subscribers.
    8. With respect to the $100 million standard, we note in particular 
the recommendation of this measure of company size by SBA's Office of 
Advocacy. As it and other commenters point out, in the common carrier 
field entities having annual regulated revenues of more than $100 
million are subject to much greater regulatory burdens than those 
earning less than that amount. For example, for various regulatory 
purposes the Common Carrier Bureau has created the Tier 1 category of 
local exchange carriers (``LECs''), consisting solely of LECs with at 
least $100 million in annual regulated revenues. In expanding LEC 
interconnection requirements, we limited the impact of our rules to 
Tier 1 LECs, citing the limited resources of smaller LECs, among other 
factors. Numerous common carrier reporting 

[[Page 35856]]
requirements apply solely to carriers having annual revenues in excess 
of $100 million. Likewise, the level of detail required under the 
Uniform System of Accounts applicable to telecommunications companies 
depends upon whether the regulated entity is a Class A or Class B 
company, the former having annual regulated revenues of $100 million or 
more and the latter having annual regulated revenues below that amount.
    9. As SBA's Office of Advocacy states, the logic underlying these 
common carrier rules also can be applied in the cable context. Cable 
companies exceeding the $100 million standard are better able to absorb 
the costs and burdens of regulation due to their expanded 
administrative and technical resources. Further, we have noted in the 
telephone context that relaxation of regulatory burdens is justified 
for smaller entities even when those entities have significant market 
power. Accordingly, we believe that $100 million in annual regulated 
revenues is a reasonable standard at which to decrease regulatory 
burdens.
    10. A cable company with an overall subscriber figure of 400,000 we 
have chosen is roughly equivalent to a cable company with $100 million 
in annual revenues. To establish this equivalency, the Commission used 
a regression methodology to estimate the statistical relationship 
between companies' regulated revenue and their subscribership. 
(Regression analysis is a statistical technique used to estimate the 
value of a random variable (the dependent variable), given that the 
value of an associated variable (the independent variable) is known. 
The regression equation is the algebraic formula by which the estimated 
value of dependent variable (in this case, the number of subscribers 
associated with annual regulated revenue) is determined. Generally, the 
functional relationship between the independent variable and the 
dependent variable is expressed as:

y=f(x)+e (1)

where `y,' the value of the dependent variable (number of subscribers), 
is determined by `x,' the independent variable (annual revenue at MSO 
level). Random variable `e' is added to the algebraic formula to 
account for variables other than `x' that may influence the dependent 
variable. In the above functional relationship, since `e' is random, 
`y' is also random. It is possible to have different types of 
functional relationships between dependent and independent variables, 
e.g., linear or non-linear relationship. We assume that the dependent 
variable is linearly related to independent variable. Hence we can 
rewrite f(x) in equation (1) as:

f(x)=a+bx (2)

Based on the value of f(x) established in equation (1), equation (2) 
can be rewritten as:

y=a+bx+e (3)

Equation (3) represents a linear regression equation. In this equation, 
both `a' and `b' are ``unknown coefficients'' and are estimated by 
fitting a straight line using the `least-squares criterion'. By the 
least-squares criterion the best-fitting regression line is that for 
which the sum of the squared deviation between the actual and estimated 
values of the dependent variables for the sample is minimum. Our 
estimation of the relationship between subscribers and regulated 
revenues yielded:

y=120.597+(.004137097)*x

where y=company subscribership and x=company regulated revenues.) The 
data for this methodology were taken from the Warren Publishing Inc. 
cable services database mentioned above. According to this methodology, 
$100 million in annual regulated revenue is equivalent to 413,830 
subscribers. We have rounded the exact figure to 400,000 subscribers 
for the administrative convenience of operators, franchising 
authorities, and the Commission. SCBA also equates $100 million in 
annual revenues with approximately 400,000 subscribers, based on its 
data showing average per subscriber revenues of about $20 per month. In 
defining a small cable company, we conclude that it would be better to 
continue to rely on the total number of subscribers, rather than to 
rely on a revenue figure. A definition based on subscribers is simpler 
to apply and will avoid the need to allocate revenues between regulated 
and unregulated services. Furthermore, evidence suggests that operating 
challenges faced by small cable companies are closely tied to the 
number of subscribers served rather than the revenues they generate. In 
addition, a subscriber-based standard should provide cable companies 
with the maximum flexibility to add new services and new programming, 
thereby increasing revenues without losing the benefits of rate relief.
    11. At the same time, however, the Commission recognizes that a 
company's revenues will affect its ability to comply with significant 
regulatory responsibilities. As noted, in the common carrier field we 
have repeatedly used the standard of $100 million in annual revenues to 
allocate regulatory burdens. We believe that the impact of regulation 
on common carriers is similar to that imposed on cable companies. Small 
cable companies also must generate a minimum level of revenue in order 
to attract financing to upgrade their networks, to provide new 
programming to subscribers, and to introduce new services that are now 
being developed. Therefore, by targeting rate relief at small cable 
companies with 400,000 or fewer subscribers, we believe we will be 
assisting those companies earning $100 million or less in annual gross 
revenues to obtain financing needed to grow.
    12. We expect that 66% of all cable systems will meet the expanded 
definitions of a small system owned by a small cable company. These 
systems serve only about 12.1% of the nation's subscribers. 
Consequently, regulatory relief provided to these eligible systems will 
affect a majority of systems in the industry but a relatively small 
number of subscribers, thus limiting the overall impact of any rate 
changes that these new definitions permit. Nonetheless, we believe that 
the new definitions will not result in unreasonable rates for 
subscribers. Indeed, the new definitions constitute a needed refinement 
to the existing definitions and thereby create a better fit between the 
relief we have created for smaller entities and the class of systems 
that qualify for that relief.
    13. We have chosen to eliminate the existing definitions of a small 
operator and a small MSO because data made available to the Commission 
since adoption of the Second Order on Reconsideration, 59 FR 17943 
April 15, 1994 leads us to conclude that these categories were not 
broad enough to include all those operators and systems in need of rate 
and administrative relief. For example, SCBA asserts that only 16 
companies meet the definition of a small MSO. Moreover, the small cable 
industry and local franchising authorities generally state that they 
find the small operator and small MSO definitions confusing and 
difficult to understand and to implement. Therefore, the system, 
operator, and MSO size standards that currently define small operators 
and small MSOs will no longer be relevant, except for resolving certain 
pending disputes as discussed more particularly below.
    14. In urging the expansion of the class of systems eligible for 
small system relief, several commenters recommend that we revise the 
method by which system size is calculated. A small system is currently 
defined based on the number of subscribers served from its principal 
headend. A number of 

[[Page 35857]]
commenters argue that the Commission should amend the definition of a 
small system so that it is defined based upon the number of subscribers 
served in a franchise area. Under this approach, a cable company that 
served two franchise areas would be treated for rate regulation 
purposes as if it operated two separate systems, even if both franchise 
areas were in fact served by one set of integrated transmission paths 
running from a single headend. The arguments in favor of this change 
have been raised before in this proceeding and were rejected by the 
Commission as unpersuasive. We continue to believe that determining 
small system size based on a system's principal headend, best 
harmonizes our small system rate rules with most of our existing 
regulations on cable system size. For example, the existing exemptions 
for systems with 1,000 or fewer subscribers in the network non-
duplication, public inspection, and technical regulations are based on 
a system's headend rather than franchise area. To use a franchise area 
definition would result in some segments of a single integrated cable 
operation being subject to a different regulatory structure than other 
segments of the same operation. Therefore, we again reject commenters' 
suggestions and in expanding current definitions to include systems 
with 15,000 or fewer subscribers we shall base eligibility on the 
number of subscribers served from a system's principal headend.
    15. We recognize that establishing a numerical test can exclude 
some systems which may also be in need of rate relief. Therefore, we 
will entertain petitions for special relief from systems who fail to 
meet the new definitions but are able to demonstrate that they share 
relevant characteristics with qualifying systems and therefore should 
be entitled to the same regulatory treatment. Absent such an avenue, 
the regulatory treatment of two smaller, nearly identical systems could 
vary significantly merely because, for example, one is just under, and 
the other just over, 15,000 subscribers, or because the size of their 
respective owners varies by a few hundred subscribers. In considering 
such petitions, relevant factors will include the degree by which the 
system fails to satisfy either or both definition, whether the systems 
recently has been the subject of an acquisition or other transaction 
that substantially reduced its size or that of its operator, and 
evidence of increased costs (e.g., lack of programming or equipment 
discounts) faced by the operator. If the system fails to qualify for 
the small system definition because it is affiliated with a cable 
company that serves over 400,000 subscribers, we will consider the 
degree to which that affiliation exceeds our affiliation standards,\2\ 
and whether other attributes of the system warrant that it be treated 
as a small system notwithstanding the percentage ownership of the 
affiliate. Likewise, a qualifying system that seeks to obtain 
programming from a neighboring system by way of a fiber optic link, but 
that is concerned that interconnection of the two systems will 
jeopardize its status as a stand-alone small system, may file a 
petition for special relief to ask the Commission to find that it is 
eligible for small system relief. This is not an exhaustive list of the 
factors we will consider in reviewing petitions for special relief; 
operators may support their petitions with whatever information and 
arguments they deem relevant.

    \2\ A small system will be considered affiliated with a cable 
company serving more than 400,000 subscribers if such a company 
holds more than a 20 percent equity interest (active or passive) in 
the system or exercise du jure control (such as though a general 
partnership or majority voting shareholder interest). Where a larger 
company is so affiliated with the small system, we believe the 
system will have access to the resources it needs to grow as well as 
larger systems, and hence should not be in need of the relief we 
will accord to small systems that have no such access.
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B. Application of Existing Rate and Administrative Relief

    16. We have summarized above the steps we have taken previously to 
ease burdens on smaller systems and operators. We now address the 
eligibility of systems that have 15,000 or fewer subscribers and are 
owned by small cable companies to take advantage of these measures. We 
also initiate the gradual termination of transition relief for all but 
low-price systems.
    17. To qualify for any existing form of relief, systems and 
companies must meet the new size standards as of either the effective 
date of this order or on the date thereafter when they file whatever 
documentation is necessary to elect the relief they seek, at their 
election. In completing and filing that documentation, the system may 
use the most recent subscriber data available to it. A system that is 
eligible for small system relief on either of the dates described above 
shall remain eligible for so long as the system has 15,000 or fewer 
subscribers, regardless of a change in the status of the company that 
owns the system. Thus, a qualifying system will remain eligible for 
relief even if the company owning the system subsequently exceeds the 
400,000 subscriber cap. Likewise, a system that qualifies shall remain 
eligible for relief even if it is subsequently acquired by a company 
that serves a total of more than 400,000 subscribers. The ability to 
remain eligible for small system relief even after being acquired by a 
larger operator should increase the value of the system in the eyes of 
operators and, more importantly, lenders and investors. The enhanced 
value of the system thus will strengthen its viability and actually 
increase its ability to remain independent if it so chooses.
    18. In most instances, eligibility for small system relief will 
terminate after the system exceeds 15,000 subscribers. As discussed in 
the subsections that follow, the manner in which relief will be 
terminated when the system reaches this subscriber threshold will vary 
depending upon the type of relief at issue.
1. Transition Relief for Small Operators
    19. In the Second Order on Reconsideration, 59 FR 18064, April 15, 
1994, we stated that transition relief would be available pending the 
adoption of final rate rules. We adopt final rate rules in the 
accompanying Eleventh Order on Reconsideration. Therefore, we provide 
herein for the termination of transition relief. (This termination of 
transition relief shall affect only systems who qualify for that relief 
on the basis of size. Low-price systems shall remain eligible for 
transition relief as provided under the existing rules.) Systems 
currently operating under transition relief may continue to do so until 
two years from the effective date of this order. We establish this 
period to allow transition systems adequate time to plan for the 
conversion to some other form of regulation, rather than requiring an 
immediate conversion. Such a sudden shift would be disruptive not only 
to operators, but also to subscribers and franchising authorities who 
are now accustomed to their operators' regulatory status. Until the 
termination of transition relief, transition systems shall continue to 
adjust their transition rates in accordance with existing rules. 
However, systems need not wait the full two years to convert from 
transition relief. Thus, for example, a transition system may convert 
at any time by filing the documentation necessary to establish rates in 
accordance with our benchmark or cost-of-service rules.
    20. Unless the operator terminates its transition status sooner as 
described above, such relief shall terminate two years from the 
effective date of this item. By that date, a current transition system 
must have restructured its rates and satisfied all notice and filing 

[[Page 35858]]
requirements pursuant to either our benchmark or cost-of-service rules, 
the latter of which include the small system cost-of-service 
regulations adopted in the accompanying Eleventh Order on 
Reconsideration. However, these requirements will not apply if the 
transition system is subject to an alternative rate agreement in 
accordance with the Eighth Order on Reconsideration, 60 FR 14373, March 
17, 1995 as of the date transition relief ends.
    21. Transition relief shall remain available only to small systems 
that already are operating pursuant to that form of relief. In 
particular, satisfaction of the new system and company size definitions 
shall not qualify a system for transition relief. Moreover, no small 
system that first becomes subject to regulation hereafter shall be 
entitled to transition relief, including systems that satisfy our 
existing definition of a small operator. Nothing herein shall affect 
the applicability of transition relief to low-price systems.
2. Cost-of-Service
    22. Systems of 15,000 or fewer subscribers owned by small cable 
companies may now use FCC Form 1225 to justify higher rates through a 
cost-of-service showing. This ``short form'' reduces the number of 
reporting categories and involves fewer calculations. Qualifying 
systems that have not previously established rates in accordance with 
Form 1225 may do so on a prospective basis only. Upon exceeding 15,000 
subscribers, any system that has established rates based on Form 1225 
may continue to charge its then permitted rate and may adjust rates in 
accordance with all rules applicable to systems that have more than 
15,000 subscribers. We believe it unduly burdensome and disruptive to 
require operators to engage in the standard benchmark or cost-of-
service showing immediately upon passing the 15,000 subscriber 
threshold. This is particularly true in the case of cost-of-service 
systems since their permitted rates reflect their cost of debt, 
amortization schedules, and other items that will be established before 
the system reaches that threshold and will remain constant thereafter. 
Depriving Form 1225 filers of adjustments for inflation, external cost 
increases, and channel additions would be inconsistent with the form of 
relief elected by the operator. Of course, to make a cost-of-service 
showing after exceeding the 15,000 subscriber threshold, a system will 
have to use Form 1220.
3. 90-Day ``Grace Period''
    23. Systems serving 15,000 or fewer subscribers owned by small 
cable companies currently may avail themselves of the 90-day ``grace 
period'' after regulation begins in which to complete and file rate 
justifications, notify subscribers, and implement restructured rates. 
Thus, eligible systems are not required to establish rates and service 
offerings that comply with our rules for 90 days after the initial date 
of regulation, and they may take up to 60 days from the date of initial 
regulation to file necessary rate justification forms with their local 
franchising authority, or the Commission where appropriate. Qualifying 
systems must continue to give 30 days notice to subscribers prior to 
implementing rate and service changes. Additionally, eligible systems 
may make their initial basic tier rates, established in accordance with 
the Commission's revised rate regulations, effective on 30 days' notice 
without prior approval from their local franchising authority. If, upon 
subsequent examination of a rate justification, a local franchising 
authority or the Commission finds that the system has implemented rates 
in excess of the maximum permitted rate, refunds may be ordered in 
accordance with our regulations. If a system exceeds the 15,000-
subscriber threshold during a grace period that already is running, or 
if the first day of regulation is no more than 90 days after the system 
exceeds 15,000 subscribers, the system shall still be entitled to the 
full 90-day and 60-day periods described above, beginning with the 
initial date of regulation.
4. Streamlined Rate Reductions
    24. We will expand the category of systems eligible for streamlined 
rate reductions to include those serving 15,000 or fewer subscribers 
owned by a small cable company. Thus, eligible systems may choose to 
reduce each billed item of regulated cable service as of March 31, 1994 
by 14% as adjusted for subsequent changes in inflation, external costs, 
and channel additions and deletions. This will enable more systems to 
reduce administrative burdens because eligible systems choosing 
streamlined rate reductions are not required to complete FCC Forms 1200 
and 1205, unbundle equipment and installation charges from programming 
service charges, or set equipment and installation charges at actual 
cost. Qualifying systems may establish rates in accordance with this 
relief upon satisfaction of all notice and filing requirements. After 
reaching 15,000 subscribers, these systems will be able to make all 
rate adjustments permitted of any system with more than 15,000 
subscribers, including increases for inflation and external costs. 
Systems that have elected streamlined rate relief have set their 
initial permitted rates to reflect the full reduction rate, as adjusted 
for inflation. Therefore, these systems should be permitted to adjust 
rates hereafter to reflect subsequent increases in inflation and 
external costs even after exceeding 15,000 subscribers.
5. Going Forward Rules
    25. Systems of any size that are owned by small cable companies and 
that incur additional monthly per subscriber headend costs of one full 
cent or more for the addition of a channel may recover the flat mark-up 
fee for the new channel, plus the actual cost of the headend equipment 
necessary to add new channels, not to exceed $5,000 per channel, plus 
the channel's licensing fee, if any, for adding not more than seven new 
channels to CPS tiers over the next three years, if the monthly per 
subscriber cost of the additional headend equipment necessary to 
receive an additional channel is one cent or more. (We note that many 
of these systems already may have qualified for this small system 
going-forward relief even though they have in excess of 1,000 
subscribers pursuant to the Seventh Order on Reconsideration, 60 FR 
4863 (January 25, 1995), which makes the relief available to a system 
with more than 1,000 subscribers if the system is independent or owned 
by a MSO meeting the prior definition of a small MSO and if the monthly 
per subscriber cost of the additional headend equipment necessary to 
receive an additional channel is one cent or more.) The cost of the 
headend equipment must be amortized over the useful life of the 
equipment and small systems will be allowed an 11.25% return on the 
undepreciated investment. Qualifying systems may elect this relief only 
with respect to channels added after the effective date of this order. 
Of course, these systems also may offer New Product Tiers which they 
are permitted to price as they elect, subject to certain conditions. We 
note that under the existing rule, small systems owned by small MSOs, 
as those terms were originally defined, could take advantage of this 
headend upgrade incentive, even if they could not show that the 
additional monthly per subscriber headend cost of adding a channel was 
at least one cent. Under the new rule, a system must meet the ``one 
cent rule'' in order to qualify for this form of relief. 

[[Page 35859]]
In theory, our revision of the rule could take away this form of relief 
from systems of under 1,000 subscribers who cannot satisfy the one cent 
rule. In practice, however, this should not be the case, because the 
additional cost of headend equipment, when spread over no more than 
1,000 subscribers and depreciated reasonably, will always produce a per 
subscriber monthly cost of at least one cent. If we are incorrect in 
this conclusion, however, we will entertain petitions for special 
relief from systems that currently qualify for this form of relief but 
who would not qualify under the new rule.
6. Alternative Rate Regulation Agreements
    26. Systems of 15,000 or fewer subscribers owned by small cable 
companies will be given the opportunity to work certified local 
franchising authorities to create alternative rate regulation 
agreements in accordance with the Eighth Order on Reconsideration, 60 
FR 14373 (March 17, 1995). In expanding eligibility, we believe the 
benefits of alternative rate regulation agreements, i.e., reasonable 
rates and reduced regulatory burdens, will flow to a greater number of 
subscribers, cable systems, and local franchising authorities. An 
agreement made while the system has 15,000 or fewer subscribers shall 
be enforceable for the term provided in the agreement. Thus, the 
agreement shall not be terminable simply because the system 
subsequently exceeds 15,000 subscribers, unless the agreement itself 
provides for termination at that time.
7. Other Existing Relief
    27. Subject to approval of the franchising authority, any system 
meeting the new small system definition shall be permitted to certify 
that its rates are reasonable, regardless of the size of the operator. 
In addition, an operator of any size that owns more than one system 
with 15,000 or fewer subscribers may establish its unbundled charges 
for regulated equipment based on the average equipment costs of all 
such small systems, or only some of them, rather than a system-by-
system basis.

C. The Small Business Act

    28. The Commission does not believe the SBA size standards, to 
which federal agencies may be required to adhere under section 3 of the 
Small Business Act, are applicable to the Commission's definitions of 
small systems and small cable companies under the 1992 Cable Act. 
Section 3(a) of the Small Business Act provides that SBA size standards 
apply for the purposes of all legislation, unless the legislation 
specifically authorizes different size standards. The 1992 Cable Act in 
fact suggests one system size definition that the Commission may use as 
one with 1,000 or fewer subscribers. The Commission has implemented the 
statutory provision regarding small system relief in a more flexible 
manner than is explicitly mandated by the Cable Act and is now 
extending relief to additional systems. But this does not alter the 
fact that the Commission is implementing a statute with an explicit 
small business size standard. Therefore, section 3(a) of the Small 
Business Act is inapplicable. Section 3(a) is also inapplicable because 
the SBA defines a small-business concern as one ``which is not dominant 
in its field of operation.'' Cable systems subject to rate regulation 
are by definition dominant in their field of operation because they do 
not face effective competition.
    29. Moreover, even if the SBA rules defining a small cable system 
as one with $11 million or less in gross annual revenues were 
applicable, the definitions we are adopting today are designed to 
provide relief to such companies. This Order extends relief to cable 
companies with 400,000 or fewer subscribers, a standard we equate with 
$100 million in annual regulated revenues as advocated by SBA's Office 
of Advocacy. Thus, we believe that our standards are more protective of 
small businesses than is the $11 million dollar standard promulgated by 
the SBA. In any event, we are directing the Commission's Secretary to 
provide a copy of this order to the SBA.

IV. Eleventh Order on Reconsideration

    30. Having redefined the class of systems entitled to relief on the 
basis of system size, we here adopt expanded relief for such systems. 
Again, the system may establish its initial eligibility with respect to 
the system and company size limitations as of the effective date of 
this order or as of the date the system files the documentation 
necessary to seek the relief.
    31. In adopting transition relief, we stated that when cost studies 
were completed, we might make permanent, eliminate, or modify such 
relief for qualifying systems and operators. We also stated that when 
we develop average equipment cost schedules, we could terminate or 
modify our provisions for streamlined rate reductions. Finally, we gave 
notice that in our final cost proceeding, we may modify our 
requirements for cost showings by small systems.
    32. The comments received in response to the Further Notice of 
Proposed Rulemaking, 58 FR 29736, May 21, 1993, suggest that many 
smaller cable operators and companies have an immediate need for 
further relief from certain aspects of rate regulation currently 
applicable to them. Moreover, we believe that the data we already have 
accumulated is sufficient to design additional relief for those systems 
most in need. In such circumstances, we see no reason to impose on 
smaller systems the burdens and delay that a formal cost study would 
entail. Therefore, based on the comments received in this proceeding, 
and in light of other pending petitions for reconsideration, we 
reconsider on our own motion the Second Reconsideration Order, 58 FR 
46718, September 2, 1993, as it relates to rate regulation of smaller 
systems, and hereby make certain relief available to systems that have 
15,000 or fewer subscribers and that are owned by a small cable 
company, as we have now defined that term.
    33. As explained more fully below, eligible systems will be able to 
establish their permitted rates on the basis of an extremely simple 
formula that requires the operator to supply only five items of data: 
Total operating expenses, net rate base, rate of return, channel count 
and subscribers. These five items will be used in an easy formula that 
will generate a per-channel rate that will be presumed reasonable if it 
is no more than $1.24 per channel. To disapprove such a rate, the 
franchising authority will have the burden of showing that the cable 
operator did not reasonably interpret and allocate its cost and expense 
data in coming up with the operating expense, net rate base, and rate 
of return figures claimed by the operator in calculating its permitted 
rate. If the formula-generated rate exceeds $1.24, the burden will be 
on the operator to establish the reasonableness of its calculations, if 
the franchising authority elects to question the requested rate. The 
new optional mechanism will replace most other forms, used to compute 
rates, including FCC Form 1205. Equipment rates will be set to comply 
with 47 U.S.C. 623(b)(3). This new mechanism can be used by any 
qualifying company, regardless of what rate regulation methodology has 
been used to justify existing rates or an increase in rates.
    34. We adopt these measures partly in response to comments received 
pursuant to the Further Notice of Proposed Rulemaking which we have 
summarized in the preceding Sixth Report and Order. We will not repeat 
that summary here, except to note again that the comments indicate that 
smaller cable companies are unduly burdened 

[[Page 35860]]
by the current scheme of rate regulation in two ways. First, the 
comments suggest that our rate rules do not adequately take into 
account the higher costs of doing business, and particularly the higher 
costs of capital, faced by smaller companies. Second, many operators 
claim that our rules place an inordinate hardship upon them in terms of 
the labor and other resources that must be devoted to ensuring 
compliance. Such comments suggest that some operators may be facing the 
dilemma of desiring to impose rates that our cost-of-service rules may 
well permit, but at the same time being averse to risking the resources 
that a cost-of-service showing entails since they cannot be guaranteed 
that the showing will be successful. In crafting the relief we adopt 
today, we have attempted to alleviate both the substantive and the 
procedural burdens of which smaller cable companies complain.
    35. We are particularly sensitive to the motion that smaller 
systems face disproportionately higher costs. In adopting rate rules, 
the Commission is required to consider operator-specific cost data. 
Thus, any scheme we adopt must take into account the cost data of the 
individual operator and give the operator the opportunity to recover 
its actual, reasonable costs. To some extent, however, the inclusion of 
operator-specific data in our scheme of rate regulation conflicts with 
the goal of simplifying the regulatory process. Establishing permitted 
rates on the basis of precise and detailed data entails more work for 
the operator that must compile that information from its own records 
and reproduce it in accordance with whatever forms and formulas we 
devise. For example, we have estimated that it takes 60 hours to 
complete the simplified cost-of-service form, FCC Form 1225, which 
requires operators to provide substantial data regarding the costs 
incurred in operating the system. Such regulation also imposes a burden 
on regulatory authorities that must review the data. We note that in 
many cases small local franchising authorities have scarce resources to 
review complicated cost-of-service filings. Yet to the extent we lessen 
the regulatory burden on operators and franchising authorities by 
reducing the amount of data that must be assembled and reviewed to 
calculate permitted rates, we are also concerned that we have 
confidence that the operator's rates are reasonable.
    36. Having reviewed the criteria identified by Congress as being 
relevant to the establishment of rate regulations, we have created a 
formula for generating permitted rates that entails as small a burden 
as possible while still producing a rate that reflects with reasonable 
accuracy the operating costs and capital investments of the operator. 
The formula can be expressed as follows:
[GRAPHIC][TIFF OMITTED]TR12JY95.002

This formula is designed to establish the annual per-channel per-
subscriber revenue requirements of the regulated system. The formula 
permits a regulated cable company to set a per-channel per-subscriber 
rate that will both cover operating expenses and provide a reasonable 
return on investments. Such a recovery is necessary to guarantee the 
operator the opportunity to attract new capital, promote innovation, 
and cover all essential costs of operating a cable system. The new 
method can be used to justify existing rates, or establish new rates, 
regardless of what rate regulation has been used in the past. Operators 
may rely on previously existing information, such as tax forms or 
company financial statements, rather than recreating financial 
calculations.
    37. To ensure that the per-channel revenue requirement is 
reasonable, all operating costs must be covered. Therefore, wages, 
salaries, programming, advertising, electricity, maintenance, 
depreciation, amortization and all other relevant costs are included in 
the total operating expenses. This is not an exhaustive list, however, 
and operators may recover other reasonable and legitimate costs of 
provide service. As under our standard benchmark and cost-of-service 
regulations, when calculating operating expenses the operator must take 
into account only those expenses related to providing regulated 
channels. Congress specifically provided that regulation of rates for 
the basic service tier (``BST'') should take into account general 
operating costs only to the extent those costs are allocable to basic 
service. With respect to regulation of both BST and CPST rates, 
inclusion of costs related to unregulated services would distort the 
revenue requirement for the regulated channels and equipment, since 
there are no restrictions on the discretion of cable operators in 
establishing rates for unregulated services. More specifically, 
inclusion of costs related to the provision of unregulated services 
could result in those services being subsidized by revenues from 
regulated channels. Clearly, Congress did not intend such a result. 
However, to further our goal of minimizing regulatory burdens, we are 
granting small cable systems owned by small cable companies substantial 
flexibility to fairly allocate costs between BST, CPST, equipment and 
unregulated services. We further stress that, when the requested rate 
does not exceed $1.24 per channel, the burden will be on the 
franchising authority to show that the operator was unreasonable in 
making allocations such as these.
    38. The net rate base is included in the formula to reflect net 
investment. The net rate base consists of the depreciated value of 
property. It provides the proper basis for calculating a fair rate of 
return on investment. For the reasons stated in the preceding 
paragraph, only assets associated with providing regulated services may 
be included in the calculation of the net rate base. However, the 
operator shall have substantial flexibility in calculating its net rate 
base. The presumptions and restrictions applicable to standard cost-of-
service proceedings shall not apply. Thus, for example, we will not 
presume it unreasonable to include in the rate base start-up losses 
that exceed the first two years of operating expenses. Having isolated 
a category of systems for whom our standard rules need to be relaxed 
due to the particular characteristics of those systems, we seek to 
ensure that those systems will be permitted to establish rates in 
accordance with such characteristics, rather than in accordance with 
characteristics of cable systems generally.
    39. Likewise, we will not presumptively exclude intangibles such as 
acquisition costs from the net rate base. In the Cost Order, 59 FR 
17975 (April 15, 1994) we presumptively 

[[Page 35861]]
excluded acquisition costs for reasons that, again, were more 
applicable to cable systems as a whole than to the subset of systems at 
issue in this proceeding. For example, whereas we found that 
acquisition costs were attributable in part to the growing number of 
programs and channels available only by subscribing to cable service, 
the limited channel line-ups of smaller systems means that a greater 
portion of their offerings consist of broadcast channels that many 
consumers can view for free without subscribing to cable. Thus, the 
acquisition costs of a smaller system are less likely to include a 
supra-competitive valuation of services over which the system has 
exclusive control. Likewise, in the Cost Order, 59 FR 17975 (April 15, 
1995), we concluded that excess acquisition costs reflected, in part, 
the value of unregulated services, such as premium and pay-per-view 
programming, that should not be included in regulated rates. Smaller 
systems with more limited channel line-ups are less likely to have such 
programming available. As we noted above, the average premium revenue 
per subscriber is more than $32.00 less for systems with fewer than 
15,000 subscribers than for systems with more than 15,000 subscribers. 
Thus, acquisition costs for small systems will reflect more accurately 
the value of the regulated services, a value which the operator should 
be able to recover.
    40. At a minimum, the permitted rate of return shall equal the 
operator's actual cost of debt as set forth in any loan agreements with 
third parties. However, the operator may make reasonable adjustments to 
this rate to reflect other relevant factors such as, but not limited 
to, its cost of equity and its capital structure. The operator will 
have substantial discretion in determining the precise manner in which 
its rate of return is calculated. Thus, the operator will not be 
limited to the single methodology for establishing cost of equity that 
we identified in the Cost Order. We selected that methodology because 
it included a large group of publicly traded companies that we found to 
be representative of the universe of nonregulated firms. While such a 
sampling is an appropriate source of surrogates for regulated cable 
service generally, we believe that small systems owned by small cable 
companies should be able to pursue any methodology that is appropriate 
based on their individual characteristics. Likewise, operators will not 
be limited to the range of debt-to-equity ratios applicable in a 
standard cost-of-service showing, but instead may establish a system-
specific or assumed ratio. (Those systems that currently have a 
negative equity percentage could not achieve a reasonable rate of 
return using its actual debt/equity ratio. Therefore, these companies 
may use a reasonable assumed ratio.)
    41. Finally, eligible systems shall not face the heavy burden 
imposed on operators seeking rates of return higher than 11.25% in 
standard cost-of-service proceedings. On the basis of the comments in 
this proceeding, we now recognize that, of all cable companies, smaller 
systems and operators are the ones for whom this rate is most likely to 
be inadequate to compensate them for the risks they encounter in 
providing service. Therefore, for operators seeking to establish rates 
no higher than $1.24 per channel, the rate of return claimed by the 
operator will be subject to the same strong presumption of 
reasonableness that will apply to all other aspects of the operator's 
calculation of its permitted rate.
    42. Because it takes into account all operating expenses and the 
net rate base, the formula will generate a rate that covers the cost of 
providing all regulated services and all equipment necessary to receive 
those services. Thus, eligible systems will not be required to make a 
separate showing with respect to equipment. Operators may establish 
equipment rates in the manner they choose, so long as this results in 
equipment rates that comply with the 1992 Cable Act.
    43. To implement this scheme of rate regulation, we have created 
FCC Form 1230, a one-page form on which the system inserts its expense, 
rate base, rate of return, channel count and subscriber count figures 
and then calculates its permitted rate. The system can set rates at any 
level up to the rate generated by FCC Form 1230. Before increasing 
rates, the system must comply with the 30-day notice requirement 
applicable whenever a system takes a rate increase. In giving notice to 
the certified local franchising authority of its first rate increase 
taken pursuant to this procedure, the operator shall include the 
completed FCC Form 1230 showing the maximum permitted rate, although 
the system need not raise rates to the maximum permitted level. As 
noted above, when filing the form the system shall not be required to 
file documentation or calculations underlying the expense and rate base 
figures included on the form. Upon filing of the form, however, our 
existing rules, permitting a certified local franchising authority to 
review the proposed rates, to request additional information, and to 
toll the effective date of the proposed rates, will then apply, subject 
to certain conditions set forth below. Because Form 1230 is a modified 
cost-of-service showing, the franchising authority may toll the rate 
for up to 150 days.
    44. In view of our intent to minimize burdens upon operators, local 
franchising authorities, and the Commission, we urge franchising 
authorities to carefully limit their requests for information, should 
they deem it necessary to request further information upon the filing 
of Form 1230. We recognize that certified franchise authorities have a 
responsibility to protect consumers from the exercise of market power 
by cable operators and may have a legitimate need to request 
information to verify operators' rate requests. We believe that, 
particularly since operators have been given wide discretion in 
choosing methods of calculating operating costs, rate base, and rate of 
return, franchise authorities should have access to the information 
necessary for judging the validity of methods used for calculating 
these costs. With respect to requested rates not exceeding $1.24 per 
channel, a reasonable request for information, if deemed necessary at 
all, should seek only existing, relevant documents or other data 
compilations and should not require the operator to create documents, 
although the operator should replicate responsive documents that are 
missing or destroyed. Where the requested rate exceeds $1.24 per 
channel, a broader request for supporting documentation, and greater 
scrutiny of that documentation, will be permitted.
    45. In order to guard against burdensome and unnecessary data 
requests from franchising authorities, cable operators will be 
permitted to seek relief from the Commission. If a request for 
information by the franchising authority exceeds a reasonable scope as 
described above, or if the franchising authority tolls a rate 
request,\3\ the operator may file an interlocutory appeal requesting 
the Commission to quash the request. The appeal of a 

[[Page 35862]]
request for information or a rate suspension may be by an informal 
letter to the chief of the Cable Services Bureau rather than by way of 
a formal pleading. The appeal will be handled pursuant to the following 
expedited procedure. The franchising authority is required to respond 
to an interlocutory appeal in seven days; the cable operator's optional 
reply date is four days thereafter. The operator will not be required 
to respond to a franchising authority's request for information while 
an appeal is pending at the Commission. The Commission will resolve 
those appeals expeditiously.

    \3\ As noted above, small systems owned by small cable companies 
may make their initial basic tier rates, established in accordance 
with the Commission's rate regulations, effective on 30 days' notice 
without prior approval from their local franchising authority, 
subject to refund liability if the rates are found later to be 
unreasonable. Therefore, with respect to small systems owned by 
small cable companies, the tolling provision of our rules applies 
when a system seeks to increase rates above a level previously 
established pursuant to one of our regulatory schemes, but does not 
apply when a system establishes rates after first becoming subject 
to regulation.
---------------------------------------------------------------------------

    46. The operator may appeal a request for information or a tolling 
order even if its requested rate exceeds $1.24 per channel. However, 
where the requested rate is no more than $1.24 per channel, our review 
of the appeal will be guided by the presumption of reasonableness that 
will attach to rates not exceeding that amount and by our conception of 
what constitutes a reasonable request for information, as described 
above. A decision by the Commission to sustain an operator's 
interlocutory appeal will be accompanied by an order directing the 
franchising authority to issue the appropriate order based upon the 
documentation previously supplied by the operator. When appropriate, we 
will make informal attempts at mediation of such disputes.
    47. We have adopted the rate of $1.24 per channel for the purposes 
set forth above based on the 35 FCC Form 1220 cost-of-service filings 
that have been submitted by systems with 15,000 or fewer subscribers 
owned by what we have defined here as small cable companies. We expect 
to adjust this figure in the future to account for changes in the 
relevant economic data, such as inflation. Using the rate-setting 
formula that we hereby adopt, staff found that the subscriber-weighted 
average cost per channel for eligible systems that had filed FCC Form 
1220 amounted to $.93. Because this is an average figure, we know that, 
according to the data provided on the forms, a fair number of these 
Form 1220 filers would be entitled to rates exceeding $.93 per channel, 
presumably because of higher costs or recent capital improvements that 
justified a higher than average rate. Using the $.93 figure for 
purposes of establishing presumptions of reasonableness would have 
imposed an unfair burden on many systems for whom a higher rate is well 
justified. Therefore, one standard deviation was added to the $.93 per 
channel rate, producing a per channel rate of $1.24.\4\ We therefore 
believe that a strong presumption of reasonableness should attach to a 
rate at or below this level when established by an eligible operator. 
As noted above, to disapprove a rate that does not exceed $1.24 per 
channel, the burden will be upon the franchising authority to show that 
the cable operator did not reasonably interpret and allocate its cost 
and expense data in coming up with the operating expense, net rate 
base, and rate of return figures claimed by the operator in calculating 
its permitted rate.

    \4\ Standard deviation is a commonly used measure of 
variability. It measures the amount of variance from the average in 
a sample. The amount of variance is usually expressed in terms of 
one or more standard deviations from the average. One standard 
deviation, when applied to the average, generally will capture about 
two-thirds of the sample, e.g., in this case, two-thirds of eligible 
cable systems. Two standard deviations generally will capture about 
95% of the sample. In this case we selected one standard deviation 
as the appropriate measure. Thus, about one-third of eligible 
systems who file for this form of relief should have rates above the 
$1.24 threshold and will have the burden of justifying their rates.
    48. Once the operator has established rates at a level permitted by 
Form 1230, it may increase rates thereafter at its discretion until it 
reaches the maximum level permitted by the form, subject only to the 30 
days' notice requirement. Even though the operator is charging less 
than the maximum rate permitted by Form 1230, the operator may adjust 
that maximum rate. For example, an operator may adjust its maximum 
permitted rate to take account of inflation and increases in external 
costs. Likewise, when adding channels an operator may use the going-
forward methodology to adjust its maximum permitted rate. While making 
these adjustments to the maximum permitted rate, the operator 
simultaneously may, but need not, increase the actual rate charged. 
Thus, adjustments to the actual rate charged may be made independent of 
adjustments to the maximum rate permitted. As long as the actual rate 
does not exceed the maximum permitted rate, the operator may adjust its 
actual rate as and when it desires, subject to the notice requirement. 
In addition, at any time an operator may adjust its maximum permitted 
rate simply by filing a new Form 1230.
    49. Once the operator has established rates at the maximum level 
permitted by Form 1230, the operator will be able to increase its 
actual rate by adjusting its maximum permitted rate in accordance with 
our normal rules to reflect increases in inflation and external costs. 
When adding channels, an operator may establish its new rate by filing 
a new Form 1230 or by complying with the going forward rules.\5\ In 
determining the number of channels for which a small system owned by a 
small cable company may claim the alternative going-forward treatment 
that we adopted in the Sixth Reconsideration Order, 59 FR 62614 
(December 6, 1994) only those channels added after the system files its 
first Form 1230 shall be counted. Therefore, if an operator added 
channels under the alternative going-forward rules before filing its 
initial Form 1230, the previously added channels will not be counted 
against the maximum of seven channels that an operator may add for 
purposes of those rules. However, the filing of a second or subsequent 
Form 1230 shall not increase the number of channel additions qualifying 
for the alternative going-forward treatment.

    \5\ The operator must elect between the two forms of relief. 
Therefore, upon adding a channel, an operator may file a new Form 
1230 reflecting that channel addition, or elect going-forward 
treatment with respect to the new channel, but it cannot do both.
---------------------------------------------------------------------------

    50. The cable system and any other participant in the rate making 
proceeding at the franchising authority level may appeal to the 
Commission for review of the final decision of the franchising 
authority under our normal appellate procedure. If the rate decision is 
appealed by the operator, we first will review any challenged request 
for information that was not the subject of an interlocutory appeal by 
the operator. If, under the standards outlined above, we find no proper 
grounds for the request for information, we will have the ability to 
permit the operator to charge the requested rate without proceeding 
further. Thus, where the requested rate does not exceed $1.24, if a 
franchising authority denies the request on the basis of information 
that goes beyond the reasonable scope described above, we will reverse 
the rate decision. If the scope of information requested by the 
franchising authority is not at issue up on appeal of the final rate 
decision, the franchising authority will have the burden of proving the 
reasonableness of its decision to deny any requested rate that does not 
exceed $1.24, and the operator will have the burden of establishing the 
reasonableness of the requested rate if it exceeds that amount. Thus, 
we will look more closely at rates exceeding $1.24 per channel and, as 
noted above, will be less restrictive with respect to the permissible 
scope of information which the franchising authority may request and 
rely upon in determining the reasonableness of the rate. If we uphold a 
franchising authority decision to request further information, we will 

[[Page 35863]]
permit an operator to present its arguments as to why its rate is 
reasonable.
    51. Complaints regarding CPST rates will be resolved by the 
Commission, as required by the 1992 Cable Act. In reviewing CPST rates 
pursuant to a complaint, we will apply the same standard that is to be 
applied by a certified franchising authority when an operator files its 
Form 1230.
    52. A system's initial and continued eligibility for this new form 
of relief shall be determined in the same manner as any other relief 
now available to them. Thus, if a system qualifies for relief under 
this approach as of the effective date of this order or as of the date 
it files Form 1230, it shall remain eligible for so long as it serves 
15,000 or fewer subscribers, regardless of whether it, or the cable 
operator that owns the system, is subsequently acquired by a company 
that exceeds the 400,000 subscriber limit, or if its current operator 
subsequently exceeds 400,000 subscribers due to the normal growth of 
its systems. When a system that has established rates in accordance 
with Form 1230 exceeds 15,000 subscribers, the system may maintain its 
then existing rates. However, any further adjustments shall not reflect 
increases in external costs, inflation or channel additions until the 
system has re-established initial permitted rates in accordance with 
our benchmark or cost-of-service rules. Such a system may file a 
petition for special relief seeking continued treatment as a small 
system.
    53. Finally, we must address the applicability of this new form of 
relief to pending matters. We have little reason to question those 
commenters who contend that our existing rules have significantly 
burdened small systems. Accordingly, we will direct franchising 
authorities to permit systems to use the small system cost-of-service 
approach to justify rates in any proceeding that is pending as of the 
date this item is released, using data that was accurate as of the time 
the rates were charged. To apply the small cable system cost-of-service 
relief to a pending case, the system must show that it met the new 
definitions of a small system owned by a small cable company as of the 
date this item is released and as of the period during which the 
disputed rates were in effect. Our adoption of this new form of relief 
shall not affect the validity of a final rate decision made by a 
franchising authority before the release date of this item. If such a 
decision is appealed to the Commission, we will review the decision in 
accordance with the rules that were in effect at the time the rates 
were charged and the decision was made. We believe that the interests 
of administrative finality warrant this treatment of cases already 
decided by a final decision of the franchising authority.
    54. In any proceeding before the Commission involving a CPST 
complaint in which a final decision had not been issued as of the 
release date of this item, a small system owned by a small cable 
company may elect the form of rate regulation set forth in this section 
to justify rates charged prior to the adoption of this rule and to 
establish new rates. This approach will apply regardless of the current 
phase of the proceedings. Thus, a small system owned by a small cable 
company may file its Form 1230 to oppose a CPST rate complaint, to 
support a timely petition for reconsideration of a previous Bureau or 
Commission decision regarding a CPST complaint, or to support a 
petition for Commission review of a Bureau decision regarding a CPST 
complaint. As with cases pending before franchising authorities, to 
apply the small cable system cost-of-service relief to a case currently 
pending before the Commission, the system must show that it met the new 
definitions of a small system owned by a small cable company as of the 
date this item is released and as of the period during which the 
disputed rates were in effect.

V. Regulatory Flexibility Analysis

    55. Pursuant to the Regulatory Flexibility Act of 1980, 5 U.S.C. 
601-12, the Commission's final analysis with respect to the Sixth 
Report and Order and Eleventh Order on Reconsideration is as follows:
    56. Need and purpose of this action: The Commission, in compliance 
with section 3(i) of the Cable Television Consumer Protection and 
Competition Act of 1992 pertaining to rate regulation, adopts rules and 
procedures intended to ensure cable subscribers of reasonable rates for 
cable services with minimum regulatory and administrative burden on 
cable entities.
    57. Summary of issues raised by the public comments in response to 
the Initial Regulatory Flexibility Analysis: There were no comments 
submitted in response to the Initial Regulatory Flexibility Analysis 
contained in the Further Notice of Proposed Rulemaking. The Chief 
Counsel for Advocacy of the United States Small Business Administration 
filed comments in the original rulemaking order. The Commission 
addressed these comments in the Rate Order. The Chief Counsel for 
Advocacy of the United States Small Business Administration also filed 
comments in response to the Further Notice of Proposed Rulemaking. 
Those comments are addressed herein.
    58. Significant alternatives considered and rejected. Petitioners 
representing cable interests and franchising authorities submitted 
several alternatives aimed at minimizing administrative burdens. The 
Commission responded to these comments in this order which will 
significantly reduce the burdens on small cable systems and small cable 
companies.

VI. Paperwork Reduction Act

    59. The requirements adopted herein have been analyzed with respect 
to the Paperwork Reduction Act of 1980 and found to impose new or 
modified information collection requirements 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.

VII. Ordering Clauses

    60. Accordingly, it is ordered that, pursuant to sections 4(i), 
4(j), 303(r), 612, and 623 of the Communications Act of 1934, as 
amended, 47 U.S.C. 154(i), 154(j), 303(r), 532, and 543 the rules, 
requirements and policies discussed in this Sixth Report and Order and 
Eleventh Order on Reconsideration are adopted and Sec. 76.934 of the 
Commission's rules, 47 CFR 76.934, is amended as set forth below.
    61. It is further ordered that the Secretary shall send a copy of 
this Order to the Chief Counsel for Advocacy of the United States Small 
Business Administration.
    62. It is further ordered that, the requirements and regulations 
established in this decision shall become effective upon approval by 
the Office of Management and Budget of the new information collection 
requirements adopted herein, but no sooner than thirty (30) days after 
publication in the Federal Register.

List of Subjects in 47 CFR Part 76

    Cable television.

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

Amendatory Text

PART 76--CABLE TELEVISION SERVICE

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

[[Page 35864]]

    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, 1083, 1084, 1085, 1101; 47 U.S.C. 
152, 153, 154, 301, 303, 307, 308, 309; secs. 612, 614-15, 623, 632 
as amended, 106 Stat. 1460, 47 U.S.C. 532; sec. 623, as amended, 106 
Stat. 1460; 47 U.S.C. 532, 533, 535, 543, 552.

    2. Section 76.901 is amended by revising paragraphs (c) and adding 
paragraph (e) to read as follows:


Sec. 76.901  Definitions.

* * * * *
    (c) Small System. A small system is a cable television system that 
serves 15,000 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.
* * * * *
    (e) Small cable company. A small cable company is a cable 
television operator that serves a total of 400,000 or fewer subscribers 
over one or more cable systems.
    3. Section 76.922 is amended by revising paragraphs (b)(4), 
(b)(4)(i), (b)(4)(ii), (b)(5)(i)(A), (b)(5)(i)(B), (b)(5)(i)(C) and 
(e)(7) to read as follows:


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

* * * * *
    (b) * * *
    (4) Transition rates.--(i) Termination of transition relief for 
systems other than low price systems. Systems other than low-price 
systems that already have established a transition rate as of the 
effective date of this rule may maintain their current rates, as 
adjusted under the price cap requirements of Sec. 76.922(d), until two 
years from the effective date of this rule. These systems must begin 
charging reasonable rates in accordance with applicable rules, other 
than transition relief, no later than that date.
    (ii) Low-price systems. Low price systems shall be eligible to 
establish a transition rate for a tier, pending a further order of the 
Commission.
    (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 Sec. 76.922(b)(2), above.
    (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 
Sec. 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 Sec. 76.923 if such rates have not already been 
established.
* * * * * *
    (5) * * *
    (i) * * *
    (A) Small systems that are owned by small cable companies and 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 systems 
owned by small cable companies 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 has a 
20 percent or greater equity interest in the small system.
    (B) 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:
    (1) Adoption of a further order by the Commission establishing a 
schedule of average equipment costs;
    (2) The system increases its rates using the calculations and time 
periods set forth in FCC Form 1211; or
    (3) The system elects to establish permitted rates under another 
available option set forth in paragraph (b)(1) of this section.
    (C) 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:
    (1) Within 60 days from the date it receives the initial notice of 
regulation from the franchising authority or the Commission, the small 
system must provide written notice to subscribers and the franchising 
authority, or to the Commission if the Commission is regulating the 
basic tier, that it is electing to set its regulated rates by the 
streamlined rate reduction process. 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 or Commission.
    (2) If a cable programming services complaint is filed against the 
system, the system must provide the required written notice, described 
in paragraph (b)(5)(iii)(C)(1) of this section, to subscribers, the 
local franchising authority or the Commission within 60 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.
    (3) 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.
* * * * *
    (e) * * *
    (7) Headend upgrades. When adding channels to CPSTs and single-tier 
systems, cable systems that are owned by a small cable company and 
incur additional monthly per subscriber headend costs of one full cent 
or more for an additional channel 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 

[[Page 35865]]
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 
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, and the level of costs they have 
actually incurred for adding the headend equipment and the depreciation 
schedule for the equipment.
* * * * *
    3. Section 76.924 is amended by revising paragraph (d) to read as 
follows:
Sec. 76.924  Cost accounting and cost allocation requirements.

* * * * *
    (d) Summary accounts. (1) Cable operators filing for cost-of-
service regulation, other than small systems owned by small cable 
companies, shall report all investments, expenses, and revenue and 
income adjustments accounted for at the franchise, system, regional 
and/or company level(s) to the summary accounts listed below.

Ratebase

Net Working Capital
Headend
Trunk and Distribution Facilities
Drops
Customer Premises Equipment
Construction/Maintenance Facilities and Equipment
Programming Production Facilities and Equipment
Business Offices Facilities and Equipment
Other Tangible Assets
Accumulated Depreciation
Plant Under Construction
Organization and Franchise Costs
Subscriber Lists
Capitalized Start-up Losses
Goodwill
Other Intangibles
Accumulated Amortization
Deferred Taxes

Operating Expenses

Cable Plant Employee Payroll
Cable Plant Power Expense
Pole Rental, Duct, Other Rental for Cable Plant
Cable Plant Depreciation Expense
Cable Plant Expenses--Other
Plant Support Employee Payroll Expense
Plant Support Depreciation Expense
Plant Support Expense--Other
Programming Activities Employee Payroll
Programming Acquisition Expense
Programming Activities Depreciation Expense
Programming Expense--Other
Customer Services Expense
Advertising Activities Expense
Management Fees
General and Administrative Expenses
Selling General and Administrative Depreciation Expenses
Selling General and Administrative Expenses--Other
Amortization Expense--Franchise and Organizational Costs
Amortization Expense--Customer Lists
Amortization Expense--Capitalized Start-up Loss
Amortization Expense--Goodwill
Amortization Expense--Other Intangibles
Operating Taxes
Other Expenses (Excluding Franchise Fees)
Franchise Fees
Interest on Funded Debt
Interest on Capital Leases
Other Interest Expenses

Revenue and Income Adjustments

Advertising Revenues
Other Cable Revenue Offsets
Gains and Losses on Sale of Assets
Extraordinary Items
Other Adjustments

    (2) Except as provided in Sec. 76.934(h), small systems owned by 
small cable companies that file for cost-of-service regulation shall 
report all investments, expenses, and revenue and income adjustments 
accounted for at the franchise, system, regional and/or company 
level(s) to the following summary accounts:
Ratebase

Net Working Capital
Headend, Trunk and Distribution System and Support Facilities and 
Equipment
Drops
Customer Premises Equipment
Production and Office Facilities, Furniture and Equipment
Other Tangible Assets
Accumulated Depreciation
Plant Under Construction
Goodwill
Other Intangibles
Accumulated Amortization
Deferred Taxes

Operating Expenses

Cable Plant Maintenance, Support and Operations Expense
Programming Production and Acquisition Expense
Customer Services Expense
Advertising Activities Expense
Management Fees
Selling, General and Administrative Expenses
Depreciation Expense
Amortization Expense--Goodwill
Amortization Expense--Other Intangibles
Other Operating Expense (Excluding Franchise Fees)
Franchise Fees
Interest Expense

Revenue and Income Adjustments

Advertising Revenues
Other Cable Revenue Offsets
Gains and Losses on Sale of Assets
Extraordinary Items
Other Adjustments
* * * * *
    4. Section 76.934 is revised to read as follows:


Sec. 76.934  Small systems and small cable companies.

    (a) For purposes of rules governing the reasonableness of rates 
charged by small systems, the size of a system or company shall be 
determined by reference to its size as of the date the system files 
with its franchising authority or the Commission the documentation 
necessary to qualify for the relief sought or, at the option of the 
company, by reference to system or company size as of the effective 
date of this paragraph. Where relief is dependent upon the size of both 
the system and the company, the operator must measure the size of both 
the system and the company as of the same date. A small system shall be 
considered affiliated with a cable company if the company holds a 20 
percent or greater equity interest in the system or exercises de jure 
control over the system.
    (b) A franchising authority that has been certified, pursuant to 
Sec. 76.910, to regulate rates for basic service and associated 
equipment may permit a small system as defined in Sec. 76.901 to 
certify that the small system's rates for basic service and associated 
equipment comply with Sec. 76.922, the Commission's substantive rate 
regulations.
    (c) 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.
    (d) Statutory period for filing initial complaint: A complaint 
concerning a 

[[Page 35866]]
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.
    (e) 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.
    (f) Small systems owned by small cable companies: Small systems 
owned by small cable companies shall have 90 days from their initial 
date of regulation on a tier to bring their rates for that tier into 
compliance with the requirements of Secs. 76.922 and 76.923. Such 
systems shall have sixty days from the initial date of regulation to 
file FCC Forms 1200, 1205, 1210, 1211, 1215, 1220, 1225, and 1230 and 
any similar forms as appropriate. Rates established during the 90-day 
period shall not be subject to prior approval by franchising 
authorities or the Commission, but shall be subject to refund pursuant 
to Secs. 76.942 and 76.961.
    (g) Alternative rate regulation agreements:
    (1) Local franchising authorities, certified pursuant to 
Sec. 76.910, and small systems owned by small cable companies may enter 
into alternative rate regulation agreements affecting the basic service 
tier and the cable programming service tier.
    (i) Small systems must file with the Commission a copy of the 
operative alternative rate regulation agreement within 30 days after 
its effective date.
    (ii) [Reserved]
    (2) Alternative rate regulation agreements affecting the basic 
service tier shall take into account the following:
    (i) The rates for cable systems that are subject to effective 
competition;
    (ii) The direct costs of obtaining, transmitting, and otherwise 
providing signals carried on the basic service tier, including signals 
and services carried on the basic service tier, pursuant to Secs. 76.56 
and 76.64 of this subpart, and changes in such costs;
    (iii) Only such portion of the joint and common costs of obtaining, 
transmitting, and otherwise providing such signals as is determined to 
be reasonably and properly allocable to the basic service tier, and 
changes in such costs;
    (iv) The revenues received by a cable operator from advertising 
from programming that is carried as part of the basic service tier or 
from other consideration obtained in connection with the basic service 
tier;
    (v) The reasonably and properly allocable portion of any amount 
assessed as a franchise fee, tax, or charge of any kind imposed by any 
State or local authority on the transactions between cable operators 
and cable subscribers or any other fee, tax, or assessment of general 
applicability imposed by a governmental entity applied against cable 
operators or cable subscribers;
    (vi) Any amount required to satisfy franchise requirements to 
support public, educational, or governmental channels or the use of 
such channels or any other services required under the franchise; and
    (vii) A reasonable profit. The rate agreed to in such an 
alternative rate regulation agreement shall be deemed to be a 
reasonable rate.
    (3) Alternative rate regulation agreements affecting the cable 
programming service tier shall take into account, among other factors, 
the following:
    (i) The rates for similarly situated cable systems offering 
comparable cable programming services, taking into account similarities 
in facilities, regulatory and governmental costs, the number of 
subscribers, and other relevant factors;
    (ii) The rates for cable systems, if any, that are subject to 
effective competition;
    (iii) The history of the rates for cable programming services of 
the system, including the relationship of such rates to changes in 
general consumer prices;
    (iv) The rates, as a whole, for all the cable programming, cable 
equipment, and cable services provided by the system, other than 
programming provided on a per channel or per program basis;
    (v) Capital and operating costs of the cable system, including the 
quality and costs of the customer service provided by the cable system; 
and
    (vi) The revenues received by a cable operator from advertising 
from programming that is carried as part of the service for which a 
rate is being established, and changes in such revenues, or from other 
considerations obtained in connection with the cable programming 
services concerned. The rate agreed to in such an alternative rate 
regulation agreement shall be deemed to be a reasonable rate.
    (4) Certified local franchising authorities shall provide a 
reasonable opportunity for consideration of the views of interested 
parties prior to finally entering into an alternative rate regulation 
agreement.
    (5) A basic service rate decision by a certified local franchising 
authority made pursuant to an alternative rate regulation agreement may 
be appealed by an interested party to the Commission pursuant to 
Sec. 76.944 as if the decision were made according to Secs. 76.922 and 
76.923.
    (h) Small system cost-of-service showings:
    (1) At any time, a small system owned by a small cable company may 
establish new rates, or justify existing rates, for regulated program 
services in accordance with the small cable company cost-of-service 
methodology described below.
    (2) The maximum annual per subscriber rate permitted initially by 
the small cable company cost-of-service methodology shall be calculated 
by adding
    (i) The system's annual operating expenses to
    (ii) The product of its net rate base and its rate of return, and 
then dividing that sum by (iii) the product of
    (A) The total number of channels carried on the system's basic and 
cable programming service tiers and
    (B) The number of subscribers. The annual rate so calculated must 
then be divided by 12 to arrive at a monthly rate.
    (3) The system shall calculate its maximum permitted rate as 
described in paragraph (b) of this section by completing Form 1230. The 
system shall file Form 1230 as follows:
    (i) Where the franchising authority has been certified by the 
Commission to regulate the system's basic service tier rates, the 
system shall file Form 1230 with the franchising authority.
    (ii) Where the Commission is regulating the system's basic service 
tier rates, the system shall file Form 1230 with the Commission.
    (iii) Where a complaint about the system's cable programming 
service rates is filed with the Commission, the system shall file Form 
1230 with the Commission.
    (4) In completing Form 1230:
    (i) The annual operating expenses reported by the system shall 
equal the system's operating expenses allocable to its basic and cable 
programming service tiers for the most recent 12 month 

[[Page 35867]]
period for which the system has the relevant data readily available, 
adjusted for known and measurable changes occurring between the end of 
the 12 month period and the effective date of the rate. Expenses shall 
include all regular expenses normally incurred by a cable operator in 
the provision of regulated cable service, but shall not include any 
lobbying expense, charitable contributions, penalties and fines paid 
one account of statutes or rules, or membership fees in social service, 
recreational or athletic clubs or associations.
    (ii) The net rate base of a system is the value of all of the 
system's assets, less depreciation.
    (iii) The rate of return claimed by the system shall reflect the 
operator's actual cost of debt, its cost of equity, or an assumed cost 
of equity, and its capital structure, or an assumed capital structure.
    (iv) The number of subscribers reported by the system shall be 
calculated according to the most recent reliable data maintained by the 
system.
    (v) The number of channels reported by the system shall be the 
number of channels it has on its basic and cable programming service 
tiers on the day it files Form 1230.
    (vi) In establishing its operating expenses, net rate base, and 
reasonable rate of return, a system may rely on previously existing 
information such as tax forms or company financial statements, rather 
than create or recreate financial calculations. To the extent existing 
information is incomplete or otherwise insufficient to make exact 
calculations, the system may establish its operating expenses, net rate 
base, and reasonable rate of return on the basis of reasonable, good 
faith estimates.
    (5) After the system files Form 1230, review by the franchising 
authority, or the Commission when appropriate, shall be governed by 
Sec. 76.933, subject to the following conditions.
    (i) If the maximum rate established on Form 1230 does not exceed 
$1.24 per channel, the rate shall be rebuttably presumed reasonable. To 
disallow such a rate, the franchising authority shall bear the burden 
of showing that the operator did not reasonably interpret and allocate 
its cost and expense data in deriving its annual operating expenses, 
its net rate base, and a reasonable rate of return.
    (ii) In the course of reviewing Form 1230, a franchising authority 
shall be permitted to obtain from the cable operator the information 
necessary for judging the validity of methods used for calculating its 
operating costs, rate base, and rate of return. If the maximum rate 
established in Form 1230 does not exceed $1.24 per channel, any request 
for information by the franchising authority shall be limited to 
existing relevant documents or other data compilations and should not 
require the operator to create documents, although the operator should 
replicate responsive documents that are missing or destroyed.
    (iii) A system may file with the Cable Services Bureau an 
interlocutory appeal from any decision by the franchising authority 
requesting information from the system or tolling the effective date of 
a system's proposed rates. The appeal may be made by an informal letter 
to the Chief of the Cable Services Bureau, served on the franchising 
authority. The franchising authority must respond within seven days of 
its receipt of the appeal and shall serve the operator with its 
response. The operator shall have four days from its receipt of the 
response in which to file a reply, if desired. If the maximum rate 
established on Form 1230 does not exceed $1.24 per channel, the burden 
shall be on the franchising authority to show the reasonableness of its 
order. If the maximum rate established on Form 1230 exceeds $1.24 per 
channel, the burden shall be on the operator to show the 
unreasonableness of the order.
    (iv) In reviewing Form 1230 and issuing a decision, the franchising 
authority shall determine the reasonableness of the maximum rate 
permitted by the form, not simply the rate which the operator intends 
to establish.
    (v) A final decision of the franchising authority with respect to 
the requested rate shall be subject to appeal pursuant to Sec. 76.944. 
The filing of an appeal shall stay the effectiveness of the final 
decision pending the disposition of the appeal by the Commission. An 
operator may bifurcate its appeal of a final rate decision by initially 
limiting the scope of the appeal to the reasonableness of any request 
for information made by the franchising authority. The operator may 
defer addressing the substantive rate-setting decision of the 
franchising authority until after the Commission has ruled on the 
reasonableness of the request for information. At its option, the 
operator may forego the bifurcated appeal and address both the request 
for documentation and the substantive rate-setting decision in a single 
appeal. When filing an appeal from a final rate-setting decision by the 
franchising authority, the operator may raise as an issue the scope of 
the request for information only if that request was not approved by 
the Commission on a previous interlocutory appeal by the operator.
    (6) Complaints concerning the rates charged for a cable programming 
services tier by a system that has elected the small cable company 
cost-of-service methodology may be filed pursuant to Sec. 76.957. Upon 
receipt of a complaint, the Commission shall review the system's rates 
in accordance with the standards set forth above with respect to basic 
tier rates.
    (7) Unless otherwise ordered by the franchising authority or the 
Commission, the system may establish its per channel rate at any level 
that does not exceed the maximum rate permitted by Form 1230, provided 
that the system has given the required written notice to subscribers. 
If the system establishes its per channel rate at a level that is less 
than the maximum amount permitted by the form, it may increase rates at 
any time thereafter to the maximum amount upon providing the required 
written notice to subscribers.
    (8) After determining the maximum rate permitted by Form 1230, the 
system may adjust that rate in accordance with this paragraph. Electing 
to adjust rates pursuant to one of the options set forth below shall 
not prohibit the system from electing a different option when adjusting 
rates thereafter. The system may adjust its maximum permitted rate 
without adjusting the actual rate it charges subscribers.
    (i) The system may adjust its maximum permitted rate in accordance 
with the price cap requirements set forth in Sec. 76.922(d).
    (ii) The system may adjust its maximum permitted rate in accordance 
with the requirements set forth in Sec. 76.922(e) for changes in the 
number of channels on regulated tiers. For any system that files Form 
1230, no rate adjustments made prior to the effective date of this rule 
shall be charged against the system's Operator's Cap and License 
Reserve Fee described in Sec. 76.922(e)(3).
    (iii) The system may adjust its maximum permitted rate by filing a 
new Form 1230 that permits a higher rate.
    (iv) The system may adjust its maximum permitted rate by complying 
with any of the options set forth in Sec. 76.922(b)(1) for which it 
qualifies or under an alternative rate agreement as provided in 
paragraph (g) of this section.
    (9) In any rate proceeding before a franchising authority in which 
a final decision had not been issued as of June 5, 1995, a small system 
owned by a small cable company may elect the form of rate regulation 
set forth in this section to justify the rates that are the subject of 

[[Page 35868]]
the proceeding, if the system and affiliated company were a small 
system and small company respectively as of the effective date of this 
rule and as of the period during which the disputed rates were in 
effect. This rule shall not affect the validity of a final rate 
decision made by a franchising authority before June 5, 1995.
    (10) In any proceeding before the Commission involving a cable 
programming services tier complaint in which a final decision had not 
been issued as of June 5, 1995, a small system owned by a small cable 
company may elect the form of rate regulation set forth in this section 
to justify rates charged prior to the adoption of this rule and to 
establish new rates. For purposes of this paragraph, a decision shall 
not be deemed final until the operator has exhausted or is time-barred 
from pursuing any avenue of appeal, review, or reconsideration.


Sec. 76.953  [Amended]

    5. Section 76.953 is amended by removing paragraph (a) and 
redesignating paragraphs (b) and (c) as paragraphs (a) and (b) 
respectively.

[FR Doc. 95-16515 Filed 7-11-95; 8:45 am]
BILLING CODE 6712-01-M