[Federal Register Volume 61, Number 47 (Friday, March 8, 1996)]
[Rules and Regulations]
[Pages 9361-9367]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-5427]
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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 76
[MM Docket No. 93-215; FCC 95-502]
Cable Television Rate Regulation; Cost of Service Rules
AGENCY: Federal Communications Commission.
ACTION: Final rule.
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SUMMARY: The Commission has adopted the Second Report and Order and
First Order on Reconsideration in MM Docket 93-215 to refine existing
cost of service rules and to create final rules governing standard cost
of service showings filed by cable operators seeking to justify rates
for regulated cable services. By refining these rules, the Commission
brings greater practicality to cost of service filing procedures and
allows operators and regulatory officials increased flexibility in
defining the actual costs of providing regulated cable services.
EFFECTIVE DATE: This final rule contains information collection
requirements and will not become effective until approval by the Office
of Management and Budget, but no sooner than 30 days after publication
in the Federal Register. The Commission will publish a document
specifying the effective date.
FOR FURTHER INFORMATION CONTACT: Tom Power, Cable Services Bureau,
(202) 416-0800.
SUPPLEMENTARY INFORMATION: This is a synopsis of the Second Report and
Order, First Order on Reconsideration and Further Notice of Proposed
Rulemaking in MM Docket No. 93-215, FCC 95-502, adopted December 15,
1995 and released January 26, 1996.
This Second Report and Order and First Order on Reconsideration
contains modified information collections subject to the Paperwork
Reduction Act of 1995 (``PRA''), Pub. L. No. 104-13. It has been
submitted to the Office of Management and Budget (``OMB'') for review
under Section 3507(d) of the PRA. OMB, the general public, and other
Federal agencies are invited to comment on the modified information
collections contained in this proceeding.
The complete text of this Second Report and Order, First Order on
Reconsideration and Further Notice of Proposed Rulemaking is available
for inspection and copying during normal business hours in the FCC
Reference Center (room 239), 1919 M Street, NW., Washington, DC, and
also may be purchased from the Commission's copy contractor,
International Transcription Services, Inc. (``ITS Inc.'') at (202) 587-
3800, 2100 M Street, NW., Suite 140, Washington, DC 20017.
I. Second Report and Order and First Order on Reconsideration
A. Ratebase--Used and Useful Plant and Excess Capacity
1. In general, except as described below, we make permanent our
interim rules regarding ratebase issues. We clarify that used and
useful plant is plant that is actually used to send signals to
customers. Plant which is not currently used and useful, however, is
excess capacity, and operators may include this excess capacity in the
ratebase only if it is fully constructed plant that will be used to
provide regulated service within 12 months. The Commission clarifies
that there are two types of excess capacity. First, where plant is
being used but not to its full capacity, the portion of the plant
allocated to the unused channels is excess capacity. For example, where
a system provides programming over 36 channels but is capable of
transmitting 48 channels of programming, the plant associated with the
12 channels not currently being used is excess capacity. In other
words, in this example, the operator may only include 75% of the cost
of the plant in the ratebase as used and useful plant, and may include
the other 25% as excess capacity only if the 12 channels will be
activated within one year. Second, excess capacity is fully constructed
plant that is not being used at all, such as where the cable operator
has extended its distribution line into an unserved portion of the
franchise area, is ready and able to provide service to that area, but
is not yet providing such service. The operator may include such plant
in its ratebase to the extent it intends to place the plant into
service within 12 months. However, the operator must make a
corresponding adjustment to its subscriber count to include a
reasonable estimate of the number of subscribers it expects to serve
with that plant by the end of the 12 month period.
2. The Commission also clarifies that plant in service must be
allocated between regulated and unregulated services based on a
reasonable measure of the current usage of that plant. Section
76.922(g)(6)(i) of our rules currently uses the phrase ``used and
useful in the provision of cable services,'' but does not specify that
such cable services must be regulated cable services. Since our
authority to determine cable rates extends only to regulated services
as defined by the Communications Act, only plant used and useful in the
provision of regulated services should be included in the ratebase.
Accordingly, for our final rules, we will make this point explicit
[[Page 9362]]
and will amend the interim rule to specify that tangible plant must be
used and useful in the provision of regulated cable services in order
to be included in the ratebase. This will ensure that the ratebase for
regulated cable service only includes plant used for such regulated
cable service, and that subscribers to regulated tiers are not forced
to subsidize plant that is used solely for premium services.
3. In addition, we recognize that what constitutes a reasonable
measure of the current usage of the tangible plant depends on the
circumstances. We believe that in many cases a reasonable measure would
be a straight channel ratio. In other words, if an operator provides
programming over a total of 40 channels, 32 of which are BST and CPST
channels and eight of which are premium and pay-per-view channels, the
operator must allocate 80% of its plant in service to regulated cable
service and 20% to unregulated service. We do not believe, however,
that the channel ratio should be weighted by customer. The cost of
physical plant is directly related to the provision of cable channels
and the amount of channel capacity which exists on a particular cable
system. The cost of that plant does not vary depending on how many
subscribers receive each channel. It would be inappropriate to weight
the channel ratio by subscriber use when such use does not affect the
cost of the plant.
4. With regard to the time period within which excess capacity must
be used and useful in order to be included in ratebase, we adopt the
interim rule of one year as our final rule. For business purposes,
operators commonly project how much capacity will be used within the
given year as part of their annual operating budgets. We believe that
the 12 month period therefore permits plant associated with all
reasonably foreseeable improvements in or additions to service to be
included in ratebase.
B. Ratebase--Intangibles
5. Previously, we had concluded that one reason we should not rely
on acquisition prices for ratemaking was that it appeared that those
prices often include an expectation of supra-competitive profits that
market power of cable systems not operating in a fully competitive
market might expect to generate.
6. We continue to reject the argument that operators are entitled
to include 100% of their intangible costs in the ratebase. Exclusion of
some amount of these costs from the ratebase does not result in an
impermissible taking without just compensation in violation of the
Fifth Amendment. We have no constitutional duty to ensure full recovery
of these acquisition costs, we must only ensure that the end result of
our ratemaking decisions here is reasonable.
7. We continue to believe that the ratebase should not include
costs resulting from any expectation of monopoly profits or expectation
of a return on emerging and unregulated services, which we believe the
presumptive exclusion of such acquisition costs ensures. However, upon
further reflection and based upon our review of cost of service
filings, we believe this presumption can be modified, without
sacrificing this conclusion.
8. Therefore, we have created a new rule, applicable to systems
conveyed prior to the effective date of the interim cost rules, with
respect to the treatment of intangible assets. We find the model in
which 34% of the purchase price of a system is presumed to be
attributable to monopoly expectations, to be the one best suited to
these goals.
9. Our final rule presumes, rebuttably, that 34% of the purchase
price associated with regulated services of systems purchased prior to
regulation represents monopoly expectations and must be removed from
the regulated ratebase. Put differently, the ratebase presumptively
shall not exceed 66% of that portion of the system price allocable to
assets used to provide regulated services. The 34% adjustment must be
applied to the entire purchase price associated with regulated
services, not just the portion of the price allocable to intangibles,
because cable operators derive revenues, including monopoly revenues,
from the employment of both tangible and intangible assets. Applying
the 34% adjustment to all assets associated with regulated services,
rather than only to the associated intangibles, should remove all
expectations of monopoly profits.
10. As noted, we recognize that this approach necessarily involves
the use of industry-wide averages with respect to certain variables
that, while reasonable, will not always reflect with perfect accuracy
the circumstances of particular operators. To the extent the 34%
adjustment is inexact for certain operators, we are particularly
concerned that this adjustment could be used to raise rates
unreasonably, given our statutory mandate to guard against unreasonable
rates. Therefore, we will allow use of the 34% adjustment only for the
purpose of justifying rates in effect as of the effective date of these
rules. We believe that this represents a reasonable compromise between
the overall integrity of the analysis used to arrive at the 34%
adjustment and the concern we have that in some cases this adjustment
could prove overly generous to operators. Accordingly, in cost of
service cases to which the 34% adjustment is applicable, the operator
may include in the ratebase up to 66% of the purchase price allocable
to assets used to provide regulated services, but only to the extent
necessary to justify rates in effect as of the effective date of these
rules. If the current rate can be justified by including in the
ratebase less than the 66% amount, then in no event shall the operator
seek to use a higher percentage for purposes of any cost of service
showing.
11. This adjustment shall be applied only to the purchase price of
systems sold prior to May 15, 1994, the effective date of the Report
and Order and Further Notice of Proposed Rulemaking, MM Docket 93-215,
9 FCC Rcd 4527 (1994) (``Cost Order'' or ``Further Notice''). The
interim rule is made permanent with respect to systems sold after this
date. Operators who acquired systems after May 15, 1994 were aware of
the interim rule strictly limiting the ability to recover the cost of
intangible assets. Thus, to the extent such operators recorded
substantial intangibles, we presume those intangibles are associated
with investment in unregulated services. As such, they cannot be
included in the regulated ratebase.
12. Generally, operators using the cost of service to justify
current rates for the first time, will be able to do so using the 34%
adjustment. In some rare cases, however, this adjustment may not be
adequate. For instance, if an operator acquired a system with tangible
assets equal to 70% of the purchase price, obviously allowing a
ratebase equal to 66% of the purchase price may not allow the operator
to recover reasonably incurred costs. Similarly, if the tangible assets
represent 64% of the purchase price, the remaining 2% may not
adequately compensate the operator for reasonably incurred intangible
assets. Therefore, where the tangible assets approach 66% of the
purchase price, the operator may justify rates using 100% of the
tangible assets and such intangible assets as are permissible using the
interim rules.
13. We further believe it appropriate to adjust our interim rule
concerning deferred income taxes. We will now require operators to
deduct deferred income taxes from the ratebase only to the extent that
such taxes accrued after
[[Page 9363]]
the date the operator became subject to rate regulation.
C. Ratebase-Start-Up Losses
14. We are persuaded that the treatment of prior year losses in the
Cost Order should be amended. We find that we should not prescribe a
specific prematurity phase, rather we find that we should define the
prematurity phase as the actual period during which expenses exceed
revenues. Although we find that the interim rule should be modified, we
continue to reject the claims of commenters who argue that the
wholesale inclusion of start-up losses in the ratebase is warranted. We
also reject the assertion that we should allow deferred earnings into
ratebase. To do so would artificially inflate the ratebase.
15. Thus, we find it appropriate to redefine our current definition
of prematurity so as to account for the specific circumstances
experienced by individual operators rather than continuing to use the
FASB 51 standard. We are persuaded by the arguments that limitations on
start-up losses should be governed by the history of individual
operators. For capitalized start-up losses, build and hold operators
should be permitted to recover reasonably incurred cumulative net
losses, plus any unrecovered interest expenses connected to funding the
regulated ratebase, over the unexpired life of the longest lived asset
in the regulated ratebase, commencing with the end of the loss
accumulation phase. In most cases, acquired systems will have recorded
accumulated start-up losses as goodwill or as some other form of
intangibles. To the extent that purchased systems can demonstrate that
start-up losses have been recorded as goodwill or some other category
of intangibles, these losses shall be allowed just as if they had been
recorded as start-up losses and the system must itemize its assets
instead of using the 66% purchase price allowance methodology described
above. In allowing this however, we must emphasize this should not be
interpreted as authority for the wholesale inclusion of goodwill. The
burden remains on the operator to demonstrate that any portion of a
class of assets is derived from start-up losses.
16. The end of the accumulation phase (i.e., the prematurity phase)
will vary from system to system, depending upon the experience of the
particular system at issue. By allowing the recovery to occur over the
unexpired life of the longest lived asset in the regulated rate base
rather than the remainder of the franchise life, the amortization
period for purchased systems will realistically reflect the expected
period during which the operating losses can be recovered.
D. Ratebase-Tangibles
17. We continue to believe that original cost is a reliable and
fair measure of the value of tangible assets. However, our review of
cost of service filings reveals that in many instances it could be
difficult, if not impossible, to determine the original cost of a
tangible asset. To accomodate this reality, for cable systems
constructed before May 15, 1994, we will allow operators to use the
book value that was recorded as of May 15, 1994, regardless of whether
the system was built or acquired by the current operator. We will
continue to require that original cost be used for cable systems
constructed after May 15, 1994. Also, an operator that acquires
individual cable assets, such as converters or remotes, at arms' length
after May 15, 1994 may use its original cost for those items, rather
than its seller's original cost.
18. An exception may apply to the original cost rule in the case of
assets acquired in an arms-length transaction and without
subscribership. In such instances, assets may be recorded at fair
market value. Thus, where a cable operator sells converters, for
example, to an unaffiliated operator to be used in a different
franchise location, it is acceptable for the acquiring operator to
record such converters at fair market value, that is, at the price the
acquiring operator paid for them.
E. Rate of Return
19. In the Cost Order, we established a single overall rate of
return for cable cost of service proceedings. The presumptive rate was
set at 11.25% after taxes, although operators could seek different
rates if they believed their circumstances justified different rates.
The burden of such justification is high, however, and local
authorities may counter an operator's effort to obtain a higher rate
with evidence to justify a rate below 11.25%. The presumptive 11.25%
rate was selected over individualized rates of return to avoid the
imposition of undue administrative burdens.
20. The Commission will retain this 11.25% presumptive rate. We are
guided to this conclusion by the general absence of challenges to the
presumptive rate and our continued concern that the effort to set an
appropriate rate of return not be overwhelmed by administrative
difficulties that individualized rate estimations could entail. We
recognize, however, that a unitary presumptive rate does not provide
the most accurate estimation of capital costs for the full range of
operators seeking to set cable rates in a cost of service filing. The
Commission is interested in developing a rate of return formula that
better accommodates capital cost differences among cable operators
without imposing unreasonable administrative burdens on operators,
franchise officials and the Commission. We will therefore proceed with
a further notice of proposed rulemaking to solicit input regarding the
development of an alternative rate of return formula. An alternative
formula, if adopted, would serve as an alternative to the current
presumptive rate method. It would not replace it.
F. Depreciation
21. We indicated in the Further Notice that industry practices with
respect to depreciation would shape our ultimate resolution of the
issue. Since release of the Further Notice, we have had the opportunity
to review numerous cost of service filings. These filings demonstrate
that some operators often do not follow any industry standards or other
specific guidelines in establishing the useful lives of their assets
for purposes of depreciation, or with respect to other aspects of their
cost of service filings. As a result, the claimed useful life of a
particular asset category can vary significantly among cable operators,
even though they all use the same type of equipment and hence should be
claiming roughly the same useful life in most instances. Some variation
in the claimed useful lives is to be expected since, for example,
management plans to replace equipment will affect its useful life and
will vary among operators. Thus, when we adopted the interim rules with
respect to depreciation, we expressly provided for case-by-case review
of filings. However, we neither intended nor expected the substantial
variations that the Form 1220s reveal. Our experience since adoption of
the Cost Order now convinces us that the benefits of standardizing the
useful lives of assets underlying depreciation rates outweigh any
resulting burdens.
22. The absence of specific standards or guidelines with respect to
useful lives creates uncertainty for operators and regulators alike
and, at the local level, creates the risk of inconsistent treatment of
similarly situated operators, given the varying practices of the
operators and the discretion given to franchising authorities. These
factors necessitate heightened scrutiny of cost of service cases before
the Commission, as our
[[Page 9364]]
staff endeavors to ensure that the rates charged for regulated services
are the product of reasonable estimations of useful lives. To provide
for consistent treatment of these issues and to ease burdens on
operators and regulators, we believe it prudent to establish some
certainty and uniformity with respect to several issues.
23. Depreciation schedules. A staff survey of cost of service
filings reveals significant disparities in the useful lives claimed by
cable operators with respect to specific assets. Although for each
particular asset category there are a substantial number of filers
claiming useful lives within a relatively small range, there are also a
significant number of outliers whose claimed useful lives appear to be
inappropriate. With respect to headends, for example, 22% of filers
claimed a useful life of between seven and nine years while 18% claimed
between 15 and 16 years. For transmission facilities, 33% of filers set
the useful life at five to six years, while 23% claimed lives of
between 15 and 16 years.
24. The variations in the useful lives of various assets, as
claimed by cable operators, are due in part to the absence of
depreciation schedules in the interim cost rules, which forces
operators to establish the useful lives of their assets on some other
basis. Thus, it appears that operators do not have a great deal of
specific guidance from any source in this regard, resulting in the
variations described above.
25. Local franchising authorities face a similar lack of guidance
when they attempt to determine the reasonableness of the useful lives
that their cable operators claim. And the Commission staff that reviews
the cost of service filings, in an effort to ensure equal treatment of
similarly situated cable operators, must attempt to reconcile the
substantial differences reflected in the individual filings.
26. To eliminate the uncertainty described above, and to facilitate
more uniform depreciation practice for use in computing rates for
regulated cable services, we will adopt a flexible range of useful
lives for use by cable operators seeking to justify depreciation rates
in cost of service filings. In general, we have used the data available
from these filings to develop a range of years defining the useful life
of each of the relevant asset categories identified in Section C, Item
9 of Form 1220, as follows:
------------------------------------------------------------------------
Useful life
Category (years)
------------------------------------------------------------------------
a. Headend................................................ 8-13
b. Transmission Facilities and Equipment.................. 6-14
c. Distribution Facilities................................ 10-15
d. Circuit Equipment...................................... 7-14
e. Maintenance Facilities................................. 17-35
f. Maintenance Vehicles and Equipment..................... 3-7
g. Buildings.............................................. 18-33
h. Office Furniture and Equipment......................... 9-11
------------------------------------------------------------------------
27. These figures are derived from 600 cost of service filings.
Such filings, including the depreciation data, are required to be made
in accordance with generally accepted accounting principles (``GAAP'').
GAAP does not dictate specific useful lives, but rather provides
general guidelines. Thus, the useful lives reported on the cost-of-
service filings reflect, to some extent, the subjective judgments of
the operators making the filings. To the extent certain aspects of
particular filings raise concerns, we have made adjustments
accordingly. For example, we excluded from the observation pool as
facially unreasonable the filings of a number of systems that claimed a
useful life of one year for all of their assets.
28. Having made such adjustments, staff arrived at an average
useful life for each asset category. Staff then established a range, by
taking one standard deviation from the average useful life for each
asset category. Each end of the range was then rounded to the nearest
whole number. We have chosen a range of years, rather than dictating
the use of a unitary figure, to provide operators with flexibility in
determining depreciation rates for their particular systems, although
still within reasonable bounds. By prescribing a range of years, we
will permit operators to take into account factors that reflect
characteristics of their individual systems. For example, the useful
life of a cable distribution system might vary depending upon the
presence and nature of a competing multichannel video programming
distributor (``MVPD''). Depending upon whether the competing MVPD
offers interactivity and other advanced features, the cable operator
reasonably might determine that these factors will alter the
obsolescence, and hence change the depreciation period, of the
operator's assets that do have such features. Thus, while the ranges we
have prescribed will provide for more consistent depreciation practices
between cable operators, we do not believe it is necessary or prudent
to deprive cable operators of all discretion to judge the appropriate
useful life of their own property. However, operators seeking to
establish useful lives that fall outside the prescribed ranges will
have to justify such claims on a case-by-case basis.
29. Given the number of filings, the requirements of GAAP, the
ability of operators to adjust for their individual circumstances, and
the refinements and adjustments made by the staff, we are confident
that the survey captures a representative sampling of data and produces
a fair and reasonable range of years for each asset category.
30. For any asset category, we will presume the reasonableness of
the useful life claimed by an operator if it falls within the range
prescribed above. An operator may seek to depreciate assets over a
period of time other than that which we have prescribed, but in that
case the operator will have the burden of establishing the
reasonableness of the period it has chosen. Thus, while furthering the
goals of certainty and uniformity in the area of depreciation rates,
our approach will be flexible enough to account for those unique
circumstances in which an operator can demonstrate the reasonableness
of a rate that falls outside of the prescribed range.
31. In addition, we will require the operator to depreciate its
assets in accordance with the straight-line methodology. Our review of
the Form 1220s on file with the Commission suggests that some operators
are using accelerated depreciation methodologies to increase the amount
of their depreciation expense and thus to increase rates. While there
are contexts in which accelerated deprecation is a legitimate practice,
we have been presented with insufficient justification to show that it
would be appropriate for purposes of establishing rates under our cable
cost of service rules.
32. Test-year data. Our cost of service rules establish a maximum
permitted rate based on the operator's costs and ratebase as
established during the test year, which is the operator's most recent
fiscal year. In some instances, an operator will be able to time the
filing of its 1220 such that the test year will be one in which
unusually high depreciation write-offs were taken. Higher depreciation
expenses translate into higher permitted rates, since rates must cover
expenses. Thus, to the extent the operator can control the timing of
its filing, it can justify rates that are higher than would be
permitted were the operator to use data from a more representative 12
month period. The staff review of the Form 1220s suggests that some
operators are pursuing precisely this strategy and thus artificially
inflating rates.
[[Page 9365]]
33. Our new rules prescribing depreciation schedules and requiring
straight-line depreciation should help to curb this practice. Where it
nevertheless appears that the test-year data include unreasonably high
depreciation write-offs, the operator should determine the extent to
which the depreciation claimed for the test year exceeds normal
depreciation and exclude the excess from the ratebase.
34. Relevance of Franchise Life in Defining Useful Life of Assets.
The cost of service filings indicate that operators often claim that
the useful life of cable system assets cannot exceed the term of the
cable franchise, based on the proposition that the termination of the
franchise renders the assets useless. However, this presumes that
operators generally are unsuccessful at renewing the franchise, a
premise for which there is no evidence and which conflicts with the
general experience of the industry. Even in the event of a non-renewal,
the operator might sell its asset to the new cable franchisee and
thereby realize the value associated with its actual remaining life.
For these reasons, we will presume that the term of the franchise is
not relevant for purposes of determining the useful life of cable
system assets, again subject to rebuttal by the operator if it can
show, for example, some threat that its franchise will not be renewed
and that in the event of non-renewal the operator will not be able to
recover the value of its assets.
G. Taxes
35. In the Cost Order, we provided for the recovery in income taxes
as an expense incurred by operators as a consequence of providing
regulated cable services. Commenters have argued that capital structure
assumptions used to calculate the tax expense should parallel the
capital structure assumptions used to estimate the rate of return.
36. We agree that use of actual capital structures is the
appropriate method of estimating the equity portion subject to tax
recovery when the actual, or individualized, capital structure of an
operator is used to establish the rate of return. Accordingly, if we
adopt the proposed alternative to use actual capital structures when
calculating the rate of return, we will rely on actual capital
structures derived from the rate of return analysis to determine the
amount of tax recovery for operators using the alternative to the
presumptive 11.25% rate. However, when hypothetical structures are used
to set the rate of return under the initial Cost Order method, we will
employ the same capital structure assumptions used in such analysis to
the tax calculation.
37. With respect to distributions to individual owners of non-
Chapter C entities, we will continue to adjust the income calculation
for estimating allowed taxes. We recognize that entities other than
Chapter C corporations may pass through income directly to the
individual owners and that this income may have been derived from the
provision of regulated cable services. Nevertheless, we will continue
to adhere to the traditional principle of adjusting the income tax
amount to ensure that ratepayers do not pay the taxes of individuals
who are structurally separate from the entity providing the regulated
service.
H. Cost Allocation
38. While our current cost allocation rules require direct
assignment of costs, the rules also allow for operator flexibility in
determining specific allocators and allocation schemes. Accordingly, we
affirm the Commission's current cost allocation requirements, with the
exception of our rule which requires cost allocation of non regulated
costs to specific non regulated service categories, which we remove. We
also clarifiy that, within our current cost allocation methods which
are affirmed by the Order, revenues must be matched with underlying
expenses between related lines on FCC Form 1220, and that allocators
need to be consistent.
39. The general propositions upon which we continue to base our
cost allocation requirements are as follows: (1) costs shall be
directly assigned among the equipment basket and service cost
categories whenever possible; (2) costs that cannot be directly
assigned and which no allocator has been specified by the Commission
are to be allocated based on direct analysis of the origin of the
costs, and where allocation based on direct analysis is not possible,
operators must attempt to make a cost causative linkage to other costs
directly assigned or allocated to the service cost categories and the
equipment basket; and (3) for costs that cannot be directly assigned
and for which no indirect measures of cost allocation can be found,
such costs shall be allocated to each service cost category based on
the ratio of all other costs directly assigned and attributed to a
service cost category over total costs directly or indirectly assigned
and directly or indirectly attributable.
40. We eliminate cost allocation of non-regulated costs to specific
non-regulated service categories. While the requirement may in some
limited instances enable us to more readily ascertain the bases for
cost allocations to regulated categories, we believe that it would be
overly burdensome to continue to include this requirement in our rules.
Therefore, we amend our rules to remove the requirement that non-
regulated costs must be allocated among the non-regulated programming
service categories, other cable activities, and non-cable activities
categories, and replace these categories with a single ``all other''
service cost category. Accordingly, operators electing cost of service
regulation and cable operators seeking an adjustment to external costs
shall allocate costs among the equipment basket and the following
service cost categories: (1) BST, (2) CPST, and (3) all other. The
``all other'' service cost category shall include all costs not
included in the BST or CPST service cost categories.
41. We decline to adopt a ``weighted channel'' approach to cost
allocation. Generally, incremental increases in plant investment are
driven by the number of channels added, irrespective of subscribership
to BST channels. The number of subscribers does not impact costs in
most cable equipment categories. Accordingly, we believe that in most
cases, a straight channel ratio would be a reasonable approach to the
allocation of plant costs amongst service baskets.
42. We also reject the proposition that advertising revenues and
home shopping services be assigned to the ``other cable services''
category. The allocation approach for cost of service showings
reflected in FCC Form 1220 indicates that revenues received for
advertising and home shopping on a regulated tier should be allocated
to that tier, and used as an offset to providing service on that tier.
We adopted this approach because advertising and home shopping shown on
regulated channels employ regulated assets and, consequently, these
revenues should be distributed as offsets to the regulated tier revenue
requirements.
I. Accounting Requirements
43. In the Cost Order, we stated that we would adopt a uniform
system of accounts for those cable operators that elect cost of service
regulation. We concluded that until a uniform system of accounts could
be finalized, operators electing cost of service regulation should use
an interim summary accounting system. Under the interim system that we
adopted, operators using FCC Form 1220 identify costs in 55 summary
level accounts, and small operators using FCC Form 1225 identify costs
in 32 summary level accounts.
[[Page 9366]]
Operators are required to identify all amounts associated with each
revenue and cost category at the franchise, system, regional and/or
company level, depending on the organizational level at which the
operator identified revenues and costs for accounting purposes as of
April 3, 1993. Local franchising authorities and the Commission may
require operators to provide any additional financial data and
explanations necessary to substantiate a cost of service filing and may
order appropriate disallowances if an operator fails to provide a
reasonable response.
44. We now conclude that a uniform system of accounts would be
unnecessarily burdensome for cable operators at this time. Our review
of the cost of service filings has shown that FCC Forms 1220 and 1225
generally provide a sufficiently detailed basis for evaluating
operators' rates. The additional detail provided by a uniform system of
accounts would be of limited value since most of the filing defects we
have discovered thus far are company-specific and would not have been
prevented by a uniform accounting system. Our practice of issuing
deficiency letters when questions arise has proved to be an adequate
means of clarifying data. Therefore, we agree that investing the time
required to develop a uniform system would be counter-productive to
achieving our objective to process cases as expeditiously as possible.
We are also persuaded that imposing a different accounting system on
the relatively few systems filing cost of service justifications may
create administrative inefficiencies for cable operators. Therefore, we
will not adopt a uniform accounting system but will require operators
electing cost of service regulation to follow the accounting standards
required by FCC Forms 1220 and 1225, thus making permanent our interim
accounting standards.
J. Affiliate Transactions
45. In the Cost Order, we promulgated rules for valuing
transactions between cable operators and affiliated companies. These
rules were designed to prevent favorable self-dealing between
affiliated companies in order to manipulate our rate rules. We defined
an affiliated entity as one that shares a 5% or greater ownership
interest with the cable system operator. The interim rules require an
affiliated transaction to be valued at the ``prevailing company
price,'' if the provider has sold the same kind of asset or services to
a substantial number of third parties at a generally available price.
If the provider has not been engaged in similar transactions with a
substantial number of third parties, the rules distinguish between the
sale of an asset and the sale of a service (for the purposes of
evaluating affiliate transactions, programming is considered an asset).
If the transaction involves an asset, the cable operator is required to
value the transaction at the higher of cost or fair market value when
the cable operator is the seller and the lower of cost or fair market
value when the cable operator is the purchaser. If the transaction
involves a service and no prevailing company price can be established,
the cable operator is required to value the service at the service
provider's cost.
46. We reject the argument to permit a window for new services,
i.e., until they can market their services to a substantial number of
third parties. In a competitive market, programmers would not be able
to subsidize new services with higher rates for competitive services.
Similarly, in a regulated industry, programmers cannot expect regulated
ratepayers to subsidize new programming ventures.
47. We also requested comment on an appropriate method of valuing
an asset absent a prevailing company price. Ruling that cable operators
are permitted to value services at the provider's cost is consistent
with the current rules for telephone companies and there appears to be
no reason to distinguish the two industries in this particular context.
This is especially true in light of the more liberal definition of
prevailing company price in the cable services regulatory scheme.
48. We also find that the current definition of ``affiliate'' is
consistent with the definition used elsewhere in the cable services
regulatory scheme.
49. Finally, we requested comment as to whether the interim
affiliate transaction rules should be incorporated into a uniform
system of accounts. Since we have found that no need exists at this
time to adopt a uniform system of accounts, this point is moot.
K. Hardship Rate Relief
50. In the Cost Order, we recognized that, in certain extraordinary
cases, rate regulation under either the benchmark or cost of service
mechanisms would threaten an operator's financial health or ability to
provide service. In such situations, an operator may obtain special
rate relief by demonstrating that rate regulation using either of the
two standard rate-setting options would cause such financial harm that
the operator would be unable to attract capital or maintain credit
necessary to operate, despite prudent and efficient management. The
operator must show that the requested rate relief would not be
unreasonable or exploitative of customers. In other words, rates cannot
be excessive compared to competitive rates of similarly situated
systems. Hardship showings must be made for the MSO level, or the
highest level of the operator's cable system organization. Operators
that submit an adequate initial showing of facts which, if proved,
might warrant special relief, are subsequently given the opportunity to
prove the facts alleged in the showing.
51. We now believe that the process could be shortened by
eliminating the requirement of an initial showing. We will therefore
allow operators to combine the requirements of the initial factual
showing and the subsequent evidentiary showing into one pleading.
52. We continue to believe that we are authorized to consider an
operator's unregulated revenues when determining eligibility for
hardship relief. An evaluation of an operator's financial health that
is based on only a portion of the operator's revenues would be
incomplete and inaccurate. Similarly, it is appropriate to consider a
hardship pleading in light of an operator's revenues measured at the
highest level of the operator's organization. Hardship relief is an
extraordinary relief measure reserved for operators whose overall
financial health would be seriously threatened under the standard rate
regulation mechanisms. It is not designed to bail out struggling cable
systems that are owned and operated by prosperous MSOs. Lastly, the
requirement that rates cannot be excessive compared to competitive
rates of similarly situated systems does not mean that rates cannot
exceed competitive rates. Rather, we expect operators to show that
their rates would not exceed competitive rates to a degree that would
be unreasonable.
II. Regulatory Flexibility Analysis
A. Final Regulatory Flexibility Act Analysis for the Second Report and
Order and First Order on Reconsideration
53. Pursuant to the Regulatory Flexibility Act of 1980, 5 U.S.C.
Secs. 601-12, the Commission's final analysis with respect to the
Second Report and Order and First Order on Reconsideration is as
follows:
54. Need and purpose of this action: The Commission, in compliance
with Section 3 (b) and (c) of the Cable Television Consumer Protection
and Competition Act of 1992 pertaining to rate regulation, adopts rules
and procedures intended to ensure cable subscribers of reasonable rates
for cable
[[Page 9367]]
services with minimum regulatory and administrative burden on cable
entities.
55. Summary of issues raised 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 filed comments in the original rulemaking order. The
Commission addressed these comments in the Rate Order ( MM Docket No.
92-266, FCC 93-177, 8 FCC Rcd 5631 (1993)). The Chief Counsel for
Advocacy of the United States Small Business Administration also filed
comments in response to the Further Notice of Proposed Rulemaking.
Those comments are addressed herein.
56. Significant alternatives considered and rejected. Petitioners
representing cable interests and franchising authorities submitted
several alternatives aimed at minimizing administrative burdens. In
this proceeding, the Commission has attempted to accommodate the
concerns raised by these parties. For example, the revised rules
regarding action on rate complaints within two years of a cost of
service showing are designed to reduce burdens on both industry and
regulators. In addition, the revised rules also reduce burdens on both
industry and regulators by simplifying certain calculations involved in
producing and reviewing a cost of service showing.
III. Paperwork Reduction Act
57. The Requirements adopted herein have been analyzed with respect
to the Paperwork Reduction Act of 1980 and found to impose a new or
modified information collection requirement on the public.
Implementation of any new or modified requirement will be subject to
approval by the Office of Management and Budget as perscribed in the
Act.
IV. Ordering Clauses
58. Accordingly, it is ordered that the Petitions for
Reconsideration are granted in part, denied in part, and to the extent
that Petitions raise issues unresolved in this order, they will be
disposed of in future orders.
59. It Is further ordered that, pursuant to Sections 4(i), 4(j),
623 (b) and (c) of the Communications Act of 1934, as amended, 47
U.S.C. 154(i), 154(j), 543(b) and (c) the rules, requirements and
policies discussed in this Second Report and Order and First Order on
Reconsideration are adopted and Sections 76.922 and 76.924 of the
Commission's rules, 47 CFR 76.922 and 76.924, are amended as set forth
below.
60. It is further ordered that the requirements and regulations
established in this decision shall become effective upon approval by
the Office of Management and Budget of the new information collection
requirements adopted herein, but no sooner than thirty (30) days after
publication in the Federal Register.
61. It is further ordered that the Secretary shall send a copy of
this Second Report and Order, First Order on Reconsideration, and
Further Notice of Proposed Rulemaking, including the Initial 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, Pub. L. No. 96-354, 94 Stat. 1164, 5 U.S.C.
Secs. 601 et seq. (1981).
List of Subjects in 47 CFR Part 76
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: Sections 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. 152, 153, 154, 301, 303, 307, 308, 309; 612, 614-615, 623,
632 as amended, 106 Stat. 1460, 47 U.S.C. 532; 623, as amended, 106
Stat. 1460; 47 U.S.C. 532, 533, 535, 543, 552.
2. Section 76.922 is amended by revising paragraphs (i)(6)(i) and
(i)(7), redesignating paragraphs (i)(6)(ii) through (i)(6)(vii) as
paragraphs (i)(6)(iii) through (i)(6)(viii) respectively, and adding a
new paragraph (i)(6)(ii) to read as follows:
Sec. 76.922 Rates for the basic service tier and cable programming
services tiers.
* * * * *
(i) * * *
(6) * * *
(i) Prudent investment by a cable operator in tangible plant that
is used and useful in the provision of regulated cable services less
accumulated depreciation. Tangible plant in service shall be valued at
the actual money cost (or the money value of any consideration other
than money) at the time it was first used to provide cable service,
except that in the case of systems purchased before May 15, 1994 shall
be presumed to equal 66% of the total purchase price allocable to
assets (including tangible and intangible assets) used to provide
regulated services. The 66% allowance shall not be used to justify any
rate increase taken after the effective date of this rule. The actual
money cost of plant may include an allowance for funds used during
construction at the prime rate or the operator's actual cost of funds
during construction. Cost overruns are presumed to be imprudent
investment in the absence of a showing that the overrun occurred
through no fault of the operator.
(ii) An allowance for start-up losses including depreciation,
amortization and interest expenses related to assets that are included
in the ratebase. Capitalized start-up losses, may include cumulative
net losses, plus any unrecovered interest expenses connected to funding
the regulated ratebase, amortized over the unexpired life of the
franchise, commencing with the end of the loss accumulation phase.
However, losses attributable to accelerated depreciation methodologies
are not permitted.
* * * * *
(7) Deferred income taxes accrued after the date upon which the
operator became subject to regulation shall be deducted from items
included in the ratebase.
* * * * *
3. Section 76.924 is amended by revising the section heading,
removing paragraphs (e)(1)(iv), (e)(1)(v), (e)(2)(iv) and (e)(2)(v),
and revising paragraphs (e)(1)(iii) and (e)(2)(iii) to read as follows:
Sec. 76.924 Allocation to service cost categories.
* * * * *
(e) * * *
(1) * * *
(iii) All other services cost category. The all other services cost
category shall include the costs of providing all other services that
are not included the basic service or a cable programming services cost
categories as defined in paragraphs (e)(1)(i) and (ii) of this section.
(2) * * *
(iii) The all other services cost category as defined by paragraph
(e)(1)(iii) of this section.
* * * * *
[FR Doc. 96-5427 Filed 3-7-96; 8:45 am]
BILLING CODE 6712-01-P