NEWS
Report No. DC- 95-72               ACTION IN DOCKET CASE                     May 5, 1995 
 

                     COMMISSION SIGNIFICANTLY EXPANDS
                SMALL CABLE SYSTEM AND COMPANY RATE RELIEF
                       (MM Docket 92-266 and 93-215)

     The Commission has issued an order significantly expanding the number of small
cable systems and small cable companies that qualify for special rate relief.  The order also
introduces a simple, four-element mechanism for small systems to use to justify existing or
increased rates.  The order is part of the Commission's ongoing effort to minimize rate
regulation burdens for small cable companies in furtherance of congressional intent.  This
option, if selected, will supersede the use of all other rate regulation forms.  The option can
be used regardless of whether the operator used another rate regulation methodology
previously.

     This relief was warranted because of the unique characteristics of small systems and
their generally higher costs relative to those of larger companies.  This relief should allow
small cable companies to provide excellent service to the public without disadvantaging
ratepayers from paying unreasonable prices for cable services.

     Specifically, the order amends Commission definitions so that systems serving 15,000
or fewer subscribers that are owned by small cable companies of 400,000 or fewer
subscribers are eligible to elect to use the new small cable company rate mechanism, as well
as other relief previously made available to small systems and small operators.  Systems
meeting these criteria will, for example, be able to take advantage of the headend upgrade
incentive for small systems under the Going Forward rules and will be able to enter into
alternative rate regulation agreements with their franchising authorities.  Small operator
transition relief will continue to remain available for two years to those systems already
justifying rates pursuant to transition.  These new definitions replace all other small company
designations such as small operators or small MSOs.

     The Commission has concluded that this simple mechanism will best serve a segment
of the cable industry that needs further assistance in complying with rate regulation while
serving subscribers better and growing their businesses.  Additionally, this approach should
better facilitate regulation of cable rates by local franchising authorities who wish to have a
simple procedure for evaluating rates in these systems.

     The order will expand the category of systems for small system relief to include
approximately 66% of all cable systems in the nation serving approximately 12.1% of all
cable subscribers.  

     The Order also permits the Commission to allow companies falling outside of this
definition to request small company treatment if they exhibit the same characteristics as those
falling within the definition.  One example would be where two small systems link their
headend facilities to achieve efficiencies.

      The new mechanism which this Order introduces will involve a brief, four-element
calculation.  If the calculation produces a per channel rate for regulated services that is no
higher than $1.24 per channel it will be presumed reasonable.  If the formula generates a
higher rate, the operator still will be permitted to charge that rate if it meets its burden of
proving that the rate is reasonable, which is the same burden of proof that is normally
attendant to rate showings of other operators.  This $1.24 figure was derived from examining
cost-of-service data filed with the Commission and other information on the record.  The
Commission concluded that it did not need to obtain further cost data from small cable
companies and, therefore, any further cost survey will be limited to other categories of cable
companies.

     The four items of data to be inserted into the calculation by the operator are its
operating expenses, its net rate base, a reasonable rate of return and the number of regulated
channels.  Small systems will have substantial flexibility in calculating these figures and in
allocating costs among regulated and unregulated services.  Equipment costs are included in
the calculation to simplify this regulatory mechanism.  Presumptions and restrictions that limit
operator discretion in standard cost-of-service filings, such as those concerning acquisition
costs and capital structure, will not apply.  Likewise, an operator will be entitled to claim a
rate of return using its actual cost of debt plus an assumed debt/equity ratio that reflects that
operator's specific operating conditions.  All of these figures can be obtained from pre-
existing documents of the system, such as tax forms or financial statements.  

     An operator seeking to justify its initial rates or to raise rates need only file a one-
page form that will contain the new calculation.  While the franchising authority can request
backup documentation, the scope of the request will generally be limited to an explanation of
how the operator made its calculation where the requested rate does not exceed $1.24 per
channel.  In such instances, the operator will not have to create documents or summaries to
respond to a request for information.  Thus, the burden on operators will be minimal.  The
franchising authority's discretion to request backup documentation will be somewhat broader
if the rate requested by the operator exceeds $1.24 per channel.  In either case, if a
franchising authority's request for documentation is overbroad, the operator may file an
immediate interlocutory appeal of that request with the Commission.  The appeal can be by
letter, as opposed to a formal pleading, and the filing of the appeal automatically stays the
effectiveness of the request for information.  If the rate is $1.24 or less per channel, the
burden will be on the local franchising authority to justify its request.  The appeal will be
handled on an expedited basis.

     Final rate decisions or decisions to suspend rate proposals by the franchising authority
will also be subject to expedited review by the Commission.  On appeal, the burden will be
on the franchising authority to establish the unreasonableness of any rate that does not exceed
$1.24 per channel.  For higher rates, the burden will be on the cable operator.  The
Commission will minimize the burden in prosecuting an appeal by first looking at the
reasonableness of an LFA decision to request further information and, if found justified, then
at the reasonableness of the cable operator's rate.

     After establishing its initial rates under this method, the operator will be permitted to
adjust rates in accordance with current rules, such as the Going Forward rules

     If a small system is later acquired by a larger company, the system will retain its
entitlement to use this small system mechanism in setting its rates.  This will ensure that
lenders view this rate regulation as stable, thereby improving the ability of small systems to
obtain financing.

     Action by the Commission, by Sixth Report and Order and Eleventh Order on
Reconsideration (FCC 95-196).  Adopted May 5, 1995.

     News Media contact: Morgan Broman (202) 416-0852;  Cable Services Bureau
     contact: Tom Power (202) 416-0877