[Federal Register Volume 60, Number 16 (Wednesday, January 25, 1995)] [Rules and Regulations] [Pages 4863-4866] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 95-1819] ======================================================================= ----------------------------------------------------------------------- FEDERAL COMMUNICATIONS COMMISSION 47 CFR Part 76 [MM Docket No. 92-266; FCC 95-8] Cable Act of 1992--Rate Regulation AGENCY: Federal Communications Commission. ACTION: Final rule. ----------------------------------------------------------------------- SUMMARY: On its own motion, the Commission amends its rules in order to provide certain cable operators with further incentives to add new channels to cable programming services tiers and to single-tier systems. These incentives apply to independent small systems, to small systems owned by small multiple system operators, and to independent systems and systems owned by small multiple system operators which incur additional monthly per subscriber headend costs of one full cent or more for an additional channel. These systems may take advantage of the streamlined cost-of-service procedure for headend upgrades associated with channel additions, as well as the per channel rate adjustments and programming expense adjustments available to all cable systems adding channels under the existing rule. The Order also provides that the streamlined cost-of-service procedure for headend upgrades associated with channel additions shall apply to single-tier systems. EFFECTIVE DATE: February 24, 1995. FOR FURTHER INFORMATION CONTACT: Joel Kaufman or Meryl S. Icove, Cable Services Bureau, (202) 416-0800. SUPPLEMENTARY INFORMATION: This is a synopsis of the Commission's Seventh Order on Reconsideration in MM Docket 92-266, FCC 95-8, adopted January 5, 1995, and released January 5, 1995. The complete text of this document is available for inspection and copying during normal business hours in the FCC Reference Center, 1919 M St., NW., Washington, DC, and also may be purchased from the Commission's copy contractor, International Transcription Service, (ITS), at 2100 M St., NW., Washington, DC 20037, (202) 857-3800. Synopsis of the Seventh Order on Reconsideration A. Background In the Second Order on Reconsideration, Fourth Report and Order, and Fifth Notice of Proposed Rulemaking (``Fourth Report and Order'') in this docket, 59 FR 17943 (April 15, 1994), the Commission specified a ``going-forward'' mechanism under which price-capped rates are adjusted for changes in the number of channels offered on the basic service tier (``BST'') and on cable programming service tiers (``CPSTs''). Under this mechanism, operators first remove all external costs from the tier charge and then adjust the residual component of the tier charge by a per channel adjustment which declines as the number of channels on the system increases. Operators were also allowed [[Page 4864]] to pass through to subscribers the programming costs associated with new channels as well as a mark-up of 7.5% on new programming expense. In the Sixth Order on Reconsideration and Fifth Report and Order (``Sixth Reconsideration Order''), 59 FR 62614 (December 6, 1994), the Commission inter alia, supplemented its existing going forward rules by creating an alternative channel adjustment methodology. Cable operators adding channels to CPSTs or single-tier systems may recover from subscribers (a) a flat per channel mark-up of up to 20 cents per subscriber per month, subject to a cap on the total amount recovered through December 31, 1997, and (b) programming costs, subject to a cap that applies through December 31, 1996. Operators adding channels to CPSTs or single-tier systems on and after May 15, 1994 may use either the new rules or the existing rules to adjust rates after December 31, 1994, but must use either the existing rules or the new rules consistently with respect to all channels added after December 31, 1994. In the Sixth Reconsideration Order, the Commission also adopted a special streamlined cost-of-service procedure that permits independent small systems and small systems owned by small multiple system operators (``MSOs'') to recover the costs of upgrading their headend equipment when they add new channels to CPSTs. A small system is a cable system that serves 1,000 or fewer subscribers from the system's principal headend, including any technically integrated headends and microwave receive sites. See 47 CFR 76.901(c). A small MSO is defined as a MSO that has 250,000 or fewer total subscribers, owns only systems with less than 10,000 subscribers each, and has an average system size of 1,000 or fewer subscribers. See 47 CFR 76.922(b)(5). To prevent the potential for unreasonably sharp rate increases to small system subscribers, the amount a small system can recover for each channel added was limited to programming costs incurred plus the lesser of the actual cost of the headend equipment or $5,000. Headend costs that are to be recovered through increased rates must be depreciated over the useful life of the equipment. In addition, the rate of return the small system may earn on such headend costs may not exceed 11.25%. Small systems that increase rates as a result of any channel additions pursuant to this methodology may be reimbursed for the addition of a maximum of seven channels to CPSTs between May 15, 1994 and December 31, 1997. Qualifying small systems adding channels to CPSTs were allowed to choose between this streamlined cost-of-service procedure and the going forward rules applicable to all systems. B. Discussion On our own motion, we find our requirement that qualifying small systems elect between the per channel adjustment methodology and the streamlined cost-of-service procedure for upgrading headend equipment insufficient to give qualifying systems an appropriate incentive to add new channels. Although the return of up to 11.25% on the cost of headend equipment was intended to allow small systems a profit when they added channels, we now believe that our formula as a whole may give such systems an insufficient incentive to add channels. This is the case because, except for very small systems, the per subscriber rate adjustment associated with the streamlined cost-of-service showing would be less than the 20 cents per subscriber per month allowed under our general going forward regulations. If the maximum $5,000 in headend costs is depreciated by a 1,000 subscriber system with an 11.25% rate of return, for example, the monthly per subscriber cost would be just over five cents, assuming a 15 year depreciation period. The Commission has not prescribed depreciation rates for headend equipment, but requires cable operators to follow reasonable depreciation practices in depreciating equipment over its useful life. The Cable Services Bureau, acting on delegated authority in examining cost-of-service rate justifications, concluded that operators generally assign 15-year useful lives to headend equipment and adjusted cable operator's proposed useful lives upward to reflect that norm. Accordingly, independent small systems and small systems owned by small MSOs will not be required to choose between the per channel adjustment methodology and the streamlined cost-of-service procedure for upgrading headend equipment. Instead, we will allow independent small systems and small systems owned by small MSOs to recover for each channel added by using both the per channel adjustment methodology and the streamlined cost-of-service procedure for upgrading headend equipment in the following manner. First, such operators may recover the lesser of the actual cost of the headend equipment or $5,000 associated with the channel addition. The recovery of the lesser of the actual cost of the headend equipment or $5,000 shall otherwise remain subject to the conditions set forth in the Sixth Reconsideration Order, namely that the headend costs be depreciated over the useful life of the equipment, the rate of return on this investment not exceed 11.25%,\1\ and the headend costs may be recovered for no more than seven channels through December 31, 1997. Second, in addition to recovery of headend upgrade costs in a streamlined cost-of-service proceeding, such operators may make rate adjustments to reflect channel additions and programming expenses that all other operators are permitted to make under the existing going forward rules. Specifically, operators may make per channel adjustments under either the new or the ``old'' going forward rules. As explained in the Sixth Reconsideration Order, operators that elect the new going forward rules are allowed to recover programming expenses associated with adding channels subject to the License Fee Reserve and the Operator's Cap. Of course, headend costs are not included in the Operator's Cap. \1\Operators are permitted to recover an 11.25% rate of return on the lesser of the actual cost of the headend equipment associated with adding a channel or $5,000. Therefore, if the cost of the headend equipment associated with adding a channel is $5,000 or more, the operator is entitled to recover $5,000 plus an 11.25% rate of return on the $5,000 investment. --------------------------------------------------------------------------- In addition, we believe that limiting eligibility to use the streamlined cost-of-service procedure for upgrading headend equipment to independent small systems and small systems owned by small MSOs may fail to give slightly larger systems an appropriate incentive to add channels. Accordingly, we have decided to allow larger systems to use the streamlined cost of service approach subject to the same conditions as independent small systems and small systems owned by small MSOs provided that (a) the systems are either independently owned or owned by small MSOs and (b) the monthly per subscriber cost of the additional headend equipment necessary to receive an additional channel is one cent or more.\2\ We are providing this relief for systems that are slightly larger than those that fall under the definition of a small system because we believe that such operators may have higher than average costs and may not always have access to the financial resources or other purchasing discounts of larger companies. However, since average equipment costs were built into the per [[Page 4865]] channel adjustment of up to 20 cents, we believe that it is unnecessary to allow systems with additional per subscriber headend equipment costs of less than one cent for each channel added to use the streamlined cost- of-service procedure for upgrading headend equipment. We believe that such operators may have sufficient resources to add channels without the additional incentive created by the streamlined cost-of-service procedure. However, we note that we may reconsider this issue in light of the comments we have received in response to our Fifth Order on Reconsideration and Further Notice of Proposed Rulemaking, 59 FR 51,869 (10/13/94). In that notice, the Commission solicited comments on whether it should retain its current definitions of small operators and small systems owned by small MSOs and whether it should employ the current Small Business Administration definition of small cable company. The definitions of these terms in the instant item may be affected by the outcome of the Further Notice. \2\The monthly per subscriber cost of the additional headend equipment necessary to receive the additional channel must be one full cent or more. For this purpose, operators may not round up monthly per subscriber costs of less than one cent. Additionally, operators must depreciate these costs at the same rate as they depreciate all similar equipment. --------------------------------------------------------------------------- In the Sixth Reconsideration Order, the Commission provided that rates for the BST will continue to be governed exclusively by our current rules, except that where a system offered only one tier on May 14, 1994, the cable operator will be allowed to use the revised per channel adjustment of up to 20 cents. We did not, however similarly provide that the streamlined cost-of-service procedure for headend upgrades by eligible small systems would be available to operators of single-tier systems. We did not intend to exclude single-tier systems from this procedure and, therefore, on our own motion, we reconsider the limitation of the streamlined cost-of-service procedure for headend upgrades to CPSTs. We conclude that the streamlined cost-of-service procedure should also apply to single-tier systems because we recognize that qualifying systems have the same small customer base over which to spread the cost of new equipment associated with providing channels, whether or not they have CPSTs. We also recognize that single-tier systems are commonly smaller systems. Accordingly, we believe that the streamlined cost-of-service procedure for headend upgrades associated with channel additions should apply to single-tier systems as well as CPSTs. Regulatory Flexibility Act Analysis Pursuant to the Regulatory Act of 1980, 5 U.S.C. 601-612, the Commission's final analysis with respect to the Seventh Order on Reconsideration is as follows: Need and purpose of this action. The Commission, in compliance with Sec. 3 of the Cable Television Consumer Protection and Competition Act of 1992, 47 U.S.C. Sec. 543 (1992), pertaining to rate regulation, adopts revised rules and procedures intended to ensure that cable services are offered at reasonable rates with minimum regulatory and administrative burdens on cable entities. Summary of issues by the public in response to the Initial Regulatory Flexibility Analysis. There were no comments submitted in response to the Initial Regulatory Flexibility Analysis. The Chief Counsel for Advocacy of the United States Small Business Administration (SBA) filed comments in the original rulemaking order. The Commission addressed the concerns raised by the Office of Advocacy in the Report and Order and Further Notice of Proposed Rulemaking, 58 FR 29769 (5/21/ 93). Consistent with our rules, the SBA also filed an ex parte letter on August 3, 1994. Significant alternatives considered and rejected. In the course of this proceeding, petitioners representing cable interest and franchising authorities submitted several alternatives aimed at minimizing administrative burdens. The Commission has attempted to accommodate the concerns expressed by these parties. In this order, the Commission is providing additional incentives to qualifying small systems to add channels to CPSTs and single-tier systems. Paperwork Reduction Act The requirements adopted herein have been analyzed with respect to the Paperwork Reduction Act of 1980 and found not to impose a new or modified information collection requirement on the public. Ordering Clauses Accordingly, IT IS ORDERED that, pursuant to Sections 4(i), 4(j), 303(r) 612, 622(c) and 623 of the Communications Act of 1934, as amended, 47 U.S.C. 154(i), 154(j), 303(r), 532, 542(c) and 543, the rules, requirements and policies discussed in this Seventh Order on Reconsideration, ARE ADOPTED and Part 76 of the Commission's rules, 47 CFR part 76, IS AMENDED as set forth below. It Is Further Ordered that the Secretary shall send a copy of this Order to the Chief Counsel for Advocacy of the Small Business Administration in accordance with paragraph 603(a) of the Regulatory Flexibility Act. Public Law No. 96-354, 94 Stat. 1164, 5 U.S.C. Secs. 601 et seq. (1981). It Is Further Ordered that the requirements and regulations established in this decision shall become effective 30 days following publication in the Federal Register. List of Subjects in 47 CFR Part 76 Cable television. Federal Communications Commission. William F. Caton, Acting Secretary. Part 76 of title 47 of the Code of Federal Regulations is amended as follows: PART 76--CABLE TELEVISION SERVICE 1. The authority citation for part 76 continues to read as follows: Authority: Secs. 2, 3, 4, 301, 303, 307, 308, 309, 48 Stat. as amended, 1064, 1065, 1066, 1081, 1082, 1083, 1084, 1085, 1101; 47 U.S.C. Secs. 152, 153, 154, 301, 303, 307, 308, 309, 532, 535, 542, 543, 552 as amended, 106 Stat. 1460. 2. Section 76.922 is amended by revising paragraph (e)(7) to read as follows: Sec. 76.922 Rates for the basic service tier and cable programming service tiers. * * * * * (e) * * * (7) Headend upgrades. When adding channels to CPSTs and single-tier systems, cable systems that are either independently owned or owned by small MSOs and incur additional monthly per subscriber headend costs of one full cent or more for an additional channel or are either independently owned or owned by small MSOs as defined in paragraph (b)(5) of this section, may choose among the methodologies set forth in paragraphs (e)(2) and (e)(3) of this section. In addition, such systems may increase rates to recover the actual cost of the headend equipment required to add up to seven such channels to CPSTs and single-tier systems, not to exceed $5,000 per additional channel. Rate increases pursuant to this paragraph may occur between January 1, 1995, and December 31, 1997, as a result of additional channels offered on those tiers after May 14, 1994. Headend costs shall be depreciated over the useful life of the headend equipment. The rate of return on this investment shall not exceed 11.25 percent. In order to recover costs for headend equipment pursuant to this paragraph, systems must certify to the Commission their eligibility to use this paragraph, the level of costs they have actually incurred for adding the [[Page 4866]] headend equipment and the depreciation schedule for the equipment. * * * * * [FR Doc. 95-1819 Filed 1-24-95; 8:45 am] BILLING CODE 6712-01-M