Low-Price Cable Television System Rate Regulation

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 76

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

Low-Price Cable Television System Rate Regulation

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: The Commission has adopted a Report and Order regarding low-

price system rate regulation. The Report and Order makes permanent the

transition relief afforded to low-price cable television systems, and

establishes final rules for low-price system rate regulation. Based on

data received in a cost survey conducted in the Fall of 1995, the

Report and Order finds that low-price system operators have lower cash

flow ratios and receive lower profit margins for their low-price

systems than operators of systems already regulated under the

Commission's revised benchmark approach receive for their systems. The

Report and Order, therefore, states that low-price system rates are

reasonable and that low-price systems will not be required to reduce

their rates by the full competitive differential or any lesser amount.

Low-price systems will be able to continue charging for cable services

in accordance with the current rules for such systems.

EFFECTIVE DATE: April 30, 1997.

ADDRESSES: In addition to filing comments with the Secretary, a copy of

any comments on the information collections contained herein should be

submitted to Dorothy Conway, Federal Communications Commission, Room

234, 1919 M Street, NW., Washington, DC 20554, or via the Internet to

[email protected], and to Timothy Fain, OMB Desk Officer, 10236 NEOB,

725--17th Street, NW., Washington, DC 20503 or via the Internet to

[email protected].

FOR FURTHER INFORMATION CONTACT: Rodney McDonald, Cable Services

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

information collections contained in the Report and

[[Page 15119]]

Order, contact Dorothy Conway at (202) 418-0217, or via the Internet at

[email protected].

SUPPLEMENTARY INFORMATION: The main text of this decision is included

below. The full text of this decision is available for inspection and

copying during normal business hours in the FCC Reference Center (Room

239), 1919 M Street, NW., Washington, DC 20554, and may be purchased

from the Commission's copy contractor, International Transcription

Services, Inc. (202) 857-3800, 1919 M Street, NW., Washington, DC

20554.

I. Introduction

1. In this Report and Order, we terminate the transition status of

low-price systems and establish final rules for low-price system rate

regulation pursuant to the provisions of the Cable Television

Competition and Consumer Protection Act of 1992, Public Law 102-385,

106 Stat. 1460 (1992), 47 U.S.C. 521 et seq. (``1992 Cable Act''). We

rely on the results of our cost survey in particular, to determine

whether low-price systems should be required to reduce their rates by

the full competitive differential or any lesser amount.

II. Background

2. In the Report and Order and Further Notice of Proposed

Rulemaking in MM Docket No. 92-266, FCC 93-177, 58 FR 29736 (May 21,

1993) (``Rate Order''), the Commission found that ``our initial effort

to regulate rates for cable service should provide for reductions from

current rates of regulated cable systems with rates above competitive

levels.'' In order to simulate the rates that would be charged by

comparable cable systems subject to effective competition, we adopted a

``benchmark'' approach to regulate the basic service tier and the cable

programming services tier of systems not subject to effective

competition. The initial benchmark formula was primarily derived by

examining cable operator's revenues. The formula reflected an implicit

assumption that all cable operators faced similar cost conditions, but

it took into account variations in rates due to certain other economic

and demographic factors. Our initial analysis revealed that the ``rates

of systems not subject to effective competition (were), on average,

approximately 10 percent higher than rates of comparable systems

subject to effective competition.'' This 10% competitive differential

was incorporated into the benchmark system, and noncompetitive systems

whose rates exceeded the benchmark were deemed to be charging

unreasonable rates. These systems were thus required to reduce their

rates, at most by the full 10% competitive differential, but not below

the benchmark.

3. In the Second Order on Reconsideration, Fourth Report and Order,

and Fifth Notice of Proposed Rulemaking in MM Docket No. 92-266, FCC

94-38, 59 FR 17943 and 59 FR 18064 (April 15, 1994) (``Second Order on

Reconsideration''), the Commission adopted a 17% competitive

differential based on a revised analysis of its early competitive

survey of the cable industry; it concluded that the 17% differential

determined by the revised model more accurately estimated the

difference between effectively competitive and noncompetitive cable

rates than the ten percent differential established in the Rate Order.

The Commission recognized, however, that the rates developed under this

revised benchmark approach might not be appropriate for all cable

systems. The competitive survey used to establish the new benchmark

approach included several cost-related variables, but we remained

concerned that our analysis may have failed to identify unusual cost

influences that might indicate whether a system was charging

unreasonable rates. In particular, the Commission identified two types

of systems, small systems and low-price systems, that appeared to

exhibit significantly different prices and costs from most other cable

systems based on the initial data gathered. The Commission granted

transition relief to small systems and low-price systems finding that

these systems would not be required to use the new benchmark approach

until the Commission gathered further data regarding their particular

price/cost profiles. We defined low-price systems as ``(i) systems

whose March 31, 1994 rates are at (or) below the revised benchmark and

(ii) systems whose March 31, 1994 rates are above the benchmark but

whose permitted rates are at or below the benchmark.'' Pending this

determination, low-price systems were placed in a ``transition'' status

and were subject to ``transition relief'' as ``transition systems.''

4. The Commission established an alternate approach to rate

regulation for transition systems pending completion of our price/cost

analysis. During the transition period, low-price systems having March

31, 1994 rates below the new benchmark were not required to reduce

their rates at all. Low-price systems having March 31, 1994 rates above

the new benchmark but having permitted rates at or below the new

benchmark were only required to reduce their rates to the new

benchmark. We imposed a modified price cap on these transition rates

that allowed systems subject to such relief to increase their rates

``to reflect increases in external costs and increases caused by

channel changes that accrue after March 31, 1994.'' A transition system

was not, however, allowed to increase its transition rate due to

increases in inflation until its transition rate was equal to the rate

that would have resulted from a full 17% rate reduction under our

revised benchmark approach (i.e., their full reduction rate increased

by permitted inflation, and increases due to external costs and channel

changes). In this way, the transition rates of transition systems would

eventually become equal to the full reduction rates these systems would

have been required to charge under our new benchmark approach. The

Commission reasoned that a system's full reduction rate might

eventually exceed its transition rate because the full reduction rate

would increase with inflation as well as external costs and channel

changes. The Commission stated that transition treatment would

terminate at the completion of our price/cost analysis, and that

systems that had been provided transition relief would be required to

apply the 17% competitive differential upon termination of transition

treatment unless our analysis revealed that application of the 17%

competitive differential to these systems would be inappropriate.

5. Specifically, we said that we needed to further study whether

below-benchmark rates are more likely to be reasonable than above-

benchmark rates, because they are comparatively lower, and that in

light of this inquiry, it would not be appropriate, at the time, to

require regulated systems to reduce their rates below the benchmark

level. In addition, we stated that ``requiring any systems whose rates

are currently slightly above the benchmark to reduce their rate levels

to the full reduction levels, but not requiring below-benchmark systems

to reduce their rates at all, would result in inequitable treatment of

systems that may be fairly similarly situated.'' Therefore, we stated

that upon completion of our collection and analysis of low price system

prices and costs ``the regulated rates of such systems [would] be set

to reflect the full 17 percent differential if our analysis [did] not

show that the resulting rates would be unreasonably low--that is, the

rates would be lower than they would be if set by competitive pressures

as

[[Page 15120]]

determined by cost comparisons between noncompetitive systems and

systems subject to effective competition.''

6. The Commission subsequently made adjustments to the transition

relief initiated in the Second Order on Reconsideration. In the Ninth

Order on Reconsideration in MM Docket No. 92-266, FCC 95-43, 60 FR

10512 (February 27, 1995), the Commission allowed all systems subject

to transition relief to further adjust their rates based on inflation.

In the Sixth Report and Order and Eleventh Order on Reconsideration in

MM Docket Nos. 92-266 and 93-215, FCC 95-196, 60 FR 35854 (July 12,

1995) (``Small System Order'') we initiated ``the gradual termination

of transition relief for all but low-price systems,'' by limiting

transition relief for small systems to two years from the effective

date of the new rule. Consistent with our statements in the Second

Order on Reconsideration, however, we have continued transition relief

for low-price systems until the completion of our collection and

analysis of necessary cost data.

7. When the Second Order on Reconsideration was adopted, the

Commission noted that we lacked sufficient data regarding the costs

faced by low-price systems to establish whether these systems were

charging reasonable rates despite the fact that they were charging

relatively low rates as compared to the rates of other noncompetitive

cable systems. Therefore, the Commission delegated authority to the

Chief, Cable Services Bureau to conduct general cost studies of the

cable industry. Report and Order and Further Notice of Proposed

Rulemaking, in MM Docket No. 93-215 and CS Docket No. 94-28, FCC 94-39,

59 FR 18066 (April 15, 1994). A cable industry cost survey was

commenced pursuant to this authority in the Fall of 1995. See Order, in

MM Docket No. 92-266, 11 FCC Rcd 4003 (released September 29, 1995).

This Report and Order analyzes data from our cost survey, and compares

the cost and revenue data of noncompetitive low-price systems with the

cost and revenue data received for non-low-price systems that are

already regulated by the Commission under the revised benchmark

approach.

III. Discussion

A. Data

8. The cost survey we initiated in September of 1995 was based upon

a random sample of cable systems. Specifically, the survey was mailed

to cable operators owning 660 of the total 2,271 non-small cable

systems in the U.S. Small systems were not included in our survey

because their treatment was previously determined in the Small System

Order. The Commission received 359 usable questionnaires from the cable

operators surveyed. Of these 359 questionnaires, 40 were received for

low-price systems (``low-price group'') and 38 were received for

systems regulated by the Commission under the revised benchmark

approach (``non-low-price group''). Of the remaining 281 usable

questionnaires, two were received for systems facing effective

competition as defined in the 1992 Cable Act, and the remaining 279

were received for several categories of cable systems including those

regulated only at the local level, those for which a cost-of-service

showing was filed, those unregulated, and those subject to social

contracts.

9. Data provided in response to the cost survey included

information regarding system plant and equipment costs, intangible

assets, operating revenues and expenses, and capital structure as of

year end 1992 and year end 1994. We also received information regarding

system characteristics.

B. Analysis

10. The data received from our cost survey was analyzed to

determine the relative profitability of the low-price group compared

with the non-low-price group. In our analysis, we used a standard

measure of ``accounting'' profitability as a means of determining the

relative profitability of these two groups. Specifically, we used cash

flow ratios, which are commonly used in financial analyses of the cable

industry. One of the more frequently used cash flow measures is income

before interest, taxes, depreciation and amortization (``IBITDA''). We

applied this measure in the form of the following ratio: operating

revenues minus operating expenses before interest, taxes, depreciation,

and amortization divided by operating revenues.

11. We compared the average cash flow ratio of our low-price group

with the average cash flow ratio of our non-low-price group. We found

that the average cash flow ratio of our low-price group was 36.5% and

the average cash flow ratio of our non-low-price group was 39.7%. These

findings indicate that, on average, the operators of systems in our

low-price group received lower profit margins for their low-price

systems than the operators of systems in our non-low-price group

received for their non-low-price systems. Based on these findings, we

believe that the operators of low-price systems generally receive lower

profit margins for their low-price systems than the operators of

systems already regulated under the Commission's revised benchmark

approach. Under these conditions we believe that rates charged by low-

price systems are reasonable. We therefore find it unnecessary for the

operators of these systems to reduce the rates on these systems by the

full competitive differential or by any lesser amount.

12. We believe that the transition relief afforded low-price

systems was appropriate, however, we see no need to maintain the

transition status of low-price systems now that we have completed an

analysis of the necessary cost data particular to these systems.

Therefore, we make that relief permanent. We will allow low-price

systems to continue charging the rates they established under

transition relief and making appropriate rate increases in accordance

with our current rules. 47 CFR 76.922.

IV. Final Regulatory Flexibility Certification

13. As required by the Regulatory Flexibility Act, 5 U.S.C. 603

(RFA), an Initial Regulatory Flexibility Analysis (IRFA) for the Fifth

Notice of Proposed Rulemaking was incorporated in the Second Order on

Reconsideration, Fourth Report and Order, and Fifth Notice of Proposed

Rulemaking in MM Docket 92-266, FCC 94-38. The Commission therein

provided notice of its intent to establish further requirements

concerning the rates permitted for systems subject to transition

treatment, and sought written public comments on the IRFA. Comments

regarding the treatment of ``small'' transition systems were received

by the Commission and addressed in a previous order. Sixth Report and

Order and Eleventh Order on Reconsideration in MM Docket Nos. 92-266

and 93-215, FCC 95-196. No comments, however, were received regarding

the matter of ``low-price'' transition cable systems.

14. Although we performed an IRFA in the Fifth Notice of Proposed

Rulemaking, we received no comments in response to the IRFA with

respect to ``low-price'' transition systems and upon further

consideration we now believe that we can certify that no regulatory

flexibility analysis is necessary. This certification conforms to the

RFA, as amended by the Small Business Regulatory Enforcement Fairness

Act of 1996 (SBREFA). See Title II of the Contract with America

Advancement Act of 1996, Public Law 104-121, 110 Stat. 847, 857 (1996),

codified at 5 U.S.C. 601 et seq.

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15. We do not believe that the amendments to the rules adopted in

this Report and Order will have a significant economic impact on a

substantial number of small entities as defined by statute, by our

rules, or by the Small Business Administration (SBA). See 47 U.S.C.

543(m)(2); 47 CFR 76.901(e); 13 CFR 121.201 (SIC 4841); 5 U.S.C.

605(b).

16. Our rules for regulating the rates of small systems owned by

small cable companies were established in a previous order, so this

Report and Order only concerns the permitted rates for low-price

systems. Based on the rule changes adopted here, low-price systems will

be permitted to maintain the rates originally established pursuant to

their status as systems subject to transition relief. Further, the

rules adopted in this Report and Order will allow low-price systems to

increase their rates in the same manner as our previous transition

rules for low-price systems. The rules adopted herein do not alter the

method by which low-price cable system rates currently are regulated,

and for this reason these amendments will not have a significant

economic impact on a substantial number of small cable operators, and

will not change the treatment of low-price systems.

17. The Commission will send a copy of this certification, along

with this Report and Order, in a report to Congress pursuant to the

Small Business Regulatory Enforcement Fairness Act of 1996, 5 U.S.C.

801(a)(1)(A), and to the Chief Counsel for Advocacy of the Small

Business Association, 5 U.S.C. 605(b). A copy of this certification

will also be published in the Federal Register. Id.

V. Ordering Clauses

18. Accordingly, it is ordered that, pursuant to sections 4(i),

4(j), 303(r), and 623 of the Communications Act of 1934, as amended, 47

U.S.C. 154(i), 154(j), 303(r), and 543, the rules, requirements and

policies discussed in this Report and Order are adopted and Sec. 76.922

of the Commission's rules, 47 CFR 76.922, is amended as set forth

below.

19. It is further ordered that the Secretary shall send a copy of

this Report and Order, including the Final Regulatory Flexibility

Analysis, to the Chief Counsel for Advocacy of the Small Business

Administration in accordance with paragraph 603(a) of the Regulatory

Flexibility Act, Public Law 96-354, 94 Stat. 1164, 5 U.S.C. 601 et seq.

(1981).

20. It is further ordered that the requirements and regulations

established in this decision shall become effective April 30, 1997.

List of Subjects in 47 CFR Part 76

Cable television.

Federal Communications Commission

William F. Caton,

Acting Secretary.

Rule Changes

Part 76 of Title 47 of the Code of Federal Regulations is amended

as follows:

PART 76--CABLE TELEVISION SERVICE

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

Authority: 47 U.S.C. 151, 152, 153, 154, 301, 302, 303, 303a,

307, 308, 309, 312, 315, 317, 325, 503, 521, 522, 531, 532, 533,

534, 535, 536, 537, 543, 544, 544a, 545, 548, 552, 554, 556, 558,

560, 561, 571, 572, 573.

2. Section 76.922 is amended by revising paragraph (b)(4)(ii) to

read as follows:

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

services tiers.

* * * * *

(b) * * *

(4) * * *

(ii) Low-price systems. Low-price systems shall be eligible to

establish a transition rate for a tier.

* * * * *

Note: This attachment will not be published in the Code of

Federal Regulations.

Attachment

Cash Flow Ratios

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Average

operating Income

expenses before

Average before interest,

operating interest, taxes, Cash flow

Category revenues taxes, depreciation ratios \1\

(million) depreciation and (percent)

and amortization

amortization (IBITDA)

(million) (million)

(A) (B) (A-B)

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Low-price group (40 systems).............................. $15.1 $9.6 $5.5 36.5

Non-low-price group (38 systems).......................... 12.5 7.5 5 39.7

Competitive group (2 systems)............................. 76.4 46.2 30.2 39.5

All other \2\ (279 systems)............................... 8.3 5.3 3 36.7

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\1\ Calculated on totals for each group prior to averaging (i.e., cash flow ratios equal total operating

revenues minus total operating expenses before interest, taxes, depreciation and amortization divided by total

operating revenues).

\2\ Includes systems for which a cost-of-service showing was filed, systems regulated only at the local level,

unregulated systems, and systems subject to social contracts.

[FR Doc. 97-7976 Filed 3-28-97; 8:45 am]

BILLING CODE 6712-01-P