Cable Television Leased Commercial Access

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 76

[CS Docket No. 96-60; FCC 97-27]

Cable Television Leased Commercial Access

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: The Commission has adopted a Second Report and Order and

Second Order on Reconsideration of the First Report and Order

(``Order'') regarding implementation of the leased commercial access

provisions of the 1992 Cable Act. The Order addressed comments and

petitions for reconsideration filed in response to the Order on

Reconsideration of the First Report and Order and Further Notice of

Proposed Rulemaking in CS Docket 96-60, FCC 96-122 (released March 29,

1996) (subparts referred to separately as ``Reconsideration Order'' and

``Further NPRM''). The Order: revised the maximum rate formulas for use

of full-

[[Page 11365]]

time leased access channels; declined to impose a transition period for

the implementation of the revised rate formulas; maintained the current

rules for maximum part-time rates and adopted a rule that cable

operators are not required to open additional leased access channels

for part-time use until all existing part-time leased access channels

are substantially filled or until a programmer requests a year-long

eight-hour daily time slot that cannot otherwise be accommodated;

allowed the resale of leased access time; granted leased access

programmers the right to demand access to a tier with a subscriber

penetration of more than 50%; stipulated that minority and educational

programming does not qualify as a substitute for leased access

programming unless it is carried on a tier with a subscriber

penetration of more than 50%; declined to mandate preferential

treatment for certain types of leased access programmers; required

operators to accept leased access programmers on a non-discriminatory

basis so long as available leased access capacity exceeds demand;

required that an independent accountant review an operator's rate

calculations prior to the filing of a rate complaint with the

Commission; established a standard of reasonableness for certain

contractual requirements; specified when leased access programmers must

pay for technical support; and defined the term ``affiliate'' for

purposes of leased access. The Order also addressed several issues on

reconsideration, including the exclusion of programming revenues from

the maximum rate calculation, the maximum rate calculation for a la

carte channels, cable operators' obligations to provide certain

information to potential leased access programmers and the need for

operators to comply with those obligations, time increments, the

calculation of the leased access set-aside requirement, and billing and

collection services. The Order is intended to address issues and

concerns raised in the comments and petitions for reconsideration that

were filed with the Commission in response to the Reconsideration Order

and Further NPRM.

DATES: This rule is effective April 11, 1997, except the amendments to

47 CFR 76.970 (c), (d), (e), (f), (g), (h), 76.971(f)(1), and 76.975

(b) and (c), which impose new or modified information collection

requirements, shall become effective upon approval by the Office of

Management and Budget (OMB), but no sooner than April 11, 1997. The

Commission will publish a document at a later date establishing the

effective date for the sections containing information collection

requirements. Written comments by the public on the modified

information collection requirements are due on or before April 11,

1997, and written comments by OMB on the modified information

collection requirements are due on or before May 12, 1997.

ADDRESSES: Office of the Secretary, Federal Communications Commission,

1919 M Street, NW., Washington, DC 20554. A copy of any comments on the

information collections contained in the Order 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: Rick Chessen, Cable Services Bureau,

(202) 418-7200. For additional information concerning the information

collections contained in the Order, contact Dorothy Conway at (202)

418-0217, or via the Internet at [email protected].

SUPPLEMENTARY INFORMATION:

Paperwork Reductions Act

The Order contains modified information collections. The

Commission, as part of its continuing effort to reduce paperwork

burdens, invites the general public and OMB to comment on the

information collections contained in the Order, as required by the

Paperwork Reduction Act of 1995, Public Law 104-13. Public and agency

comments are due 30 days from the date of publication of the Order in

the Federal Register; OMB notification of action is due 60 days from

date of publication of the Order in the Federal Register. Comments

should address: (a) Whether the modified collection of information is

necessary for the proper performance of the functions of the

Commission, including whether the information shall have practical

utility; (b) the accuracy of the Commission's burden estimates; (c)

ways to enhance the quality, utility, and clarity of the information

collected; and (d) ways to minimize the burden of the collection of

information on the respondents, including the use of automated

collection techniques or other forms of information technology.

OMB Approval Number: 3060-0568.

Title: Commercial leased access rates, terms and conditions.

Type of Review: Revision of existing collection.

Respondents: Business and other for profit entities; not-for-profit

institutions.

Number of Respondents: 6,330 (6,270 cable systems + 30 selected

accountant reviewers + an estimated 30 leased access programmers

involved in the leased access rate dispute process).

Estimated Time Per Response: 1-10 hours.

Total Annual Burden: 94,171 hours, estimated as follows:

Sec. 76.970 describes the manner in which cable operators are to

calculate maximum leased access rates. Currently, there are

approximately 11,400 cable systems, of which approximately 45% have

channel capacities of less than 36 channels, and are therefore exempt

from the Commission's leased access provisions. The number of cable

system respondents is therefore 6,270 (55% of 11,400). The average

annual burden of calculating maximum rates is estimated to be 4 hours

per cable system.

6,270 x 4 hours=25,080 hours.

Section 76.970(h) requires cable operators to provide the following

information within 15 calendar days of a request regarding leased

access (for systems subject to small system relief, cable operators are

required to provide the following information within 30 days of a

request regarding leased access): (a) A complete schedule of the

operator's full-time and part-time leased access rates; (b) how much of

the cable operator's leased access set-aside capacity is available; (c)

rates associated with technical and studio costs; and (d) if

specifically requested, a sample leased access contract. We estimate

that each cable system operator will undergo an average burden of 10

hours per year to gather and maintain this information and disclose it

to requesting potential leased access programmers. Of the 10 hours, we

estimate an average burden of 4 hours for each operator to gather and

maintain the information and an average burden of 6 hours for each

operator to furnish materials to an estimated 20 requesters per year.

6,270 x 10 hours=62,700 hours.

Section 76.971 requires cable operators to provide billing and

collection services to leased access programmers unless they can

demonstrate the existence of third party billing and collection

services which, in terms of cost and accessibility, offer leased access

programmers an alternative substantially equivalent to that offered to

comparable non-leased access programmers. The Commission estimates that

identification of a third party billing and collection service rarely

needs to occur because the vast majority of leased access programming

[[Page 11366]]

is placed on a programming services tier and is billed as part of that

tier. Nonetheless, the Commission estimates an average burden of no

more than 1 hour per cable system operator to identify a third party

billing and collection service and then to make the necessary

information available.

6,270 x 1 hour=6,270 hours.

Section 76.975(b) requires that persons alleging that a cable

operator's leased access rate is unreasonable must receive a

determination of the cable operator's maximum permitted rate from an

independent accountant prior to filing a rate complaint with the

Commission. We estimate that operators will undergo an average burden

of 4 hours to arrange for an independent accountant review and

coordinate rate information with the selected accountant. This average

burden accounts for those instances where parties that cannot agree on

a mutually acceptable accountant must each select an independent

accountant who in turn select a third independent accountant.

Nationwide, we estimate a need for 30 accountant rate reviews per year.

30 x 4 hours = 120 hours.

76.975(c) requires that petitioners attach a copy of the final

accountant's report to their petition where the petition is based on

allegations that a cable operator's leased access rates are

unreasonable. We estimate that petitioners will undergo an average

burden of 2 minutes to attach such reports. Nationwide, we estimate

that petitioners will need to attach a total of no more than 30

accountant's reports when filing petitions for relief.

30 x 2 minutes = 1 hour. 25,080 + 62,700 + 6,270 + 120 + 1 = 94,171

hours.

Estimated costs to respondents: $74,000, estimated as follows: We

estimate the annual telephone, postage and stationery costs incurred by

cable operators for leased access recordkeeping, sending out leased

access information to prospective programmers, identifying third party

billing collection services, and selecting accountants to be $50,000,

equating to approximately $7.97 per operator. ($7.97 x 6,270

respondents = $50,000). We estimate that accountants will undergo an

average burden of 8 hours to review an operator's maximum rate

calculations and to prepare the required report. Accountants are

estimated to be paid $100 per hour for their services. (30 accountant

reviews) x (8 hours per review) x ($100 per hour) = $24,000.

Total costs to respondents = $50,000 + $24,000 = $74,000.

Needs and Uses: The information collected is used by prospective

leased access programmers and the Commission to verify rate

calculations for leased access channels and to eliminate uncertainty in

negotiations for leased commercial access. The Commission's leased

access requirements are designed to promote diversity of programming

and competition in programming delivery as required by section 612 of

the Communications Act.

Synopsis

The following is a synopsis of the Commission's Second Report and

Order and Second Order on Reconsideration of the First Report and Order

in CS Docket 96-60, FCC 97-27, adopted January 31, 1997 and released

February 4, 1997. 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. The statutory framework for commercial leased access, provided

in Section 612 of the Communications Act of 1934, as amended, 47 U.S.C.

521 et seq. (``Communications Act''), was first established by the

Cable Communications Policy Act of 1984, Public Law 98-549, 98 Stat.

2779 (1984), 47 U.S.C. 521 et seq. (``1984 Cable Act'') and was amended

by the Cable Television Consumer Protection and Competition Act of

1992, Public Law 102-385, 106 Stat. 1460 (1992), 47 U.S.C. 521 et seq.

(``1992 Cable Act''). Commercial leased access was created to provide

access to the channel capacity of cable systems by parties unaffiliated

with the cable operator that wish to distribute video programming free

of the editorial control of the cable operator. Channel set-aside

requirements were established in proportion to a system's total

activated channel capacity. The statutory objectives of leased access

are to ``promote competition in the delivery of diverse sources of

video programming and to assure that the widest possible diversity of

information sources are made available to the public from cable systems

in a manner consistent with growth and development of cable systems.''

Each system operator subject to the leased access requirement must

establish, consistent with the rules prescribed by the Commission,

``the price, terms, and conditions of such use which are at least

sufficient to assure that such use will not adversely affect the

operation, financial condition, or market development of the cable

system.''

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 established initial regulations

to implement the leased access provisions of the 1992 Cable Act. The

Commission adopted the ``highest implicit fee'' formula as the method

for setting maximum reasonable rates, and adopted various standards

governing access terms and conditions, tier placement, technical

standards for use, technical support, security deposits, conditions

based on program content, requirements for billing and collection

services, and procedures for the expedited resolution of disputes. In

the Reconsideration Order, the Commission addressed certain issues

pertaining to the highest implicit fee formula, the provision of

certain leased access rate and channel availability information to

prospective leased access programmers, acceptable time increments and

pricing for part-time leased access use, operator provision of billing

and collection services for leased access programmers, security

deposits, calculation of the leased access set-aside requirement and

reporting requirements. In the Further NPRM, the Commission re-examined

the highest implicit fee formula from an economic perspective and

tentatively concluded that the highest implicit fee formula is likely

to overcompensate cable operators and does not sufficiently promote the

goals underlying the leased access provisions. The Commission proposed

a cost/market rate approach to setting maximum reasonable rates and

requested comment on the approach and its implementation. In addition,

the Commission sought comment on: (a) Part-time rates and an operator's

obligation to open additional leased access channels for part-time use,

(b) the resale of leased access time, (c) tier and channel placement

for leased access programming, (d) the placement of minority or

educational programming when it is used as a substitute for leased

access programming, (e) preferential treatment for certain types of

leased access programmers, including not-for-profit programmers, (f)

the selection of leased access programmers, and (g) streamlined leased

access dispute resolution procedures.

3. In the Order, the Commission amended its rules pertaining to

cable television commercial leased access, after considering the

comments and

[[Page 11367]]

reply comments filed in response to the Further NPRM, and addressed

petitions for reconsideration of the leased access rules adopted in the

Reconsideration Order.

II. Report and Order

A. Maximum Rate Formula for Leasing a Full Channel

4. Background: Section 612 directs the Commission to determine the

maximum reasonable rates that cable operators may charge for commercial

leased access. In the Rate Order, the Commission adopted rules that

established maximum rates based on the highest implicit fee paid by

non-leased access programming services distributed on a system. In the

non-leased access context, cable operators generally pay programmers

(e.g., a contractual license fee or a copyright fee) for their

programming services. Nevertheless, there is an implicit fee for

carriage to the extent that the amount of subscriber revenue that the

operator receives for the programming is greater than the fee that the

operator pays to the programmer. In other words, the amount of

subscriber revenue that the programmer forgoes to the operator

represents an implicit payment for carriage. The Commission determined

that the implicit fee paid by a programmer is the average price per

channel that a subscriber pays the operator minus the amount per

subscriber that the operator pays the programmer. The highest of the

implicit fees charged any unaffiliated non-leased access programmer was

the maximum rate per subscriber that a cable operator could charge a

leased access programmer.

5. In the Reconsideration Order and Further NPRM, we identified

certain problems with the highest implicit fee formula and sought

comment on a ``cost/market rate formula,'' an alternative approach that

we believed might better promote the goals of leased access. Under this

proposed approach, the maximum rate for leased access would depend on

whether the cable operator is leasing its full statutory set-aside

requirement. When the full set-aside capacity is not leased to

unaffiliated programmers, the maximum rate would be based on the

operator's reasonable and quantifiable costs (i.e., the costs of

operating the cable system plus the additional costs related to leased

access), including a reasonable profit. The operator would be allowed

to use the subscriber revenue received from a leased access channel to

offset the operating costs associated with the channel. In addition,

the operator would be allowed to charge the leased access programmer

the reasonable costs of bumping a programming service in order to

accommodate the leased access programmer. We tentatively concluded that

once the operator met its set-aside requirement, the cost-based maximum

rate could be replaced by a market rate.

6. Discussion: Our role with regard to leased access rates is to

establish maximum reasonable rates, not a mandatory rate that must be

charged to all leased access programmers. Operators have the discretion

to negotiate rates below the maximum rates established by the

Commission. For clarification purposes, we adopted a rule that

specifically states that cable operators are permitted under our rules

to negotiate rates below the maximum permissible rates.

i. Cost/Market Rate Formula

7. After reviewing the record in this proceeding and after

considering and analyzing all of the options presented, we concluded

that the proposed cost/market rate formula does not adequately account

for certain factors which, if excluded, would make the maximum leased

access rates resulting from the formula unworkable in today's

programming marketplace. Although the proposed cost/market rate formula

accounts for lost advertising revenue and lost commissions that would

result from bumping existing programming, it does not account for

negative effects that leased access programming might have on

subscriber revenue (i.e., lost subscriber revenue caused by subscribers

dropping the tier or by requiring a lower price due to a devaluation of

the tier). In the Further NPRM, we recognized this cost but tentatively

concluded that the inability to quantify the specific effect on

subscriber revenue caused by the replacement of current programming

with leased access programming in the tiered programming services

context made it too speculative to include as an opportunity cost

category in the cost/market rate formula. We nevertheless sought

comment on how our cost/market rate formula might measure changes in

subscriber penetration due to the addition of leased access

programming.

8. Neither the Commission nor the commenters in this proceeding

have been able to accurately quantify the effect that leased access

programming carried on a programming services tier may have on

subscribership or subscriber revenues to a degree specific enough to

assign it a definite value in a formula. Nevertheless, we no longer

believe that this effect is a factor that reasonably can be ignored.

Under the cost/market rate formula, the value of a channel is measured

by subtracting the programming or license fee the operator pays for the

channel from the advertising revenues and commissions the operator

receives for the channel. The formula does not include the subscriber

revenue received for the channel because, as explained above, we

assumed that leased access programming would have no measurable impact

on subscriber revenue. By ignoring the effect of leased access

programming on subscriber revenue, the cost/market rate formula assigns

a negative value to a channel where the license fee is higher than the

revenue collected from advertising and commissions. For example, a

programming service such as The Disney Channel, which carries no

commercial advertising, could have a negative value under the cost/

market rate formula and thus would yield a negative leased access rate.

The proposed cost/market rate formula therefore must not accurately

represent at least some important factor in assessing the value of a

channel because a well-established channel like The Disney Channel is

unlikely to have a negative value to the operator. The missing factor,

we believe, is the subscriber revenue that an operator receives because

it carries a particular channel. In the case of a channel newly added

to a tier, this subscriber revenue includes both the additional amount

an operator can charge its existing subscribers when it adds a channel

and also the full tier price paid by subscribers the channel attracts

to the tier.

9. Because the cost/market rate formula does not adequately account

for a significant benefit that cable operators receive from

programming, we believe it may result in an unduly low rate that does

not adequately capture the value of a channel. Such a rate would not

adequately compensate the cable operator and would force cable

operators to subsidize leased access programmers, thereby impermissibly

affecting the cable system's operation, financial condition or market

development. We therefore concluded that the proposed cost/market rate

formula would not accurately establish reasonable maximum rates

because, in its attempt to measure the opportunity costs of using a

channel for leased access, it ignores a significant opportunity cost--

the effect on subscriber revenue. Because neither the Commission nor

the commenters in this proceeding have been able to

[[Page 11368]]

specifically quantify this effect, we were unable to revise our

proposed formula in a way that would allow us to adopt it as an

appropriate method for determining maximum leased access rates.

ii. Maximum Rate for Full-Time Leased Access Programming Carried on a

Programming Services Tier

10. Based on our review of the comments, we no longer believe that

the proposed cost/market rate formula is a reasonable formula for

determining maximum leased access rates. Instead, we decided to retain

an implicit fee formula. We did, however, modify our current formula to

address the concerns set forth in the Further NPRM and in the comments.

Specifically, as described below, we concluded that the maximum

reasonable rate for leased access programming that is carried on a

programming services tier should be the ``average implicit fee.'' We

will, however, continue to monitor the availability of leased access

channels and may revisit this issue if it appears that the average

implicit fee formula no longer reflects a reasonable rate.

11. To determine the average implicit fee for a full-time channel

on a particular tier with a subscriber penetration over 50%, an

operator must first calculate the total amount it receives in

subscriber revenue per month for the programming on all such tier(s),

and then subtract the total amount it pays in programming costs per

month for such tier(s) (the ``total implicit fee calculation''). A

weighting scheme that accounts for differences in the number of

subscribers and channels on all such tier(s) must be used to determine

how much of the total implicit fee calculation will be recovered from

any particular tier. The weighting scheme is determined in two steps.

First, the number of subscribers is multiplied by the number of

channels (the result is the number of ``subscriber-channels'') on each

tier with subscriber penetration over 50%. For instance, a tier with 10

channels and 1,000 subscribers would have 10,000 subscriber-channels.

Second, the number of subscriber-channels on each of these tiers is

divided by the total number of subscriber-channels on all such tiers.

Given the percent of subscriber-channels for the particular tier, the

implicit fee for the tier is computed by multiplying the subscriber-

channel percentage for the tier by the total implicit fee calculation.

Finally, to calculate the average implicit fee per channel, the

implicit fee for the tier must be divided by the corresponding number

of channels on the tier. The final result is the maximum rate per month

that the operator may charge the leased access programmer for a full-

time channel on that particular tier. In the event of an agreement to

lease capacity on a tier with less than 50% penetration, the average

implicit fee should be determined on the basis of subscriber revenues

and programming costs for that tier alone.

12. In essence, the average implicit fee measures the average

amount that full-time programmers implicitly ``pay'' the cable operator

for carriage. In other words, the average implicit fee represents the

average amount of subscriber revenue that full-time programmers cede to

the operator to permit the operator to cover its costs and earn a

profit. For instance, if subscribers pay an average of $0.50 per

channel for a particular tier, and the average programming or license

fee on the tier is $0.10, then, on average, programmers on the tier are

implicitly ``paying'' the operator $0.40 for carriage. Since full-time

lessees resemble, and will be competing with, full-time cable networks,

it is appropriate that the maximum full-time leased access rate reflect

the average marketplace terms and conditions under which cable networks

are able to gain access to the cable system. From the operator's

standpoint, the average implicit fee represents the average value of a

channel after programming acquisition costs are paid. A formula based

on the average value of a channel may reflect the value of channel

capacity more accurately than a formula based on the value of the

programming bumped for leased access, such as the proposed cost/market

rate formula, because programming that is bumped for leased access may

not have had sufficient opportunity to reach its full revenue-

generating potential.

13. In addition, we adopted an average implicit fee formula because

it is possible to determine the average value of a channel accurately,

even when channels are sold as part of a package (i.e., a tier). A

precise calculation of the average channel value is possible because

the necessary components are known: in particular, what a subscriber

pays for the tier and what the operator pays in total programming costs

for all channels on the tier. By contrast, the proposed cost/market

rate formula and the highest implicit fee formula cannot provide such

accuracy because they attempt to measure the value of an individual

channel on a tier. However, the value of an individual channel on a

tier cannot be ascertained accurately because it is not possible to

determine the subscriber revenue attributable to a particular channel

that is sold collectively with other channels as a single package. The

same problem would be presented by an attempt to determine the lowest

implicit fee.

14. We also believe that developments in the multichannel video

programming marketplace are relevant to our decision to adopt the

average implicit fee formula. The number of non-vertically integrated

national programming services has grown in each of the past three

years. We believe that a shift from a highest implicit fee formula to

an average implicit fee formula may provide additional opportunities

for diverse, unaffiliated programmers to enter the marketplace, without

creating a maximum rate that is artificially low and putting the cable

operator's operation, financial development or market development at

risk.

15. Moreover, we believe that the average implicit fee formula

addresses the concerns with the highest implicit fee formula that we

expressed in the Reconsideration Order. Most importantly, we do not

believe that the average implicit fee formula permits the operator a

``double recovery.'' In the Reconsideration Order, we noted that the

highest implicit fee formula overcompensates the operator because it

appears to allow the value of the channel to be recovered twice--once

from the leased access programmer (the highest implicit fee), and once

from subscribers (the average per channel subscriber charge). For

example, if the subscriber revenue for a tier is an average of $0.50

per channel and the lowest license fee for unaffiliated programming on

that tier is $0.05, the highest implicit fee for that tier would be

$0.45. Because we assumed that the leased access programmer would pay

up to $0.45 (the highest implicit fee) and the subscriber would still

pay $0.50 (the average per channel subscriber charge), we believed that

the operator was permitted to recover the value of the channel twice.

16. Our ``double recovery'' hypothesis was based on the assumption

that operators would be able to charge subscribers the same amount for

leased access programming that they charge on average for other

programming on the same tier. Although a number of commenters in this

proceeding supported this assumption, other commenters asserted that

subscribers will not be willing to pay the same amount for leased

access programming because subscribers value it less than programming

selected by the operator. These commenters claimed that the amount of

subscriber revenue that

[[Page 11369]]

operators will be able to collect for most leased access channels will

be close to or equal to zero, and leased access programming may in fact

diminish the value of a tier because subscribers will find it so

unappealing that viewership of the other programming on the tier will

be adversely impacted.

17. Based on the record before us, we could not conclude that

operators, in general, will be able to charge the same amount for a

tier once leased access programming is added, especially since most

leased access programming will be new and will not have an established

audience. We could not, however, predict with any certainty what the

relative value of the leased access programming will be. It is possible

that some leased access programming will be as profitable, if not more

so, than some of the operator's selected programming and that the

effect on the tier charge will be neutral or positive. On the other

hand, it is also possible that some leased access programming will be

less valuable than the operator's current programming, leading either

to a loss of subscribers or to a loss of subscriber revenue if the

operator lowers the tier price.

18. We therefore found that the assumption underlying our ``double

recovery'' hypothesis--that leased access programming will always be

equally valuable to the operator as its non-leased access programming--

was not supported by the record. Neither the Commission nor the

commenters, however, have been able to develop a reliable method for

predicting what value, if any, subscribers will place on leased access

programming. Since the current record did not permit us to accurately

assess the impact of leased access programming on the value of the

tier, we could not find that leased access programming will necessarily

result in an excess recovery (let alone a ``double'' recovery) for the

operator.

19. Moreover, we believe that any potential excess recovery

generally will be minimal. Based on what cable operators in a

competitive environment are able to charge subscribers for the addition

of a new channel, our ``going forward'' order allows operators to

charge a subscriber $0.20 a month for an additional channel. We expect,

however, that operators will recover less than $0.20 for a new leased

access channel because we believe that, on average, subscribers will

not be willing to pay as much for new leased access programming as they

do for new programming selected by the cable operator. In selecting its

own programming, a cable operator is able to take into account the

particular mix of programming already on its system and the particular

interests and demands of its subscribership. Thus, unlike with leased

access, the operator can select programming that will maximize net

subscriber revenue.

20. Additional factors are likely to further reduce any potential

excess recovery. For one, the ``going forward'' rate is based on what

operators can charge subscribers when new channels are added without

displacing existing programming. Therefore, if leased access

programming displaces existing programming, any amount of subscriber

revenue that an operator gains from a leased access channel may be

offset by subscriber revenue lost from the displaced channel. In

addition, we believe that subscriber revenue from a leased access

channel will be further offset by lost advertising revenues since

leased access programmers, unlike other programmers, generally will not

provide advertising slots to the cable operator. Subscriber revenue

will also be offset by additional administrative costs imposed by

leasing, which are not recovered through the average implicit fee

formula. For all of the above reasons, we believe that any excess

recovery for a leased access channel will be significantly less than

the $0.20 that an operator is allowed to charge subscribers for a new

channel.

21. Although we no longer believe that our ``double recovery''

concern was a valid reason for rejecting the highest implicit fee

formula, we nonetheless believe that the average implicit fee formula

is a more appropriate method for determining the maximum leased access

rate. First, as discussed above, the average implicit fee is based on a

more logical calculation than the highest implicit fee, because it is

derived from values that can be measured--subscriber revenue for the

tier(s) and programming costs for the tier(s)--to arrive at an average

amount of subscriber revenue that programmers cede to the operator in

exchange for carriage. The highest implicit fee formula, by contrast,

attempts to measure the implicit fee of a particular channel by using

one verifiable figure (the actual programming cost) and one proxy (the

average per channel subscriber revenue), since the actual amount that

subscribers pay for any particular channel on a tier cannot be

determined. Second, the average implicit fee mitigates our previous

concern that the highest implicit fee may overcompensate operators by

permitting them to charge the highest mark-up over programming costs

(i.e., the highest of the implicit fees). While the average implicit

fee formula does not allow the operator to recover its highest mark-up

over programming costs, it also does not restrict the operator to

charging the lowest mark-up over programming costs. Although we stated

in the Rate Order that using the highest market value of channel

capacity is fair, we believe that basing the maximum rate on the

average mark-up over programming costs more appropriately balances the

interests of cable operators and leased access programmers.

22. Third, we also expressed concern in the Reconsideration Order

that an implicit fee formula is not based on the operator's reasonable

costs. We now believe, however, that an implicit fee formula may better

reflect the value of the channel capacity, since a formula based

strictly on quantifiable costs cannot account for lost subscriber

revenue and therefore may not adequately compensate the operator. Given

that the maximum rate should not adversely affect the operation,

financial condition or market development of the cable system, it is

entirely appropriate to consider these non-quantifiable costs, such as

any negative effects leased access programming may have on the value of

the tier, in establishing the market value of a channel.

23. We also made a few other changes to the manner in which the

maximum leased access rate is calculated for tiered channels. First, we

departed from the current rule requiring rate calculations to be made

on a tier-by-tier basis. As described below, we have determined that

leased access programmers have the right to demand access to a tier

with more than 50% subscriber penetration. We believe that subscribers

generally perceive these highly penetrated tiers as a single

programming package, not as separate products. Consistent with this

view, we believe that operators should calculate the average implicit

fee using all channels carried on any tier with more than 50%

subscriber penetration. In addition, our rate regulation rules

generally are based on the principle of tier neutrality, which requires

cable operators to charge the same per channel rate regardless of the

programming costs incurred on a particular tier. Prior to rate

regulation, we believe that tier prices did not necessarily follow this

tier neutrality principle. Similarly, because the Communications Act

requires cable operators to transmit must-carry and public,

educational, and governmental (``PEG'') access channels on the basic

service tier, the average programming cost on that tier will tend to be

lower than it would be absent such a carriage requirement. Since, as a

result of

[[Page 11370]]

regulation, individual tier prices may not be directly correlated with

their underlying programming costs, we believe that it is appropriate

to permit cable operators to assess these costs more accurately by

averaging across highly penetrated tiers.

24. Second, we believe that the maximum rate calculation should no

longer exclude channels devoted to must-carry broadcast signals or PEG

access programming. In the Reconsideration Order, we stated that must-

carry and PEG access channels should be excluded from consideration

because the lack of program license fees for those channels does not

represent a marketplace decision, but is the result of statutory

mandates. Under the highest implicit fee approach, the inclusion of

channels with zero license fees, such as must-carry and PEG access

channels, would virtually ensure that every cable system had a

commensurately high leased access rate. Now, with the average implicit

fee formula, because all of the programming costs are averaged

together, it is appropriate to include must-carry and PEG access

channels in calculating the maximum leased access rate. Although the

lack of programming costs for these channels makes it inappropriate to

use them as the sole determinant of maximum rates, these channels are

relevant to a calculation that is based on the value of the relevant

tier(s). Since the average implicit fee is derived from the total value

of the tier(s) being considered, it is appropriate to account for the

effect of all of the channels on the tier(s). Moreover, as with all

individual channels on a tier, it would not be possible to ascertain

how much the total subscriber revenue for the tier should be reduced if

must-carry and PEG access channels were excluded.

25. For the same reason we also concluded that the maximum rate

calculation should no longer exclude channels devoted to affiliated

programming. In the Rate Order, we determined that affiliated

programming should not be considered in determining the highest

implicit fee because to do so could affect the operator's right to

charge affiliated and unaffiliated programmers different rates.

However, in addition to the necessity of including all channels on the

relevant tier(s) in an average implicit fee calculation, we believe

that requiring cable operators to base an implicit fee calculation only

on unaffiliated programming may inappropriately result in different

maximum leased access rates for systems that are identical but for

their affiliation with certain programmers. We believe that adopting a

standard similar to that adopted with regard to our affiliate

transaction rules will resolve this disparity without interfering with

the operator's right to establish different rates for affiliated and

unaffiliated programmers. We therefore modified our rules to require

that, in calculating the average implicit fee, operators must use

programming costs for affiliated programming that reflect the

prevailing company prices offered in the marketplace to third parties.

If a prevailing company price does not exist, the programming should be

priced at the lower of the programmer's cost or the fair market value.

Because these objective measurements are based on factors outside

affiliated transactions, the requirement to use them as proxies for the

actual programming costs does not conflict with our conclusion in the

Rate Order that the Commission is precluded from establishing rates

based on transactions with affiliates.

26. Finally, we eliminated our current programmer categories for

determining maximum rates for leased access programming that is carried

on a tier. In the Rate Order, the Commission stated that the programmer

categories were intended to reflect the different economies faced by

the different types of programmers. We now believe, however, that

basing maximum rates on the average value of the channel capacity is a

more appropriate approach to implementing section 612 than making

distinctions based on the different economies among leased access

programmers. For this reason, and also because an average implicit fee

calculation must include all channels on the relevant tier(s), we

abolished the mandatory distinction between the rate charged to direct

sales programmers and ``all others.'' Therefore, all leased access

programmers carried on a cable system's tier will be subject to the

same maximum rate, which will be derived using all channels on the

relevant tier(s), including channels devoted to direct sales

programming (e.g., home shopping networks and infomercials). As

described below, cable operators will still be required to calculate

different rates for programming services sold on a per-channel, or a la

carte, basis. We will maintain the distinction between leased access

programming carried on a tier and leased access programming offered as

an a la carte service, not because of their ``different economies,''

but because of the practical differences involved in implementing a

maximum leased access rate for a la carte services.

iii. Maximum Rate for Full-Time Leased Access Programming Carried as an

A La Carte Service

27. Despite our conclusion that the average implicit fee formula is

the appropriate method for setting maximum reasonable rates for leased

access programming carried on a tier, we concluded that the highest

implicit fee formula remains the best approach for setting maximum

reasonable rates for leased access programming offered to subscribers

as an a la carte service. Because the subscriber revenue for an a la

carte service is known, an a la carte programmer can readily determine

how much it is implicitly paying the operator for carriage. If an

unaffiliated a la carte programmer is implicitly paying more than the

maximum leased access rate for carriage, the a la carte programmer

could obtain a larger share of the subscriber revenue simply by

demanding a lease. This potential disruption to operators' negotiated

relationships with unaffiliated a la carte programmers could adversely

impact the operation, financial condition, and market development of

cable systems. The highest implicit fee for a la carte services

protects operators from this potential adverse effect because, unlike

the average implicit fee, it represents the maximum amount that any a

la carte programmer is implicitly paying for carriage. The average

implicit fee does not pose such a risk for tiered services because the

actual subscriber revenue for individual channels is not known. Even if

the actual subscriber revenue for a particular tiered service could be

determined, a non-leased access programmer implicitly paying more than

the average implicit fee would have little reason to switch to leased

access because subscriber revenue is not passed through to leased

access programmers that are carried on a tier. Non-leased access

programmers that are carried on a tier are unlikely to switch from an

arrangement where they receive a license fee to an arrangement where

they pay the cable operator but receive no subscriber revenue.

28. In addition, because in the a la carte context we are able to

determine the actual subscriber revenue derived from particular

programming services, we do not need to use the average implicit fee

formula. Moreover, there can be no ``double recovery'' in the a la

carte context because any subscriber revenues for a leased access

channel carried as an a la carte service are readily ascertainable and

can be passed through to the leased access programmer. In order to

protect against any over recovery, we modified our

[[Page 11371]]

rules to clarify that any subscriber revenue from an a la carte leased

access service must be passed through to the leased access programmer.

As with the average implicit fee, we require operators to include

affiliated a la carte services in their highest implicit fee

calculation using the rules described above for determining programming

costs for affiliated programming. As discussed below, we also made one

modification regarding the calculation of the highest implicit fee for

a la carte programming services.

iv. Transition Period

29. We did not establish a transition period for implementing our

revised rate formulas. In the Rate Order, the Commission clearly stated

that ``the rules we adopt should be understood as a starting point that

will need refinement both through the rulemaking process and as we

address issues on a case-by-case basis.'' Thus, cable operators and

non-leased access programmers have had ample notice that the rate

formula was subject to change. Both operators and programmers alike

understand that a reduction in the maximum rate could increase the

demand for leased access, thereby increasing the possibility that

bumping might occur. We believe that operators and programmers that

negotiate to place non-leased access programming on a channel

designated for leased access assume the risk that the programming might

have to be bumped for a leased access programmer. Section 612

explicitly provides that operators may no longer use unused leased

access capacity once a written agreement is obtained by a leased access

programmer.

B. Part-Time Leased Access Programming and Maximum Part-Time Rates

30. Under the Commission's rules, cable operators are required to

accommodate part-time leased access requests, but need not accommodate

requests of less than one half hour. With respect to rates for part-

time leased access programming, the Commission's rules permit cable

operators to charge different time-of-day rates, provided that: (a) The

total of the rates for a day's schedule (i.e., a 24-hour block) does

not exceed the maximum rate for one day of a full-time leased access

channel prorated evenly from the monthly rate; (b) the overall pattern

of time-of-day rates is otherwise reasonable; and (c) the time-of-day

rates are not intended to unreasonably limit leased access use. The

Further NPRM sought comment on a cable operator's obligation to

accommodate a part-time leased access programmer by opening a new

channel for leased access use, and on the calculation of maximum rates

for part-time use.

i. Accommodation of Requests for Part-Time Leased Access

31. As an initial matter, we affirmed our current rule requiring

cable operators to lease time in half-hour increments. We recognize

that part-time leasing is not expressly required by the statute, that

it may impose additional administrative and other costs on cable

operators, and that it may pose the risk of capacity being under-used.

As noted above, if cable operators are not adequately compensated for

their capacity, it may constitute a violation of Section 612. We also

recognize, however, that the statute does not restrict leased access to

full-time programming and that part-time programming currently

represents a significant share of the leased access marketplace,

thereby providing much of the competition and diversity of programming

sources that Section 612 was intended to promote. Therefore, rather

than permit cable operators to exclude part-time leased access

programming, we permit cable operators to set reasonable limits on when

and how part-time programming must be accommodated, as set forth below.

32. First, we affirmed the holding in TV-24 Sarasota, Inc. v.

Comcast, 10 FCC Rcd 3512, 3518 (Cable Serv. Bur., Dec. 27, 1994) that a

cable operator is not required to open an additional leased access

channel if a programmer's request can be accommodated in a comparable

time slot on an existing leased access channel. We believe that the

comparability of time slots can be determined by a number of objective

factors, such as day of the week, time of day, and audience share. We

also adopted our tentative conclusion in the Further NPRM that a cable

operator should not be required to make even a dark channel available

for leased access, so long as the programmer's request can be

accommodated in a comparable time slot on a programmed channel. In

addition, we extended TV-24 Sarasota to permit a cable operator to

accommodate a part-time leased access request by offering the

programmer a comparable time slot on a channel otherwise carrying non-

leased access programming.

33. Furthermore, we concluded that cable operators should not be

required to open an additional channel for use by part-time leased

access programmers until existing part-time leased access channels are

substantially filled with leased access programming. For these

purposes, we will consider a channel to be ``substantially filled''

with leased access programming if leased access programming occupies

75% or more of its programming day. In other words, cable operators do

not have to open a second channel for part-time use until the first

part-time channel has at least 18 hours of programming every day.

Likewise, a third channel for part-time use does not have to be made

available until the second channel has at least 18 hours of programming

every day, and so on.

34. Consistent with our tentative conclusion in the Further NPRM,

we provide an exception to this rule and require operators to open an

additional channel for part-time leased access use if a programmer (or

collective) agrees to provide programming for a minimum of eight

contiguous hours every day for at least one year. The programmer may

select any eight-hour time period during the day, but the same eight

hours must be used every day. Therefore, even if an operator has an

existing part-time leased access channel that is not substantially

filled with leased access programming, the operator must open an

additional part-time leased access channel if it cannot otherwise

accommodate a programmer's request for a year-long eight-hour daily

time slot. Once an operator has opened a vacant channel to accommodate

such a request, our other leased access rules apply. If, however, the

operator has accommodated such a request on a channel already carrying

an existing full-time non-leased access programmer, the operator does

not have to accommodate other part-time requests of less than eight

hours on that channel until all other existing part-time leased access

channels are substantially filled with leased access programming.

35. Part-time programmers are permitted to seek access on a

collective basis. If part-time programmers request an entire channel on

a collective basis, the operator must provide the channel regardless of

any unused capacity on part-time leased access channels because we

would not consider that a request for part-time programming. Similarly,

part-time programmers that individually cannot meet the year-long

eight-hour daily time commitment may demand access as a group in order

to satisfy the requirement. Allowing collective requests will not

impose any further burden on cable operators since the same request

could have been made by an individual programmer.

36. To summarize, we modified our rules regarding part-time leased

access programming as follows. Cable operators may accommodate part-

time

[[Page 11372]]

leased access requests by providing comparable time slots on non-leased

access channels or on channels already being used for leased access on

a part-time basis. Cable operators will not be required to make an

additional channel available for part-time leased access use until all

other part-time leased access channels have at least 18 hours of leased

access programming every day. So long as an operator has at least one

channel designated for part-time leased access use that is not

substantially filled by part-time programmers, the operator will not be

required to open another part-time channel even if comparable time

slots are no longer available on the part-time channel that is only

partially programmed. However, if a leased access programmer (or

collective) agrees, at a minimum, to provide programming during the

same eight-hour time slot every day for at least one year, an operator

will be required to accommodate the request even if an existing part-

time leased access channel is not substantially filled with leased

access programming. We believe that this approach achieves the

statutory objectives of competition and diversity of programming

sources, while doing so in a manner consistent with the growth and

development of cable systems.

ii. Maximum Part-Time Rates

37. Because we did not adopt the proposed cost/market rate formula,

and because the formulas for tiered and a la carte full-time services

that we adopted are similar in kind to the existing approach for

setting the maximum full-time leased access rate, we affirmed our

decision to require that cable operators prorate their maximum full-

time rate when determining their maximum permitted part-time rate, and

to allow operators to adjust part-time rates according to time-of-day

pricing. As we stated in the Reconsideration Order, we believe that

this approach accounts for marketplace realities by recognizing that

different time slots have different values, furthers the statutory goal

of promoting a diversity of programming sources, and promotes the full

use of leased access channels by making non-prime time slots less

expensive than prime-time slots, and therefore more attractive, to

programmers. Cable operators are permitted to recover any additional

technical costs that are attributable to part-time leased access

programming in accordance with the rules described below.

C. Resale of Leased Access Time

38. In the Further NPRM, we asked whether persons unaffiliated with

the operator should be allowed to lease programming time from the

operator and then sell it for a profit to other unaffiliated persons.

In the Order, we concluded that resale of leased access capacity to

persons unaffiliated with the operator should be permitted, subject to

certain contractual conditions described below that a cable operator

may reasonably impose, because we believe that resale can provide

substantial benefits to leased access programmers without an adverse

impact on cable operators. In particular, we believe that small and

part-time programmers could benefit from resale. For instance, a

reseller could bring together various part-time programmers to form a

programming package for an entire channel. This service would not only

relieve operators of much of the cost and burden of dealing with a

large number of small programmers, but would be more efficient, since a

reseller's business would be devoted to this goal while cable operators

typically devote little or no staff to promoting leased access. We

believe that resale may prove to be a crucial mechanism by which part-

time programmers are able to obtain carriage.

39. To avoid discouraging cable operators from providing carriage

to not-for-profit entities and others at reduced rates, we found that

it would be a reasonable term or condition of carriage for a cable

operator to provide that if the lessee resells its capacity, the lessee

must start paying the operator at a rate which may be up to and

including the maximum permissible rate. In addition, cable operators

may provide in their leased access contracts that any sublessees are

subject to the non-price terms and conditions that apply to the initial

lessee. Finally, we noted that the cable operator's right to refuse to

transmit programming containing obscenity or indecency applies to any

leased access program or portion of a leased access program, regardless

of whether the programmer purchased leased access capacity directly

from the cable operator or through a reseller.

D. Tier and Channel Placement

40. Background: According to the legislative history of the 1992

amendments to Section 612, the purpose of leased access would be

defeated if leased access programmers were placed on tiers that few

subscribers access. The 1992 Senate Report states that ``[t]he FCC

should ensure that [leased access] programmers are carried on channel

locations that most subscribers actually use.'' It further states that

``it is vital that the FCC use its authority to ensure that these

channels are a genuine outlet for programmers.'' In the Further NPRM,

the Commission tentatively concluded that leased access programmers are

entitled to placement either on the basic service tier (``BST'') or on

the cable programming services tier (``CPST'') with the highest

subscriber penetration, unless technical or other compelling reasons

weigh against such placement. We reasoned that the BST and the CPST

with the highest subscriber penetration qualify as ``genuine outlets''

because ``most subscribers actually use'' them. We sought comment on

whether the term ``most subscribers'' should be interpreted to mean

that any CPST that has a subscriber penetration of more than 50% should

also qualify as a ``genuine outlet.''

41. Discussion: As stated in the Further NPRM, we believe that we

must ensure a ``genuine outlet'' for leased access programming in order

to further the statutory goals of competition in the delivery of video

programming sources and diversity of programming sources. To that end,

we affirmed our tentative conclusion that, absent a technical or other

compelling reason, leased access programmers have the right to demand

access to a tier that most subscribers actually use. Leased access

programmers would not be assured access to most subscribers if cable

operators were permitted to require leased access channels to be sold

on an individual, or a la carte, basis.

42. Although we continue to believe that the BST and the CPST with

the highest subscriber penetration qualify as genuine outlets, we do

not think it is necessary to restrict the placement of leased access

programming to only those tiers. We believe that any tier with a

subscriber penetration over 50% should also qualify as a genuine outlet

because it consists of channel locations that ``most subscribers

actually use.'' Therefore, if a leased access programmer requests

placement on a tier, we will allow the cable operator the flexibility

to place the programming on any tier that has a subscriber penetration

of more than 50%. We believe that this approach takes into account the

``legitimate need of the cable operator to market its product'' because

it allows the operator to consider the marketing mix of different

tiers. The record reflected that some commenters would favor placing

leased access channels on a separate tier comprised primarily, if not

exclusively, of leased access programming. We concluded that so long as

such a tier has a subscriber penetration of more than 50%, the cable

operator is not precluded from developing a tier that predominantly

features leased access programming.

[[Page 11373]]

43. With regard to specific channel placement, we believe that the

cable operator should have the discretion to select the channel

location of a leased access channel, so long as the operator's choice

is reasonable. Because a determination of reasonable channel placement

will depend on the particular circumstances of a situation, we will

evaluate these types of disputes on a case-by-case basis. We will take

into consideration evidence that the operator deliberately interfered

with potential viewership of the leased access programming in an effort

to discourage continued carriage (e.g., by intentionally surrounding a

leased access channel with dark channels or by frequently shifting its

channel location without sufficient justification). Once a cable

operator has provided leased access programmers with a genuine outlet,

we do not believe it is necessary to interfere with that operator's

ability to structure channel line-ups. Therefore, although a leased

access programmer may demand access to a tier that has a subscribership

of more than 50%, the cable operator is entitled to place the leased

access programming on any reasonable channel location on any qualifying

tier.

E. Minority and Educational Programmers

44. Background: Pursuant to section 612(i), a cable operator may

substitute programming from a qualified minority or educational

programming source for up to 33% of its designated leased access

channels. In the Further NPRM, the Commission sought comment on whether

leased access requirements regarding tier and channel placement should

also apply to minority or educational programming that is used as a

substitute for leased access programming. The Commission tentatively

concluded that minority or educational programming should not qualify

as a substitute for leased access programming unless it is carried on

the BST or on a CPST that qualifies as a genuine outlet.

45. Discussion: Applying the same tier placement standard we

adopted for leased access, we concluded that minority or educational

programming will not qualify as a substitute for leased access

programming unless it is carried on a tier that has a subscriber

penetration of more than 50%. The cable operator may select which

qualifying tier to use for the substituted programming. As we noted in

the Further NPRM, neither the statute nor the legislative history

specifically requires that most subscribers receive the substituted

minority or educational programming. However, as we previously stated,

the language of Section 612(i)(1) strongly suggests that Congress

envisioned that any substituted minority or educational programming

would be placed on the same channels that would have been used for

leased access. Specifically, section 612(i)(1) states that ``a cable

operator required by this section to designate channel capacity for

commercial use may use any such channel capacity'' to provide minority

or educational programming. Furthermore, to allow a more lenient

standard for minority or educational programming could potentially

diminish its value as a substitute for leased access programming. We

therefore imposed the same tier and channel placement requirements on

substitute minority or educational programming as we did on leased

access programming.

F. Preferential Access

46. Background: In the Further NPRM, we asked whether preferential

treatment for not-for-profit leased access programmers should be

required to promote a diversity of programming sources. We sought

comment on how to calculate preferential rates, if found to be

necessary, and we asked whether cable operators should be required to

give preferential access to not-for-profit programmers by setting aside

a certain percentage of their leased access capacity for such use

(e.g., 25%). Commenters were also invited to demonstrate with specific

evidence why preferential treatment might be appropriate for certain

types of for-profit programmers, such as low power television

(``LPTV'') stations and minority and educational programmers.

47. Discussion: We do not believe that mandating preferential

access or preferential rates for not-for-profit programmers, or any

other class of programmers, is necessary or appropriate under Section

612. First, leased access is intended for ``commercial use,'' which the

Communications Act defines as ``the provision of video programming,

whether or not for profit.'' The fact that not-for-profit leased access

programmers are defined as commercial users for purposes of leased

access indicates that they should compete on equal terms with for-

profit leased access programmers.

48. Second, we do not believe that requiring cable operators to

offer preferential treatment to not-for-profit programmers is necessary

to serve the statutory purposes of Section 612. Mandatory preferential

treatment would not necessarily promote diversity since unaffiliated

not-for-profit programming sources are not inherently more diverse than

unaffiliated for-profit programming sources. In fact, mandatory

preferential treatment could potentially conflict with the statutory

directive that leased access rates not ``adversely affect the

operation, financial condition, or market development of the cable

system'' because a mandatory preferential rate below what the

Commission has determined to be the maximum reasonable rate may be

insufficient to compensate operators for leased access use. Third, not-

for-profit status does not necessarily indicate a lack of financial

resources. While we noted that Congress gave cable operators the

flexibility to negotiate lower rates, we do not believe that operators'

right to negotiate lower rates should be transformed into an obligation

to provide affordable rates to not-for-profit leased access

programmers.

49. We also declined to mandate preferential treatment for not-for-

profit programmers that qualify as minority or educational programmers

under Section 612(i)(2) or (3). Congress chose to encourage minority

and educational programming by allowing it to be used as a substitute

for leased access, regardless of its profit status. There is no

evidence that Congress intended the Commission to create an additional

mechanism to promote not-for-profit minority or educational programming

through preferential rates and set-asides. Furthermore, we did not

require cable operators to provide preferential treatment for LPTV

stations or for educational and community programming services that

public television stations may wish to offer in addition to their

primary over-the-air signals. Congress provided public television

stations and LPTV stations the preferences it deemed necessary.

G. Selection of Leased Access Programmers

50. In the Further NPRM, the Commission proposed rules to govern a

cable operator's selection of leased access programmers. In the Order,

we concluded that, so long as an operator's available leased access

capacity is sufficient to satisfy the current demand for leased access,

all leased access requests must be accommodated as expeditiously as

possible, unless the operator refuses to transmit the programming

because it contains obscenity or indecency. We believe that such an

approach is the most appropriate method of assuring that cable

operators comply with section 612(c)(2), which explicitly restricts

operators' exercise of editorial control

[[Page 11374]]

over leased access programming. Section 612(c)(2) provides that ``a

cable operator shall not exercise any editorial control over any video

programming provided pursuant to this section, or in any other way

consider the content of such programming,'' except in the case of

programming containing obscenity or indecency, or to the minimum extent

necessary to set a reasonable price. We believe that requiring

operators to accommodate all leased access requests when the

programming does not contain obscenity or indecency, so long as there

is available capacity, will most effectively restrict operators'

exercise of editorial control, without impinging upon their discretion

with regard to price and sexually-oriented programming. We also believe

that such an approach will further the statutory objective to promote

competition because it will reduce an operator's ability to select

leased access programming based on anti-competitive motives.

51. We believe, however, that an operator should be allowed to make

objective, content-neutral selections from among leased access

programmers when the operator's available leased access channel

capacity is insufficient to accommodate all pending leased access

requests. In the full-time channel context, this situation would arise

if two or more leased access programmers requested the remaining

available leased access space; in the part-time context, this situation

could arise, for example, if two or more programmers requested the 8:00

p.m. to 9:00 p.m. time slot on the system's part-time leased access

channel. In such situations, we believe that the cable operator should

be allowed to make an objective, content-neutral selection among the

competing programmers. For example, the operator could hold a lottery.

Or, the operator could base its decision on other objective, content-

neutral criteria such as a programmer's non-profit status, the amount

of time a programmer is willing to lease, or a programmer's willingness

to pay the highest reasonable price for the capacity at issue. Allowing

flexibility within this limited context will better enable operators to

assure the growth and development of their cable systems.

H. Procedures for Resolution of Disputes

52. We affirmed our proposal in the Further NPRM to streamline the

complaint process by requiring that an independent accountant make a

determination of the cable operator's maximum permitted rate prior to

the filing of any complaint alleging that the operator's rate is

unreasonable. We believe that such a requirement will preserve

Commission resources by reducing the likelihood that unsubstantiated

claims will be filed with the Commission. In the event that a complaint

is filed with the Commission because the dispute remains unresolved

despite the accountant's final report, there will be a rebuttable

presumption that the accountant's findings are correct.

53. We did not adopt our proposal in the Further NPRM to allow the

cable operator to select an independent accountant in the event that

the operator and leased access programmer fail to agree on a mutually

acceptable accountant. Such an approach may be unfair to the leased

access programmer because it does not encourage the operator to find a

mutually acceptable accountant. Instead, we required that if the

parties cannot agree on a mutually acceptable accountant within five

business days of the programmer's request for a review, they must each

select an independent accountant on the sixth business day. These two

accountants will then have five business days to select a third

independent accountant to perform the review. To account for their more

limited resources, operators of systems entitled to small system relief

will have 14 business days to select an independent accountant when no

agreement can be reached. A cable system is entitled to small system

relief if it either: (a) serves 15,000 or fewer subscribers and is

owned by a small cable company serving a total of 400,000 or fewer

subscribers over all of its systems, or (b) has been granted special

relief as provided for in the Sixth Report and Order and Eleventh Order

on Reconsideration in MM Docket Nos. 92-266 and 93-215, 60 FR 35854

(July 12, 1995) (``Small System Order''). The final accountant report

must be completed within 60 days of when the final accountant is

selected to perform the review. The Order amended the Commission's

current rule requiring complaints to be filed within 60 days of the

alleged violation to provide instead that complaints must be filed

within 60 days of the completion of the final accountant report.

54. The operator must pay the full cost of the review if the final

accountant report shows that the operator's rate exceeds the maximum

permitted rate by more than a de minimis amount. Otherwise, each party

will pay their own expenses incurred in making the review and will

split the cost of the final accountant's review. We believe that this

approach is appropriate because, unlike the leased access programmer,

the cable operator possesses all the information necessary to calculate

its rates accurately and knows, or should know, whether its rates are

excessive.

55. The final accountant report should be filed in the cable

system's local public file. In order for the information to serve as

adequate notice to other potential leased access programmers, the final

accountant report must, at a minimum, state the maximum permitted rate

and explain, as fully as possible without revealing proprietary

information, how it was determined. The report must be signed, dated,

and certified by the accountant.

56. We strongly encourage parties to use ADR to settle disputes

that are not resolved by the final accountant report. If parties

attempt, but fail, to settle their dispute through ADR, we will make an

exception to our requirement that complaints must be filed within 60

days of the completion of the final accountant report, provided that

the leased access programmer certifies that its complaint was filed

within 60 days of the termination of the ADR proceedings. The cable

operator may rebut such a certification.

I. Contractual Issues

i. Minimum Contract Length

57. In response to the request of a few commenters that we address

certain contractual issues that arise in the negotiation of leased

access contracts, we found that the record before us was insufficient

to determine what a reasonable minimum contract length would be. We

recognize that the lack of long-term security could create difficulties

for leased access programmers that need to obtain financing or to make

long-term investments in leases and equipment. However, our rule that

operators must accommodate all leased access requests so long as

capacity exceeds demand guarantees that a leased access programmer will

be assured of continued access at least until the operator's set-aside

requirement is met. Operators are not allowed to terminate leased

access contracts for simply any reason asserted by the cable operator.

Termination provisions of leased access contracts must be commercially

reasonable. Because we believe that this requirement affords leased

access programmers adequate security, we declined to establish a

minimum contract length.

58. Operators may not, however, unreasonably limit the length of a

contract with a leased access programmer. In assessing reasonableness

in this context, we will

[[Page 11375]]

weigh heavily the contract lengths that the operator enters into with

the non-leased access programming services on its system.

ii. Insurance Requirements

59. At the outset, we noted that operators have the right to

require reasonable liability insurance coverage for leased access

programming. We declined to adopt specific conditions or limits

regarding the amount of coverage or the type of insurance policy that

operators may require because we believe that a specific restriction

might not be appropriate for all situations. Instead, we adopted a

standard comparable to the standard that applies in the context of

security deposits for leased access programming. That is, insurance

requirements must be reasonable in relation to the objective of the

requirement. Cable operators will bear the burden of proof in

establishing reasonableness. Similar to the rule for security deposits,

insurance requirements may be sufficient to insure adequate coverage.

Determinations of what is a ``reasonable'' insurance requirement will

be based on the operator's practices with respect to insurance

requirements imposed on non-leased access programmers, the likelihood

that the nature of the leased access programming will pose a liability

risk for the operator, previous instances of litigation arising from

the leased access programming, and any other relevant factors.

J. Technical Equipment Costs

60. The Commission's rules provide that cable operators must

provide ``the minimal level of technical support necessary for [leased

access] users to present their material on the air * * * provided

however, that leased access providers must reimburse operators for the

reasonable cost of any technical support that operators actually

provide.'' We clarified that this provision entitles cable operators to

charge an additional fee only for the reasonable cost of providing

technical support to a leased access programmer that is not also

provided to non-leased access programmers on the system. Cable

operators may not impose a separate charge for the same kind of

technical support that they already provide to non-leased access

programmers because the maximum leased access rate represents what non-

leased access programmers implicitly pay for carriage, including their

technical costs. In other words, the maximum leased access rate already

includes technical costs common to all programmers. Similarly, the

operator cannot impose an additional charge on the leased access

programmer to purchase additional equipment (e.g., when the current

equipment is fully utilized) if the same type of equipment is used to

serve non-leased access programmers. For example, the operator cannot

add a charge for the costs of providing a satellite dish if it provides

that type of technical support to non-leased access programmers at no

additional charge. In contrast, the operator is entitled to add a

charge to recover the costs of providing, for instance, a tape recorder

or a camera if such technical equipment would be provided to non-leased

access programmers for the same additional charge. The operator may

also charge the leased access programmer for the use of technical

equipment that is provided at no charge for PEG access programming,

provided that the franchise agreement requires the operator to provide

the equipment, the equipment is not being used for any other non-leased

access programming, and the operator's franchise agreement does not

preclude such use.

61. If, in order to accommodate a leased access programmer, a cable

operator must purchase technical equipment that is not of a type used

by non-leased access programmers on the system, we believe that the

operator should have the option of requiring the leased access

programmer to pay the full purchase price of the equipment. Should the

cable operator exercise this option, the leased access programmer will

have all rights of ownership associated with the equipment under

applicable state and local law. If, on the other hand, the operator

prefers to own the technical equipment, it may purchase the equipment

for itself and lease it to leased access programmers at a reasonable

rate. We believe that this approach will protect leased access

programmers, while assuring that the cable system's operation,

financial condition or market development are not adversely affected.

K. Definition of Affiliate

62. For purposes of section 612, we adopted the definition of

affiliate that applies in the context of our program access rules under

section 628 and our open video system rules under section 653. As we do

in those contexts, we apply the definitions contained in the notes to

47 CFR 76.501 (which reflect the broadcast attribution rules contained

in the notes to 47 CFR 73.3555), with certain modifications.

Specifically, in contrast to the broadcast attribution rules reflected

in Sec. 76.501: (a) An entity is considered a cable operator's

affiliate if the cable operator holds 5% or more of the entity's stock,

whether voting or non-voting; (b) there is no single majority

shareholder exception; and (c) all limited partnership interests of 5%

or greater qualify, regardless of insulation. In addition, actual

working control, in whatever manner exercised, is also deemed a

cognizable interest.

63. Section 612 is designed to promote diversity of programming

sources and to reduce the ability of cable operators to discriminate

against unaffiliated programming services for anti-competitive reasons.

Because these dual objectives are analogous to the objectives of the

program access and open video system rules, adoption of a similar

affiliation standard is warranted. Moreover, by adopting a definition

of affiliate for leased access that is consistent with the program

access standard, we avoided the possibility that a programmer will be

considered a cable operator's affiliate for one purpose but not for

another.

64. We also clarified that leased access programmers are required

to be unaffiliated only with the operator of the cable system on which

they seek carriage. Section 612(b)(1) provides that leased access

channel capacity shall be designated for use by programmers

``unaffiliated with the cable operator.'' We believe that use of the

term ``the'' to modify ``cable operator'' clearly indicates that

Congress was referring only to the cable operator of the particular

system in question. We believe that if Congress feared that affiliated

programmers have an advantage in acquiring carriage from even rival

cable operators, it would have disqualified all affiliated programmers

by using ``a'' or ``any'' to modify ``cable operator.'' Furthermore,

allowing a broader category of programmers to use leased access will

advance the statutory purposes of promoting competition and diversity.

III. Order on Reconsideration

A. Maximum Rate Formula

i. Exclusion of Programming Revenues

65. We declined to modify our current rule that programming

revenues received by the operator from non-leased access programmers,

such as sales commissions from home shopping networks, should be

excluded from the maximum rate calculation. We found that the effect of

excluding sales commissions on future maximum leased access rates will

be minimal given that the Order: (a) Adopted the average implicit fee

for tiered services which, unlike the highest implicit fee, is derived

using all channels on the

[[Page 11376]]

relevant tier(s), and (b) eliminated direct sales programming as a

separate category for setting rates. We therefore do not believe that

excluding sales commissions will result in the migration of home

shopping networks to leased access.

ii. Averaging Subscriber Penetration for A La Carte Channels

66. The Reconsideration Order clarified that in order to calculate

the maximum rate when leased access programming is offered as an a la

carte service, the highest per-subscriber implicit fee should be

multiplied by the average number of subscribers that subscribe to the

operator's a la carte services. As discussed above, we continue to

permit cable operators to use the highest implicit fee formula to set

maximum reasonable rates for leased access programming that is carried

as an a la carte service. We believe, however, that it is most

appropriate to require operators to determine on an aggregate basis for

a single channel which of their a la carte services has the highest

implicit fee. For example, if Channel A on a given cable system has a

per-subscriber implicit fee of $1.00 and has 2000 subscribers, its

aggregate implicit fee is $2000. If Channel B has a per-subscriber

implicit fee of $1.50 and 1000 subscribers, its aggregate implicit fee

is $1500. Of these channels, Channel A has the highest aggregate

implicit fee even though it has a lower per-subscriber implicit fee

than Channel B. Therefore, assuming these two channels are the only

channels offered on an a la carte basis, the amount that is implicitly

paid for Channel A would be the maximum rate that the operator may

charge a leased access programmer that wishes to be carried as an a la

carte service.

67. We believe that this formulation accurately represents the

highest amount that a non-leased access programmer has agreed to

implicitly pay the operator for carriage as an a la carte service.

Thus, it will discourage existing a la carte services from migrating to

leased access. Accordingly, on reconsideration, we concluded that

operators should not be required to multiply the highest per-subscriber

implicit fee by the average number of subscribers that subscribe to the

operator's a la carte services. Instead, operators must determine which

a la carte service has the highest implicit fee by comparing their

implicit fees on an aggregate basis.

B. Provision of Initial Leased Access Information

i. Response Period

68. In the Reconsideration Order, we stated that our leased access

complaint process had revealed that cable operators often did not

provide rate information in a timely manner, despite our rule requiring

a schedule of rates to be provided to prospective leased access

programmers upon request. In order to facilitate the provision of such

information to potential leased access programmers, we required an

operator to provide the following information within seven business

days of a request regarding leased access: (a) A complete schedule of

the operator's full-time and part-time leased access rates; (b) how

much of the cable operator's leased access set-aside capacity is

available; (c) rates associated with technical and studio costs; and

(d) if specifically requested, a sample leased access contract.

69. In the Order, we stressed our expectation that cable operators

will respond to all leased access requests in a complete and timely

manner. While we recognized the importance of prompt disclosure of the

required information by cable operators, we nevertheless modified our

rule to require operators to respond to a leased access request within

15 calendar days of the date the leased access programmer makes the

request. Such an extension should insure that operators have a

reasonable length of time to process leased access requests even when

those requests are received through the mail. In order to provide more

certainty regarding the date of a request, we also modified our rule to

require that all requests for leased access be made in writing and

specify the date they are sent to the operator. In addition, we allowed

operators of systems subject to small system relief 30 calendar days

from the date of a leased access request to provide the required

information, rather than the 15 calendar days in which other operators

must respond.

ii. Preconditions To Providing Initial Leased Access Information

70. Because we remain concerned that requests for programmer

information will be used by operators to discourage leased access use,

operators may not ask for any information before responding to a leased

access request unless the information is necessary to prepare the

required response. For instance, if a leased access request does not

specify for which cable system access is sought, the cable operator may

ask the programmer for this information because maximum rates are

calculated on a per-system basis. On the other hand, information from

the programmer regarding its tier preference is not necessary for the

operator to provide the required information, since the operator may

place a programmer demanding access to a tier on any tier with more

than 50% subscriber penetration. In addition, operators are not

entitled to inquire about the content of the programming before

responding to a request because such information is not relevant to the

required rate and capacity information.

71. We did, however, make an exception for systems subject to small

system relief because their initial costs of providing this information

may be higher than other systems. Therefore, we found that operators of

systems subject to small system relief do not have to provide the

required information until the leased access programmer supplies the

following information: (a) Desired length of contract term, (b) time

slot desired, (c) anticipated commencement date for carriage, and (d)

the nature of the programming.

iii. Obligation To Provide Information Regarding the Amount of

Available Leased Access Capacity

72. We declined to reconsider our requirement that cable operators

provide potential leased access users with information about how much

set-aside capacity is available on their systems. We believe that

information concerning overall available channel capacity may be of use

to a potential leased access programmer in deciding which cable system

best meets its needs, particularly if the programmer wishes to lease

more than one channel. Moreover, we do not believe that calculating a

system's available leased access capacity is difficult, particularly

with the clarifications of our rules regarding the methodology for

calculating set-aside requirements. Finally, the additional time we

granted cable operators to supply the information should make supplying

the information less burdensome.

C. Time Increments

73. We declined to alter our current rule that operators are not

required to accept leases that are for less than half-hour intervals.

As noted above, part-time leased access programming provides much of

the competition and diversity of programming sources that Section 612

was intended to promote. As we stated in the Reconsideration Order, the

most common programming time increment is typically one-half to

[[Page 11377]]

one hour. We therefore continue to believe that permitting operators to

exclude leased access programming seeking half-hour increments would

unfairly deny access to a substantial number of potential programmers.

Moreover, we believe that the rules we adopted regarding part-time use

address any concerns that a half-hour minimum will cause excessive

migration of current infomercial programming to leased access channels

and will lead to excessive displacement of existing non-leased access

programmers. We clarified that the leased access rate for a half-hour

program must be prorated to reflect the length of the program (i.e.,

hourly rates cannot be charged for half-hour programs).

D. Calculation of Statutory Set-Aside Requirement

74. Section 612 requires a cable system to set aside up to 15% of

its activated channels for leased access. For operators with 100 or

fewer activated channels, the statutory set-aside requirements for

leased access channels are expressed as a percentage of ``channels not

otherwise required for use by federal law or regulation.'' We continue

to believe that, when calculating its set-aside requirement, an

operator must include channels carrying retransmission consent stations

because such channels are not ``required by federal law or

regulation.'' We clarified that channels which cannot be used due to

technical and safety regulations of the federal government, such as

aeronautical channels, should be excluded when calculating the set-

aside requirement for cable systems that have 100 channels or less.

E. Billing and Collection Services

75. Section 612(c)(4)(A)(ii) grants the Commission the authority to

establish reasonable terms and conditions for the billing of rates to

subscribers and for the collection of revenue from subscribers for

leased access channels. In the Rate Order, we required cable operators

to provide billing and collection services to leased access programmers

unless operators could demonstrate the existence of third-party billing

and collection services which, in terms of cost and accessibility,

offer leased access programmers an alternative substantially equivalent

to that offered to comparable non-leased access programmers. In both

the Rate Order and the Reconsideration Order, we did not adopt specific

rules regarding rates for such services. In the Order, we declined to

modify our current rule or to establish specific rules relating to the

rates that cable operators can charge for billing and collection

services.

IV. Market Entry Analysis

76. We noted that section 257 of the Communications Act requires

the Commission to complete a proceeding to identify and eliminate

market entry barriers for entrepreneurs and other small businesses in

the telecommunications industry. The Commission is directed to promote

a diversity of media voices and vigorous economic competition, among

other things. We believe that the Order is consistent with the

objectives of section 257 in that it establishes rates, terms, and

conditions for leased access that are intended to promote diversity and

competition. We also believe that our provisions for part-time leased

access are especially suited to allow small or entrepreneurial leased

access programmers to enter the telecommunications programming

marketplace.

V. Final Regulatory Flexibility Analysis

77. As required by section 603 of the Regulatory Flexibility Act, 5

U.S.C. 603, (``RFA''), an Initial Regulatory Flexibility Analysis

(``IRFA'') was incorporated in the Further NPRM. The Commission sought

written public comments on the proposals in the Further NPRM, including

comments on the IRFA. This Final Regulatory Flexibility Analysis

(``FRFA'') conforms to the RFA, as amended.

A. Need for Action and Objectives of the Rule

78. Section 612 of the Communications Act requires the Commission

to establish reasonable terms and conditions, including maximum

reasonable rates, for leased access on cable systems. The purpose of

the Order is to amend the Commission's rules regarding leased access,

including the rules for calculating maximum reasonable rates. The

statutory objectives of the leased access provisions are to promote

competition in the delivery of diverse programming sources and to

assure the widest possible diversity of programming sources in a manner

that is consistent with the growth and development of cable systems.

B. Summary of Issues Raised by the Public Comments in Response to the

Initial Regulatory Flexibility Analysis

79. In response to the IRFA, the Small Cable Business Association

(``SCBA'') filed comments criticizing the Commission for failing to

estimate the number of small cable systems and small cable operators

that would be affected by the regulations proposed in the Further NPRM.

SCBA argued that, as reflected in the Small System Order, the

Commission has extensive data regarding the existence of small cable

entities. SCBA also claimed the Commission neither sought specific

comment regarding the impact of its proposals on small cable entities

nor asked for alternatives. SCBA urged the Commission to adopt the

alternatives for small cable systems that it has proposed in this

proceeding. In its filings, SCBA raised the following issues and

alternatives.

80. Information Collection Issues. SCBA argued that the

Commission's seven business-day response time for providing leased

access information imposes significant burdens on small cable systems.

SCBA recommended that the Commission allow small system operators 30

days to provide a written response stating whether unused leased access

capacity is available and 60 days to provide the remaining required

information. SCBA also requested that the Commission allow small system

operators to respond only to ``bona fide'' leased access requests.

81. Rate Issues. SCBA argued that the Commission's proposed cost/

market rate formula would not adequately compensate small system

operators for the following reasons:

(a) Full-Time Rates. SCBA contended that because small system

operators often receive no advertising revenues, the Commission's cost/

market rate formula could result in leased access rates of zero or

less. Among other things, SCBA suggested that the Commission revise the

proposed formula to allow small system operators to recover all

operating costs reflected on FCC Form 1230, instead of using subscriber

revenue as a surrogate for such costs. Alternatively, SCBA proposed

allowing operators of small systems to charge market rates for all

leased access programmers regardless of demand, particularly if the

party requesting access is affiliated with the provider of a competing

multi-channel video programming service.

(b) Part-Time Rates. SCBA argued that if the full-time rate under

the proposed cost/market rate formula is prorated, the per hour or

half-hour rates for small systems would be lower than advertising

rates, which would create a flood of requests for part-time leased

access.

(c) Transaction Costs. SCBA contended that leased access contracts

create higher transaction costs than other programming contracts

because leased access agreements are negotiated

[[Page 11378]]

more frequently and must be negotiated on a system-by-system basis.

SCBA proposed that the Commission remedy this problem for small system

operators by allowing them to include an additional amount of at least

$1,000 in their leased access rate calculations.

(d) Technical Costs. SCBA argued that additional headend equipment

used to add leased access channels will result in high per-subscriber

costs for small systems. SCBA proposed that the Commission allow small

system operators to charge leased access programmers for all technology

costs related to leased access.

(e) Transition Period. SCBA argued that the Commission should phase

in leased access obligations for small cable systems to avoid the

disruption to current programming line-ups that the proposed cost/

market rate formula would create.

(f) Advance Channel Designations. The Further NPRM proposed that a

cable operator must place in its public file a list of the specific

channels it intends to use for leased access programming. SCBA argued

that small system operators should only be required to provide the

required leased access information following receipt of a ``bona fide''

request.

82. In reviewing the record before us, we identified issues that

may impact small leased access programmers, such as maximum rate

calculations, part-time use of leased access, resale, tier and channel

placement, preferential access, dispute resolution procedures, certain

contractual issues, technical equipment costs, and the definition of

affiliate. The Order addressed comments from leased access programmers

regarding these issues.

C. Description and Estimate of the Number of Small Entities Impacted

83. The RFA directs the Commission to provide a description of and,

where feasible, an estimate of the number of small entities that will

be affected by the proposed rules. The RFA defines the term ``small

entity'' as having the same meaning as the terms ``small business,''

``small organization,'' and ``small governmental jurisdiction,'' and

the same meaning as the term ``small business concern'' under section 3

of the Small Business Act. Under the Small Business Act, a ``small

business concern'' is one which: (a) Is independently owned and

operated; (b) is not dominant in its field of operation; and (c)

satisfies any additional criteria established by the Small Business

Administration (``SBA''). The rules we adopted in the Order will affect

cable systems and cable programmers.

84. Cable Systems: The SBA has developed a definition of small

entities for cable and other pay television services, which includes

all such companies generating $11 million or less in revenue annually.

While this definition includes small cable entities, it also includes

closed circuit television services, direct broadcast satellite

services, multipoint distribution systems, satellite master antenna

systems and subscription television services. Thus, the definition

includes many small entities that will not be directly impacted by our

leased access rules. According to the Census Bureau, there were 1,423

such cable and other pay television services generating less than $11

million in revenue that were in operation for at least one year at the

end of 1992. We noted that not only does this estimate include small

entities other than small cable entities, but the majority of the small

cable systems included within this estimate have less than 36 channels

and therefore are not subject to the Commission's leased access

regulations. We therefore estimated that, based on the SBA definition,

the number of small cable entities likely to be impacted by our rules

will be significantly less than 1,423 entities.

85. The Commission has developed its own definition of a small

cable system for purposes of rate regulation. Under the Commission's

rules, cable systems serving fewer than 15,000 subscribers are

considered small systems, and small systems owned by small cable

companies serving fewer than 400,000 subscribers nationwide are

entitled to small system relief. This definition is both broader and

narrower than that of the SBA. The definition is broader in that it

includes larger cable systems than the SBA definition. It is narrower

in that, unlike the SBA definition, it does not include closed circuit

television services, direct broadcast satellite services, multipoint

distribution systems, satellite master antenna systems, or subscription

television services. Our most recent information indicates that, under

the Commission's definition, there were 1,439 systems entitled to small

system relief at the end of 1995. Of these systems, we estimated that

approximately 614 systems offer more than 36 channels, and thus are

subject to our leased access rules.

86. Section 623(m)(2) of the Communications Act defines a small

cable system operator as ``a cable operator that, directly or through

an affiliate, serves in the aggregate fewer than 1 percent of all

subscribers in the United States and is not affiliated with any entity

or entities whose gross annual revenues in the aggregate exceed

$250,000,000.'' The Commission has determined that there are 61,700,000

subscribers in the United States. Therefore, we found that an operator

serving fewer than 617,000 subscribers shall be deemed a small operator

if its annual revenues, when combined with the total annual revenues of

all of its affiliates, do not exceed $250 million in the aggregate.

Based on available data, we found that the number of cable operators

serving 617,000 subscribers or less totals 1,450. Although it seems

certain that some of these cable system operators are affiliated with

entities whose gross annual revenues exceed $250 million, we were

unable to estimate with greater precision the number of cable system

operators that would qualify as small cable operators under the

definition in the Communications Act.

87. Cable Programmers: We anticipate that both small leased access

programmers and small non-leased access programmers may be impacted by

our leased access rules. The Commission has not developed a definition

of small entities applicable to producers or distributors of cable

television programs. Therefore, we utilized the SBA classifications of

Motion Picture and Video Tape Production (SIC 7812), and Theatrical

Producers (Except Motion Pictures) and Miscellaneous Theatrical

Services (SIC 7922). These SBA definitions provide that a small entity

in the cable television programming industry is an entity with $21.5

million or less in annual receipts for SIC 7812, and $5 million or less

in annual receipts for SIC 7922. Census Bureau data indicate the

following: (a) There were 7,265 firms in the United States classified

as Motion Picture and Video Production (SIC 7812), and that 6,987 of

these firms had $16.999 million or less in annual receipts and 7,002 of

these firms had $24.999 million or less in annual receipts; and (b)

there were 5,671 firms in the United States classified as Theatrical

Producers and Services (SIC 7922), and that 5,627 of these firms had

$4.999 million or less in annual receipts.

88. Each of these SIC categories is very broad and includes firms

that may be engaged in various industries, including cable programming.

Specific figures are not available regarding how many of these firms

exclusively produce and/or distribute programming for cable television

or how many are independently owned and operated. Thus, we estimated

that our rules may affect approximately 6,987 small entities that

produce and distribute taped cable

[[Page 11379]]

television programs and 5,627 small producers of live programs. In

addition, as of May 31, 1996, there were 1,880 LPTV stations that may

also be affected by our rules.

D. Reporting, Recordkeeping, and Other Compliance Requirements

This section specifies the reporting, recordkeeping and other

related requirements of the regulations adopted, amended, modified, or

clarified in the Order.

89. Maximum Rate Calculations: Operators of cable systems subject

to leased access requirements must calculate their maximum leased

access rates in accordance with the rate formulas we have established.

We do not believe that operators will need additional professional

skills to perform these calculations.

90. Accountant Reports: A final accountant report that is completed

as a result of a dispute concerning an operator's rate calculations

must be filed in the operator's local public file.

91. Provision of Initial Leased Access Information: Within 15

calendar days of a leased access request, cable operators are required

to provide the following types of information: (a) A complete schedule

of the operator's full-time and part-time leased access rates, (b) how

much of the cable operator's leased access set-aside capacity is

available, (c) rates associated with technical and studio costs, and

(d) if specifically requested, a sample leased access contract. An

exception is provided for operators of systems entitled to small system

relief, which are allowed 30 calendar days to provide the required

information. In addition, these operators are not required to respond

to a leased access request if the programmer does not provide the

following information: (a) Desired length of contract term, (b) time

slot desired, (c) anticipated commencement date for carriage, and (d)

the nature of the programming.

92. Requirements for Leased Access Requests: Leased access requests

must be made in writing and must specify the date the request was sent

to the operator.

E. Significant Alternatives and Steps Taken to Minimize the Significant

Economic Impact on a Substantial Number of Small Entities Consistent

With the Stated Objectives

This section analyzes the impact on small entities of the

regulations adopted, amended, modified, or clarified in the Order.

93. Information Collection Issues. We allow operators of systems

entitled to small system relief to respond to leased access requests

within 30 calendar days, instead of the 15 calendar days required of

other operators. In addition, we do not require these operators to

respond to leased access requests unless the programmer provides the

following information: (a) Desired length of contract term, (b) time

slot desired, (c) anticipated commencement date for carriage, and (d)

the nature of the programming. These modifications to the Commission's

rules should mitigate any disproportionate burdens that responding to a

leased access request may create for small system operators.

94. Rate Issues. We do not believe that either full-time or part-

time rates under our maximum rate formula will impose disproportionate

burdens on small system operators. When calculated for a particular

cable system, both the average implicit fee (for tiered services) and

the highest implicit fee (for a la carte services) represent what

current non-leased access programmers are implicitly paying for

carriage on that system. Because the maximum rates under an implicit

fee formula are tailored to each individual system, we disagreed with

SCBA that small system operators should be allowed to charge market

prices. For the following reasons, we also disagreed with SCBA's

various other proposals to modify the maximum rate formula for small

systems.

(a) Transaction Costs. We did not agree with SCBA that small system

operators should be allowed to include in their rates an additional sum

of at least $1,000 as compensation for transaction costs imposed by

leased access because, as discussed above, we believe that the recovery

that operators may gain from subscriber revenue for leased access

programming will sufficiently offset any additional transaction costs.

(b) Technical Costs. We declined to adopt modified rules for small

system operators regarding the recovery of technical costs associated

with leased access. We do not believe that there will be a

disproportionate impact on small system operators because our rules

enable them to recover technical costs that are specific to leasing.

(c) Transition Period. SCBA argued that the Commission should phase

in leased access obligations for small cable systems in order to

minimize the displacement of existing programming services. In light of

our adoption of the average implicit fee methodology and our

accommodations of the special needs of small systems, we concluded that

a transition period was unnecessary.

(d) Advance Channel Designations. SCBA argued that the Commission

should not require small system operators to publicly file a list of

their designated leased access channels. The Commission did not adopt

such a requirement for any cable systems.

95. Dispute Resolution Procedures. To account for their more

limited resources, we allow operators of systems entitled to small

system relief 14 business days to select an independent accountant when

an operator and a leased access programmer fail to agree on a mutually

acceptable accountant to review the operator's rate calculations in the

case of a dispute. The general rule is that the parties must each

select an independent accountant on the sixth business day if they

cannot agree on a mutually acceptable accountant within five business

days of the programmer's request for a review.

96. Impact on Cable Programmers. Leased access may impact existing

programmers to the extent that operators displace them in order to

accommodate leased access requests. However, we believe that

displacement of existing programmers is inherent in section 612(b)(4),

which provides that a cable operator may no longer use unused leased

access capacity once a written agreement is obtained by a leased access

programmer. In addition, since it is within an operator's discretion to

select which non-leased access programmers to carry (aside from must-

carry and PEG access channels), our rules do not create a

disproportionate impact on small non-leased access programmers. With

respect to small leased access programmers, we believe that the impact

of our revised rules generally will be positive, particularly since our

rules will result in lower maximum rates for tiered services, permit

resale, grant access to highly penetrated tiers, and require part-time

rates to be prorated without a surcharge. Although permissible costs

for insurance policies, technical equipment, and accountant reviews of

rate calculations may impose a burden on small leased access

programmers, we believe that such impacts are the normal costs of being

a leased access programmer, and that no modifications are warranted.

F. Report to Congress

97. The Commission will send a copy of this Final Regulatory

Flexibility Analysis, along with the 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).

[[Page 11380]]

VI. Ordering Clauses

98. Accordingly, it is ordered that, pursuant to the authority

granted in sections 4(i), 4(j), and 612 of the Communications Act of

1934, as amended, 47 U.S.C. 154(i), 154(j) and 532, the Petitions for

Reconsideration in CS Docket No. 96-60 are Granted in part and denied

in part, as provided herein.

99. It is further ordered that, pursuant to the authority granted

in Sections 4(i), 4(j), and 612 of the Communications Act of 1934, as

amended, 47 U.S.C. 154(i), 154(j) and 532, Part 76 of the Commission's

rules is hereby amended as indicated below. The amendments to 47 CFR

76.970 (a), (b), (i), 76.971 (a), (c), (d), (g), (h), and 76.977(a)

shall become effective April 11, 1997. The amendments to 47 CFR 76.970

(c), (d), (e), (f), (g), (h), 76.971(f)(1), and 76.975 (b) and (c),

which impose information collection requirements, shall become

effective upon approval by the Office of Management and Budget (OMB),

but no sooner than April 11, 1997. The Commission will publish a

document at a later date establishing the effective date for the

sections containing information collection requirements.

100. It is further ordered that the Secretary shall send a copy of

this 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).

List of Subjects in 47 CFR Part 76

Administrative practice and procedure, Cable television, Reporting

and recordkeeping requirements.

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 76.970 is amended by adding a last sentence to paragraph

(a), revising paragraphs (b), (c), (d), (e) and (f), and adding new

paragraphs (g), (h) and (i) to read as follows:

Sec. 76.970 Commercial leased access rates.

(a) * * * For cable systems with 100 or fewer channels, channels

that cannot be used due to technical and safety regulations of the

Federal Government (e.g., aeronautical channels) shall be excluded when

calculating the set-aside requirement.

(b) In determining whether a party is an ``affiliate'' for purposes

of commercial leased access, the definitions contained in the notes to

Sec. 76.501 shall be used, provided, however, that the single majority

shareholder provision of Note 2(b) to Sec. 76.501 and the limited

partner insulation provisions of Note 2(g) to Sec. 76.501 shall not

apply, and the provisions of Note 2(a) to Sec. 76.501 regarding five

(5) percent interest shall include all voting or nonvoting stock or

limited partnership equity interest of five (5) percent or more. Actual

working control, in whatever manner exercised, shall also be deemed a

cognizable interest.

(c) The maximum commercial leased access rate that a cable operator

may charge for full-time channel placement on a tier exceeding a

subscriber penetration of 50 percent is the average implicit fee for

full-time channel placement on all such tier(s).

(d) The average implicit fee identified in paragraph (c) of this

section for a full-time channel on a tier with a subscriber penetration

over 50 percent shall be calculated by first calculating the total

amount the operator receives in subscriber revenue per month for the

programming on all such tier(s), and then subtracting the total amount

it pays in programming costs per month for such tier(s) (the ``total

implicit fee calculation''). A weighting scheme that accounts for

differences in the number of subscribers and channels on all such

tier(s) must be used to determine how much of the total implicit fee

calculation will be recovered from any particular tier. The weighting

scheme is determined in two steps. First, the number of subscribers is

multiplied by the number of channels (the result is the number of

``subscriber-channels'') on each tier with subscriber penetration over

50 percent. For instance, a tier with 10 channels and 1,000 subscribers

would have a total of 10,000 subscriber-channels. Second, the

subscriber-channels on each of these tiers is divided by the total

subscriber-channels on all such tiers. Given the percent of subscriber-

channels for the particular tier, the implicit fee for the tier is

computed by multiplying the subscriber-channel percentage for the tier

by the total implicit fee calculation. Finally, to calculate the

average implicit fee per channel, the implicit fee for the tier must be

divided by the corresponding number of channels on the tier. The final

result is the maximum rate per month that the operator may charge the

leased access programmer for a full-time channel on that particular

tier. The average implicit fee shall be calculated by using all

channels carried on any tier exceeding 50 percent subscriber

penetration (including channels devoted to affiliated programming,

must-carry and public, educational and government access channels). In

the event of an agreement to lease capacity on a tier with less than 50

percent penetration, the average implicit fee should be determined on

the basis of subscriber revenues and programming costs for that tier

alone. The license fees for affiliated channels used in determining the

average implicit fee shall reflect the prevailing company prices

offered in the marketplace to third parties. If a prevailing company

price does not exist, the license fee for that programming shall be

priced at the programmer's cost or the fair market value, whichever is

lower. The average implicit fee shall be based on contracts in effect

in the previous calendar year. The implicit fee for a contracted

service may not include fees, stated or implied, for services other

than the provision of channel capacity (e.g., billing and collection,

marketing, or studio services).

(e) The maximum commercial leased access rate that a cable operator

may charge for full-time channel placement as an a la carte service is

the highest implicit fee on an aggregate basis for full-time channel

placement as an a la carte service.

(f) The highest implicit fee on an aggregate basis for full-time

channel placement as an a la carte service shall be calculated by first

determining the total amount received by the operator in subscriber

revenue per month for each non-leased access a la carte channel on its

system (including affiliated a la carte channels) and deducting the

total amount paid by the operator in programming costs (including

license and copyright fees) per month for programming on such

individual channels. This calculation will result in implicit fees

determined on an aggregate basis, and the highest of these implicit

fees shall be the maximum rate per month that the operator may charge

the leased access programmer for placement as a full-time a la carte

channel. The license fees for affiliated channels used in determining

the highest implicit fee shall reflect the prevailing company prices

offered in the marketplace to third parties. If a prevailing company

[[Page 11381]]

price does not exist, the license fee for that programming shall be

priced at the programmer's cost or the fair market value, whichever is

lower. The highest implicit fee shall be based on contracts in effect

in the previous calendar year. The implicit fee for a contracted

service may not include fees, stated or implied, for services other

than the provision of channel capacity (e.g., billing and collection,

marketing, or studio services). Any subscriber revenue received by a

cable operator for an a la carte leased access service shall be passed

through to the leased access programmer.

(g) The maximum commercial leased access rate that a cable operator

may charge for part-time channel placement shall be determined by

either prorating the maximum full-time rate uniformly, or by developing

a schedule of and applying different rates for different times of the

day, provided that the total of the rates for a 24-hour period does not

exceed the maximum daily leased access rate.

(h)(1) Cable system operators shall provide prospective leased

access programmers with the following information within 15 calendar

days of the date on which a request for leased access information is

made:

(i) How much of the operator's leased access set-aside capacity is

available;

(ii) A complete schedule of the operator's full-time and part-time

leased access rates;

(iii) Rates associated with technical and studio costs; and

(iv) If specifically requested, a sample leased access contract.

(2) Operators of systems subject to small system relief shall

provide the information required in paragraph (h)(1) of this section

within 30 calendar days of a bona fide request from a prospective

leased access programmer. For these purposes, systems subject to small

system relief are systems that either:

(i) Qualify as small systems under Sec. 76.901(c) and are owned by

a small cable company as defined under Sec. 76.901(e); or

(ii) Have been granted special relief.

(3) Bona fide requests, as used in this section, are defined as

requests from potential leased access programmers that have provided

the following information:

(i) The desired length of a contract term;

(ii) The time slot desired;

(iii) The anticipated commencement date for carriage; and

(iv) The nature of the programming.

(4) All requests for leased access must be made in writing and must

specify the date on which the request was sent to the operator.

(5) Operators shall maintain, for Commission inspection, sufficient

supporting documentation to justify the scheduled rates, including

supporting contracts, calculations of the implicit fees, and

justifications for all adjustments.

(i) Cable operators are permitted to negotiate rates below the

maximum rates permitted in paragraphs (c) through (g) of this section.

3. Section 76.971 is amended by revising paragraphs (a), (c),

(f)(1) and (g), adding two sentences to the end of paragraph (d), and

adding new paragraph (h) to read as follows:

Sec. 76.971 Commercial leased access terms and conditions.

(a) (1) Cable operators shall place leased access programmers that

request access to a tier actually used by most subscribers on any tier

that has a subscriber penetration of more than 50 percent, unless there

are technical or other compelling reasons for denying access to such

tiers.

(2) Cable operators shall be permitted to make reasonable

selections when placing leased access channels at specific channel

locations. The Commission will evaluate disputes involving channel

placement on a case-by-case basis and will consider any evidence that

an operator has acted unreasonably in this regard.

(3) On systems with available leased access capacity sufficient to

satisfy current leased access demand, cable operators shall be required

to accommodate as expeditiously as possible all leased access requests

for programming that is not obscene or indecent. On systems with

insufficient available leased access capacity to satisfy current leased

access demand, cable operators shall be permitted to select from among

leased access programmers using objective, content-neutral criteria.

(4) Cable operators that have not satisfied their statutory leased

access requirements shall accommodate part-time leased access requests

as set forth in this paragraph. Cable operators shall not be required

to accept leases for less than one half-hour of programming. Cable

operators may accommodate part-time leased access requests by opening

additional channels for part-time use or providing comparable time

slots on channels currently carrying leased or non-leased access

programming. The comparability of time slots shall be determined by

objective factors such as day of the week, time of day, and audience

share. A cable operator that is unable to provide a comparable time

slot to accommodate a part-time programming request shall be required

to open an additional channel for part-time use unless such operator

has at least one channel designated for part-time leased access use

that is programmed with less than 18 hours of part-time leased access

programming every day. However, regardless of the availability of

partially programmed part-time leased access channels, a cable operator

shall be required to open an additional channel to accommodate any

request for part-time leased access for at least eight contiguous

hours, for the same time period every day, for at least a year. Once an

operator has opened a vacant channel to accommodate such a request, our

other leased access rules apply. If, however, the operator has

accommodated such a request on a channel already carrying an existing

full-time non-leased access programmer, the operator does not have to

accommodate other part-time requests of less than eight hours on that

channel until all other existing part-time leased access channels are

substantially filled with leased access programming.

* * * * *

(c) Cable operators are required to provide unaffiliated leased

access users the minimal level of technical support necessary for users

to present their material on the air, and may not unreasonably refuse

to cooperate with a leased access user in order to prevent that user

from obtaining channel capacity. Leased access users must reimburse

operators for the reasonable cost of any technical support actually

provided by the operator that is beyond that provided for non-leased

access programmers on the system. A cable operator may charge leased

access programmers for the use of technical equipment that is provided

at no charge for public, educational and governmental access

programming, provided that the operator's franchise agreement requires

it to provide the equipment and does not preclude such use, and the

equipment is not being used for any other non-leased access

programming. Cable operators that are required to purchase technical

equipment in order to accommodate a leased access programmer shall have

the option of either requiring the leased access programmer to pay the

full purchase price of the equipment, or purchasing the equipment and

leasing it to the leased access programmer at a reasonable rate. Leased

access programmers that are required to pay the full purchase price of

additional equipment shall have all rights of

[[Page 11382]]

ownership associated with the equipment under applicable state and

local law.

(d) * * * Cable operators may impose reasonable insurance

requirements on leased access programmers. Cable operators shall bear

the burden of proof in establishing reasonableness.

* * * * *

(f) (1) A cable operator shall provide billing and collection

services for commercial leased access cable programmers, unless the

operator demonstrates the existence of third party billing and

collection services which in terms of cost and accessibility, offer

leased access programmers an alternative substantially equivalent to

that offered to comparable non-leased access programmers.

* * * * *

(g) Cable operators shall not unreasonably limit the length of

leased access contracts. The termination provisions of leased access

contracts shall be commercially reasonable and may not allow operators

to terminate leased access contracts without a reasonable basis.

(h) Cable operators may not prohibit the resale of leased access

capacity to persons unaffiliated with the operator, but may provide in

their leased access contracts that any sublessees will be subject to

the non-price terms and conditions that apply to the initial lessee,

and that, if the capacity is resold, the rate for the capacity shall be

the maximum permissible rate.

4. Section 76.975 is amended by revising paragraphs (b), (c), (d)

and (e) to read as follows:

Sec. 76.975 Commercial leased access dispute resolution.

* * * * *

(b) (1) Any person aggrieved by the failure or refusal of a cable

operator to make commercial channel capacity available or to charge

rates for such capacity in accordance with the provisions of Title VI

of the Communications Act, or our implementing regulations,

Secs. 76.970 and 76.971, may file a petition for relief with the

Commission. Persons alleging that a cable operator's leased access rate

is unreasonable must receive a determination of the cable operator's

maximum permitted rate from an independent accountant prior to filing a

petition for relief with the Commission.

(2) Parties to a dispute over leased access rates shall have five

business days to agree on a mutually acceptable accountant from the

date on which the programmer provides the cable operator with a written

request for a review of its leased access rates. Parties that fail to

agree on a mutually acceptable accountant within five business days of

the programmer's request for a review shall each be required to select

an independent accountant on the sixth business day. The two

accountants selected shall have five business days to select a third

independent accountant to perform the review. Operators of systems

subject to small system relief shall have 14 business days to select an

independent accountant when an agreement cannot be reached. For these

purposes, systems subject to small system relief are systems that

either:

(i) Qualify as small systems under Sec. 76.901(c) and are owned by

a small cable company as defined under Sec. 76.901(e); or

(ii) Have been granted special relief.

(3) The final accountant's report must be completed within 60 days

of the date on which the final accountant is selected to perform the

review. The final accountant's report must, at a minimum, state the

maximum permitted rate, and explain how it was determined without

revealing proprietary information. The report must be signed, dated and

certified by the accountant. The report shall be filed in the cable

system's local public file.

(4) If the accountant's report indicates that the cable operator's

leased access rate exceeds the maximum permitted rate by more than a de

minimis amount, the cable operator shall be required to pay the full

cost of the review. If the final accountant's report does not indicate

that the cable operator's leased access rate exceeds the maximum

permitted rate by more than a de minimis amount, each party shall be

required to split the cost of the final accountant's review, and to pay

its own expenses incurred in making the review.

(5) Parties may use alternative dispute resolution (ADR) processes

to settle disputes that are not resolved by the final accountant's

report.

(c) A petition must contain a concise statement of the facts

constituting a violation of the statute or the Commission's Rules, the

specific statute(s) or rule(s) violated, and certify that the petition

was served on the cable operator. Where a petition is based on

allegations that a cable operator's leased access rates are

unreasonable, the petitioner must attach a copy of the final

accountant's report. In proceedings before the Commission, there will

be a rebuttable presumption that the final accountant's report is

correct.

(d) Where a petition is not based on allegations that a cable

operator's leased access rates are unreasonable, the petition must be

filed within 60 days of the alleged violation. Where a petition is

based on allegations that the cable operator's leased access rates are

unreasonable, the petition must be filed within 60 days of the final

accountant's report, or within 60 days of the termination of ADR

proceedings. Aggrieved parties must certify that their petition was

filed within 60 days of the termination of ADR proceedings in order to

file a petition later than 60 days after completion of the final

accountant's report. Cable operators may rebut such certifications.

(e) The cable operator or other respondent will have 30 days from

the filing of the petition to file a response. If a leased access rate

is disputed, the response must show that the rate charged is not higher

than the maximum permitted rate for such leased access, and must be

supported by the affidavit of a responsible company official. If, after

a response is submitted, the staff finds a prima facie violation of our

rules, the staff may require a respondent to produce additional

information, or specify other procedures necessary for resolution of

the proceeding.

* * * * *

5. Section 76.977 is amended by revising the last sentence of

paragraph (a) to read as follows:

Sec. 76.977 Minority and educational programming used in lieu of

designated commercial leased access capacity.

(a) * * * The channel capacity used to provide programming from a

qualified minority programming source or from any qualified educational

programming source pursuant to this section may not exceed 33 percent

of the channel capacity designated pursuant to 47 U.S.C. 532 and must

be located on a tier with more than 50 percent subscriber penetration.

* * * * *

[FR Doc. 97-5897 Filed 3-11-97; 8:45 am]

BILLING CODE 6712-01-P