[Federal Register Volume 62, Number 61 (Monday, March 31, 1997)]
[Rules and Regulations]
[Pages 15118-15121]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-7976]


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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 76

[MM Docket No. 92-266; FCC 97-87]


Low-Price Cable Television System Rate Regulation

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: The Commission has adopted a Report and Order regarding low-
price system rate regulation. The Report and Order makes permanent the 
transition relief afforded to low-price cable television systems, and 
establishes final rules for low-price system rate regulation. Based on 
data received in a cost survey conducted in the Fall of 1995, the 
Report and Order finds that low-price system operators have lower cash 
flow ratios and receive lower profit margins for their low-price 
systems than operators of systems already regulated under the 
Commission's revised benchmark approach receive for their systems. The 
Report and Order, therefore, states that low-price system rates are 
reasonable and that low-price systems will not be required to reduce 
their rates by the full competitive differential or any lesser amount. 
Low-price systems will be able to continue charging for cable services 
in accordance with the current rules for such systems.

EFFECTIVE DATE: April 30, 1997.

ADDRESSES: In addition to filing comments with the Secretary, a copy of 
any comments on the information collections contained herein should be 
submitted to Dorothy Conway, Federal Communications Commission, Room 
234, 1919 M Street, NW., Washington, DC 20554, or via the Internet to 
[email protected], and to Timothy Fain, OMB Desk Officer, 10236 NEOB, 
725--17th Street, NW., Washington, DC 20503 or via the Internet to 
[email protected].

FOR FURTHER INFORMATION CONTACT: Rodney McDonald, Cable Services 
Bureau, (202) 418-7200. For additional information concerning the 
information collections contained in the Report and

[[Page 15119]]

Order, contact Dorothy Conway at (202) 418-0217, or via the Internet at 
[email protected].

SUPPLEMENTARY INFORMATION: The main text of this decision is included 
below. The full text of this decision is available for inspection and 
copying during normal business hours in the FCC Reference Center (Room 
239), 1919 M Street, NW., Washington, DC 20554, and may be purchased 
from the Commission's copy contractor, International Transcription 
Services, Inc. (202) 857-3800, 1919 M Street, NW., Washington, DC 
20554.

I. Introduction

    1. In this Report and Order, we terminate the transition status of 
low-price systems and establish final rules for low-price system rate 
regulation pursuant to the provisions of the Cable Television 
Competition and Consumer Protection Act of 1992, Public Law 102-385, 
106 Stat. 1460 (1992), 47 U.S.C. 521 et seq. (``1992 Cable Act''). We 
rely on the results of our cost survey in particular, to determine 
whether low-price systems should be required to reduce their rates by 
the full competitive differential or any lesser amount.

II. Background

    2. In the Report and Order and Further Notice of Proposed 
Rulemaking in MM Docket No. 92-266, FCC 93-177, 58 FR 29736 (May 21, 
1993) (``Rate Order''), the Commission found that ``our initial effort 
to regulate rates for cable service should provide for reductions from 
current rates of regulated cable systems with rates above competitive 
levels.'' In order to simulate the rates that would be charged by 
comparable cable systems subject to effective competition, we adopted a 
``benchmark'' approach to regulate the basic service tier and the cable 
programming services tier of systems not subject to effective 
competition. The initial benchmark formula was primarily derived by 
examining cable operator's revenues. The formula reflected an implicit 
assumption that all cable operators faced similar cost conditions, but 
it took into account variations in rates due to certain other economic 
and demographic factors. Our initial analysis revealed that the ``rates 
of systems not subject to effective competition (were), on average, 
approximately 10 percent higher than rates of comparable systems 
subject to effective competition.'' This 10% competitive differential 
was incorporated into the benchmark system, and noncompetitive systems 
whose rates exceeded the benchmark were deemed to be charging 
unreasonable rates. These systems were thus required to reduce their 
rates, at most by the full 10% competitive differential, but not below 
the benchmark.
    3. In the Second Order on Reconsideration, Fourth Report and Order, 
and Fifth Notice of Proposed Rulemaking in MM Docket No. 92-266, FCC 
94-38, 59 FR 17943 and 59 FR 18064 (April 15, 1994) (``Second Order on 
Reconsideration''), the Commission adopted a 17% competitive 
differential based on a revised analysis of its early competitive 
survey of the cable industry; it concluded that the 17% differential 
determined by the revised model more accurately estimated the 
difference between effectively competitive and noncompetitive cable 
rates than the ten percent differential established in the Rate Order. 
The Commission recognized, however, that the rates developed under this 
revised benchmark approach might not be appropriate for all cable 
systems. The competitive survey used to establish the new benchmark 
approach included several cost-related variables, but we remained 
concerned that our analysis may have failed to identify unusual cost 
influences that might indicate whether a system was charging 
unreasonable rates. In particular, the Commission identified two types 
of systems, small systems and low-price systems, that appeared to 
exhibit significantly different prices and costs from most other cable 
systems based on the initial data gathered. The Commission granted 
transition relief to small systems and low-price systems finding that 
these systems would not be required to use the new benchmark approach 
until the Commission gathered further data regarding their particular 
price/cost profiles. We defined low-price systems as ``(i) systems 
whose March 31, 1994 rates are at (or) below the revised benchmark and 
(ii) systems whose March 31, 1994 rates are above the benchmark but 
whose permitted rates are at or below the benchmark.'' Pending this 
determination, low-price systems were placed in a ``transition'' status 
and were subject to ``transition relief'' as ``transition systems.''
    4. The Commission established an alternate approach to rate 
regulation for transition systems pending completion of our price/cost 
analysis. During the transition period, low-price systems having March 
31, 1994 rates below the new benchmark were not required to reduce 
their rates at all. Low-price systems having March 31, 1994 rates above 
the new benchmark but having permitted rates at or below the new 
benchmark were only required to reduce their rates to the new 
benchmark. We imposed a modified price cap on these transition rates 
that allowed systems subject to such relief to increase their rates 
``to reflect increases in external costs and increases caused by 
channel changes that accrue after March 31, 1994.'' A transition system 
was not, however, allowed to increase its transition rate due to 
increases in inflation until its transition rate was equal to the rate 
that would have resulted from a full 17% rate reduction under our 
revised benchmark approach (i.e., their full reduction rate increased 
by permitted inflation, and increases due to external costs and channel 
changes). In this way, the transition rates of transition systems would 
eventually become equal to the full reduction rates these systems would 
have been required to charge under our new benchmark approach. The 
Commission reasoned that a system's full reduction rate might 
eventually exceed its transition rate because the full reduction rate 
would increase with inflation as well as external costs and channel 
changes. The Commission stated that transition treatment would 
terminate at the completion of our price/cost analysis, and that 
systems that had been provided transition relief would be required to 
apply the 17% competitive differential upon termination of transition 
treatment unless our analysis revealed that application of the 17% 
competitive differential to these systems would be inappropriate.
    5. Specifically, we said that we needed to further study whether 
below-benchmark rates are more likely to be reasonable than above-
benchmark rates, because they are comparatively lower, and that in 
light of this inquiry, it would not be appropriate, at the time, to 
require regulated systems to reduce their rates below the benchmark 
level. In addition, we stated that ``requiring any systems whose rates 
are currently slightly above the benchmark to reduce their rate levels 
to the full reduction levels, but not requiring below-benchmark systems 
to reduce their rates at all, would result in inequitable treatment of 
systems that may be fairly similarly situated.'' Therefore, we stated 
that upon completion of our collection and analysis of low price system 
prices and costs ``the regulated rates of such systems [would] be set 
to reflect the full 17 percent differential if our analysis [did] not 
show that the resulting rates would be unreasonably low--that is, the 
rates would be lower than they would be if set by competitive pressures 
as

[[Page 15120]]

determined by cost comparisons between noncompetitive systems and 
systems subject to effective competition.''
    6. The Commission subsequently made adjustments to the transition 
relief initiated in the Second Order on Reconsideration. In the Ninth 
Order on Reconsideration in MM Docket No. 92-266, FCC 95-43, 60 FR 
10512 (February 27, 1995), the Commission allowed all systems subject 
to transition relief to further adjust their rates based on inflation. 
In the Sixth Report and Order and Eleventh Order on Reconsideration in 
MM Docket Nos. 92-266 and 93-215, FCC 95-196, 60 FR 35854 (July 12, 
1995) (``Small System Order'') we initiated ``the gradual termination 
of transition relief for all but low-price systems,'' by limiting 
transition relief for small systems to two years from the effective 
date of the new rule. Consistent with our statements in the Second 
Order on Reconsideration, however, we have continued transition relief 
for low-price systems until the completion of our collection and 
analysis of necessary cost data.
    7. When the Second Order on Reconsideration was adopted, the 
Commission noted that we lacked sufficient data regarding the costs 
faced by low-price systems to establish whether these systems were 
charging reasonable rates despite the fact that they were charging 
relatively low rates as compared to the rates of other noncompetitive 
cable systems. Therefore, the Commission delegated authority to the 
Chief, Cable Services Bureau to conduct general cost studies of the 
cable industry. Report and Order and Further Notice of Proposed 
Rulemaking, in MM Docket No. 93-215 and CS Docket No. 94-28, FCC 94-39, 
59 FR 18066 (April 15, 1994). A cable industry cost survey was 
commenced pursuant to this authority in the Fall of 1995. See Order, in 
MM Docket No. 92-266, 11 FCC Rcd 4003 (released September 29, 1995). 
This Report and Order analyzes data from our cost survey, and compares 
the cost and revenue data of noncompetitive low-price systems with the 
cost and revenue data received for non-low-price systems that are 
already regulated by the Commission under the revised benchmark 
approach.

III. Discussion

A. Data

    8. The cost survey we initiated in September of 1995 was based upon 
a random sample of cable systems. Specifically, the survey was mailed 
to cable operators owning 660 of the total 2,271 non-small cable 
systems in the U.S. Small systems were not included in our survey 
because their treatment was previously determined in the Small System 
Order. The Commission received 359 usable questionnaires from the cable 
operators surveyed. Of these 359 questionnaires, 40 were received for 
low-price systems (``low-price group'') and 38 were received for 
systems regulated by the Commission under the revised benchmark 
approach (``non-low-price group''). Of the remaining 281 usable 
questionnaires, two were received for systems facing effective 
competition as defined in the 1992 Cable Act, and the remaining 279 
were received for several categories of cable systems including those 
regulated only at the local level, those for which a cost-of-service 
showing was filed, those unregulated, and those subject to social 
contracts.
    9. Data provided in response to the cost survey included 
information regarding system plant and equipment costs, intangible 
assets, operating revenues and expenses, and capital structure as of 
year end 1992 and year end 1994. We also received information regarding 
system characteristics.

B. Analysis

    10. The data received from our cost survey was analyzed to 
determine the relative profitability of the low-price group compared 
with the non-low-price group. In our analysis, we used a standard 
measure of ``accounting'' profitability as a means of determining the 
relative profitability of these two groups. Specifically, we used cash 
flow ratios, which are commonly used in financial analyses of the cable 
industry. One of the more frequently used cash flow measures is income 
before interest, taxes, depreciation and amortization (``IBITDA''). We 
applied this measure in the form of the following ratio: operating 
revenues minus operating expenses before interest, taxes, depreciation, 
and amortization divided by operating revenues.
    11. We compared the average cash flow ratio of our low-price group 
with the average cash flow ratio of our non-low-price group. We found 
that the average cash flow ratio of our low-price group was 36.5% and 
the average cash flow ratio of our non-low-price group was 39.7%. These 
findings indicate that, on average, the operators of systems in our 
low-price group received lower profit margins for their low-price 
systems than the operators of systems in our non-low-price group 
received for their non-low-price systems. Based on these findings, we 
believe that the operators of low-price systems generally receive lower 
profit margins for their low-price systems than the operators of 
systems already regulated under the Commission's revised benchmark 
approach. Under these conditions we believe that rates charged by low-
price systems are reasonable. We therefore find it unnecessary for the 
operators of these systems to reduce the rates on these systems by the 
full competitive differential or by any lesser amount.
    12. We believe that the transition relief afforded low-price 
systems was appropriate, however, we see no need to maintain the 
transition status of low-price systems now that we have completed an 
analysis of the necessary cost data particular to these systems. 
Therefore, we make that relief permanent. We will allow low-price 
systems to continue charging the rates they established under 
transition relief and making appropriate rate increases in accordance 
with our current rules. 47 CFR 76.922.

IV. Final Regulatory Flexibility Certification

    13. As required by the Regulatory Flexibility Act, 5 U.S.C. 603 
(RFA), an Initial Regulatory Flexibility Analysis (IRFA) for the Fifth 
Notice of Proposed Rulemaking was incorporated in the Second Order on 
Reconsideration, Fourth Report and Order, and Fifth Notice of Proposed 
Rulemaking in MM Docket 92-266, FCC 94-38. The Commission therein 
provided notice of its intent to establish further requirements 
concerning the rates permitted for systems subject to transition 
treatment, and sought written public comments on the IRFA. Comments 
regarding the treatment of ``small'' transition systems were received 
by the Commission and addressed in a previous order. Sixth Report and 
Order and Eleventh Order on Reconsideration in MM Docket Nos. 92-266 
and 93-215, FCC 95-196. No comments, however, were received regarding 
the matter of ``low-price'' transition cable systems.
    14. Although we performed an IRFA in the Fifth Notice of Proposed 
Rulemaking, we received no comments in response to the IRFA with 
respect to ``low-price'' transition systems and upon further 
consideration we now believe that we can certify that no regulatory 
flexibility analysis is necessary. This certification conforms to the 
RFA, as amended by the Small Business Regulatory Enforcement Fairness 
Act of 1996 (SBREFA). See Title II of the Contract with America 
Advancement Act of 1996, Public Law 104-121, 110 Stat. 847, 857 (1996), 
codified at 5 U.S.C. 601 et seq.

[[Page 15121]]

    15. We do not believe that the amendments to the rules adopted in 
this Report and Order will have a significant economic impact on a 
substantial number of small entities as defined by statute, by our 
rules, or by the Small Business Administration (SBA). See 47 U.S.C. 
543(m)(2); 47 CFR 76.901(e); 13 CFR 121.201 (SIC 4841); 5 U.S.C. 
605(b).
    16. Our rules for regulating the rates of small systems owned by 
small cable companies were established in a previous order, so this 
Report and Order only concerns the permitted rates for low-price 
systems. Based on the rule changes adopted here, low-price systems will 
be permitted to maintain the rates originally established pursuant to 
their status as systems subject to transition relief. Further, the 
rules adopted in this Report and Order will allow low-price systems to 
increase their rates in the same manner as our previous transition 
rules for low-price systems. The rules adopted herein do not alter the 
method by which low-price cable system rates currently are regulated, 
and for this reason these amendments will not have a significant 
economic impact on a substantial number of small cable operators, and 
will not change the treatment of low-price systems.
    17. The Commission will send a copy of this certification, along 
with this Report and Order, in a report to Congress pursuant to the 
Small Business Regulatory Enforcement Fairness Act of 1996, 5 U.S.C. 
801(a)(1)(A), and to the Chief Counsel for Advocacy of the Small 
Business Association, 5 U.S.C. 605(b). A copy of this certification 
will also be published in the Federal Register. Id.

V. Ordering Clauses

    18. Accordingly, it is ordered that, pursuant to sections 4(i), 
4(j), 303(r), and 623 of the Communications Act of 1934, as amended, 47 
U.S.C. 154(i), 154(j), 303(r), and 543, the rules, requirements and 
policies discussed in this Report and Order are adopted and Sec. 76.922 
of the Commission's rules, 47 CFR 76.922, is amended as set forth 
below.
    19. It is further ordered that the Secretary shall send a copy of 
this Report and Order, including the Final Regulatory Flexibility 
Analysis, to the Chief Counsel for Advocacy of the Small Business 
Administration in accordance with paragraph 603(a) of the Regulatory 
Flexibility Act, Public Law 96-354, 94 Stat. 1164, 5 U.S.C. 601 et seq. 
(1981).
    20. It is further ordered that the requirements and regulations 
established in this decision shall become effective April 30, 1997.

List of Subjects in 47 CFR Part 76

    Cable television.

Federal Communications Commission
William F. Caton,
Acting Secretary.

Rule Changes

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

PART 76--CABLE TELEVISION SERVICE

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

    Authority: 47 U.S.C. 151, 152, 153, 154, 301, 302, 303, 303a, 
307, 308, 309, 312, 315, 317, 325, 503, 521, 522, 531, 532, 533, 
534, 535, 536, 537, 543, 544, 544a, 545, 548, 552, 554, 556, 558, 
560, 561, 571, 572, 573.

    2. Section 76.922 is amended by revising paragraph (b)(4)(ii) to 
read as follows:


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

* * * * *
    (b) * * *
    (4) * * *
    (ii) Low-price systems. Low-price systems shall be eligible to 
establish a transition rate for a tier.
* * * * *
    Note: This attachment will not be published in the Code of 
Federal Regulations.

Attachment

                                                Cash Flow Ratios                                                
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                                                                            Average                             
                                                                           operating      Income                
                                                                           expenses       before                
                                                              Average       before       interest,              
                                                             operating     interest,      taxes,      Cash flow 
                         Category                             revenues      taxes,     depreciation   ratios \1\
                                                             (million)   depreciation       and       (percent) 
                                                                              and      amortization             
                                                                         amortization    (IBITDA)               
                                                                           (million)     (million)              
                                                                    (A)           (B)       (A-B)               
----------------------------------------------------------------------------------------------------------------
Low-price group (40 systems)..............................        $15.1          $9.6          $5.5         36.5
Non-low-price group (38 systems)..........................         12.5           7.5           5           39.7
Competitive group (2 systems).............................         76.4          46.2          30.2         39.5
All other \2\ (279 systems)...............................          8.3           5.3           3          36.7 
----------------------------------------------------------------------------------------------------------------
\1\ Calculated on totals for each group prior to averaging (i.e., cash flow ratios equal total operating        
  revenues minus total operating expenses before interest, taxes, depreciation and amortization divided by total
  operating revenues).                                                                                          
\2\ Includes systems for which a cost-of-service showing was filed, systems regulated only at the local level,  
  unregulated systems, and systems subject to social contracts.                                                 

[FR Doc. 97-7976 Filed 3-28-97; 8:45 am]
BILLING CODE 6712-01-P