NOTICE ************************************************************************* NOTICE ************************************************************************* This document was originally prepared in Word Perfect. If the original document contained-- * Footnotes * Boldface & Italics --this information is missing in this version The document format (spacing, margins, tabs, etc.) is changed too. If you need the complete document, download the Word Perfect version. For information about downloading documents (FTP) see file pnmc5021. File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ************************************************************************* Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of: ) ) ) D.D. CABLE HOLDINGS, INC. and ) CSR 4725-D D.D. CABLE PARTNERS, L.P. ) ) Petition for Special Relief ) MEMORANDUM OPINION AND ORDER Adopted: September 6, 1996 Released: September 9, 1996 By the Chief, Cable Services Bureau: INTRODUCTION 1. In this Memorandum Opinion and Order, we address a petition for special relief (the "Petition") filed by D.D. Cable Holdings, Inc. ("DD Holdings") and D.D. Cable Partners, L.P. ("DD Partners"). The petitioners (being collectively referred to herein as "DDC") ask that the Bureau grant a waiver of the Commission's rules to the extent necessary to permit DD Holdings to establish regulated cable rates for its 93 cable systems in accordance with the small system cost-of-service methodology adopted in the Sixth Report and Order and Eleventh Order on Reconsideration in MM Docket Nos. 92-266 and 93-215 ("Small System Order"). The City of Slayton, Minnesota and the City of Savage, Minnesota (the "Cities") jointly filed an opposition to the Petition ("Opposition"). 2. Section 623(i) of the Communications Act of 1934, as amended ("Communications Act"), requires that the Commission design rate regulations in such a way as to reduce the administrative burdens and the cost of compliance for cable systems with 1,000 or fewer subscribers. Accordingly, in the course of establishing the standard benchmark and cost-of- service ratemaking methodologies generally available to cable operators, the Commission adopted various measures aimed specifically at easing regulatory burdens for these smaller systems. In the Small System Order, the Commission further extended small system rate relief to certain systems that exceed the 1,000-subscriber standard. These systems were deemed eligible for small system rate relief because they were found to face higher costs and other burdens disproportionate to their size. 3. The Small System Order defines a small system as any system that serves 15,000 or fewer subscribers. The Commission recognized that systems with no more than 15,000 subscribers were qualitatively different from larger systems with respect to a number of characteristics, including: (1) average monthly regulated revenues per channel per subscriber; (2) average number of subscribers per mile; and (3) average annual premium revenues per subscriber. The magnitude of the differences between the two classes of systems as to these characteristics indicated that the 15,000 subscriber threshold was the appropriate point of demarcation for purposes of providing for substantive and procedural regulatory relief. 4. However, most forms of rate relief provided under the Small System Order and the Commission's rules are available only to those small systems that are owned by a small cable company, which is defined as a cable operator that serves a total of 400,000 or fewer subscribers over all of its systems. The Commission adopted this threshold because it roughly corresponds to $100 million in annual regulated revenues, a standard the Commission has used in other contexts to identify smaller entities deserving of relaxed regulatory treatment. The Commission found that cable companies exceeding this threshold would find it easier than smaller companies to attract the financing and investment necessary to maintain and improve service. In addition, the Commission determined that cable companies that exceeded the small company definition "are better able to absorb the costs and burdens of regulation due to their expanded administrative and technical resources." 5. In addition to adopting the new categories of small systems and small cable companies, the Small System Order introduced a form of rate regulation known as the small system cost-of-service methodology. This approach, which is available only to small systems owned by small cable companies, is more streamlined than the standard cost-of-service methodology available to cable operators generally. In addition, the small system rules include substantive differences from the standard cost-of-service rules to take account of the proportionately higher costs of providing service faced by small systems. Eligible systems establish their rates under this methodology by completing and filing FCC Form 1230. In order to qualify for the small system cost-of-service methodology, systems and companies must meet the new size standards as of either the effective date of the Small System Order, or on the date thereafter when they file the documents necessary to elect the relief they seek. 6. Cable systems that fail to meet the numerical definition of a small system, or whose operators do not qualify as small cable companies, may submit petitions for special relief requesting that the Commission grant a waiver of its rules to enable the petitioning systems to utilize the various forms of rate relief available to small systems owned by small cable companies. The Commission stated that petitioners should demonstrate that they "share relevant characteristics with qualifying systems." Other potentially pertinent factors include "the degree by which the system fails to satisfy either or both definitions, whether the system recently has been the subject of an acquisition or other transaction that substantially reduced its size or that of its operator, and evidence of increased costs (e.g., lack of programming or equipment discounts) faced by the operator." If the system fails to qualify for relief based on its affiliation with a larger cable company, the Commission will consider "the degree to which that affiliation exceeds our affiliation standards, and whether other attributes of the system warrant that it be treated as a small system notwithstanding the percentage ownership of the affiliate." The Commission specifically stated that this list of relevant factors was not exclusive and invited petitioners to support their petitions with any other information and arguments they deemed relevant. THE PETITION AND THE OPPOSITION 7. According to the Petition, DDC operates 93 cable systems serving about 115,000 subscribers in 214 communities throughout Illinois, Iowa, Minnesota and Wisconsin. Each system serves fewer than 15,000 subscribers and therefore qualifies as a small system. However, DDC notes that it is affiliated with Leo J. Hindery, an individual "who, arguably, holds attributable interests in cable operations serving more than 400,000 subscribers." To the extent DDC is affiliated with Hindery, the DDC cable systems are ineligible for the small system cost- of-service methodology, absent special relief. 8. DDC argues that its "independent business structure and its classic small systems demonstrate the need for a waiver of Commission rules." Describing that business structure, the Petition indicates that the owner of the cable systems at issue is DD Holdings, a corporation that is a wholly-owned subsidiary of DD Partners. DD Partners, according to the Petition, has one general partner and one limited partner, each of which holds a 50% equity interest in DD Partners. The general partner of DD Partners is InterMedia Partners, II, L.P. That partnership's general partner is InterMedia Capital Management II., L.P. The general partner of that partnership is Hindery. Through these successive general partnership interests, Hindery holds an attributable interest in DD Holdings, the direct owner of the cable systems for which the waiver is sought. 9. The limited partner of DD Partners, according to the Petition, is General Electric Credit Corporation. The Petition does not describe the ownership structure of General Electric Credit Corporation. However, the Petition does state that General Electric Credit Corporation has no attributable interest in any cable company or cable system other than DDC. 10. The Petition asserts that, except as stated above, DDC is not affiliated with any other cable operators. Thus, according to the Petition: "The common thread that links [DDC] to any other cable television operation is the ownership interest of Mr. Hindery." The Petition states that Hindery has attributable interests in cable systems that serve a total of 542,000 subscribers, which includes the approximately 115,000 subscribers served by DDC. 11. DDC notes that in previous filings to the Bureau, it asserted that its systems met the criteria for small system relief and that, without a waiver, it intended to rely on the small system rules in responding to certain pending rate complaints. This assertion rested on the notion that Hindery's interest in Robin Media Group, Inc. ("RMG"), a cable operator serving 180,000 subscribers, should not be deemed attributable under the small system rules. Although Hindery's ownership interest in RMG exceeds the 20% attribution threshold, DDC had argued that we should discount that interest to take account of a capital appreciation program that was created to provide financial incentives for the benefit of certain RMG employees. The effect of that program, according to DDC, is to dilute the value of Hindery's ownership interest in RMG to less than 20%. If, for this reason, we were to conclude that Hindery's interest in RMG was not attributable to him, deducting the 180,000 RMG subscribers would leave fewer than 400,000 subscribers attributable to Hindery, according to DDC. In the Petition, DDC refers to this argument but then, in the alternative, asserts that "a waiver is appropriate because, on the relevant dates, [Hindery's] interest in RMG would have been 22%, only narrowly exceeding the 20% attribution threshold set forth in the Small System Order." 12. DDC further argues that its small systems bear characteristics of small systems generally and therefore deserve small system treatment. With respect to subscriber density, for example, DDC states that its systems serve approximately 40 subscribers per mile of cable plant, whereas the average among small systems generally is 35.3 subscribers per mile. With respect to monthly regulated revenues, DDC notes that its average of $0.75 per channel per subscriber is less than the small system average of $0.86. DDC further posits that its systems have average annual advertising revenues that amount to $1.31 per subscriber. According to the Petition, this "small amount of advertising revenue . . . points once again to its need for regulatory flexibility in order to attract other sources of capital." 13. Finally, the Petition asserts that small system rate relief is appropriate because DDC "has always operated as an independently financed entity." According to the Petition, the DDC systems "are not consolidated or clustered" with any system in which Hindery has an interest. DDC contends that it effectively is insulated from Hindery and the various InterMedia cable operations, and that it receives little benefit as a result of its affiliation with them. DDC states that it does have "indirect access" to discounts when purchasing cable programming and equipment, presumably by virtue of its affiliation with a larger operator, but contends that many operators with small systems enjoy such discounts. In addition, DDC notes that the Bureau previously has determined that the receipt of such discounts does not preclude a grant of small system rate relief. DDC acknowledges that it receives accounting and other administrative assistance from InterMedia Partners, but contends that it "pays a market rate fee for such services." 14. "Most importantly," the Petition asserts,"[DDC] is capitalized and financed as a stand-alone company whose finances are non-recourse to any other entity, including those in which Mr. Hindery maintains an interest." DDC describes and attaches various loan and partnership agreements purporting to show that neither Hindery nor any of the InterMedia entities bears any liability as a result of their affiliation with DDC. DDC argues that a waiver is appropriate because "[t]his financial independence marks [DDC] as a small cable company which the small system rules are intended to assist so that it may continue to provide the quality of service needed to compete in the increasingly competitive marketplace . . . ." DDC assures that "[t]here has been no change in this independent financial structure to date, nor is it anticipated that any such change will occur." 15. In their Opposition, the Cities particularly challenge this last assertion, noting that five days before filing its Petition on April 22, 1996, DDC announced that it had entered into a merger agreement with Triax Midwest Associates, L.P. ("Triax"), another cable operator. Attached to the Opposition is a copy of a completed FCC Form 394 describing the merger. The Form 394 and an attachment thereto state that the merger will result in the creation of a "restructured Triax" that will serve 487,135 subscribers via several hundred cable systems, including the 93 DDC systems at issue in this case; that DDC will obtain a limited partnership interest in the restructured Triax and a cash payment; and that consummation of the merger agreement is scheduled for July or August of 1996. According to the Cities: "As a result of this transaction the vast majority of information contained within [DDC]'s Petition for Special Relief is no longer accurate . . . ." 16. In addition, the Cities express concern that granting the Petition would "adversely affect subscriber rates in [the affected] communities potentially resulting in rate increases above maximum permitted levels allowed pursuant to the Commission's rate regulations." For these reasons, the Cities request that we deny the Petition. 17. In its Reply, DDC first asserts that the Triax merger is irrelevant because DDC is seeking "to confirm its small cable company status at a point in time which occurred more than one year before the proposed transaction was announced." DDC notes that in the Small System Order, the Commission determined that any rate complaint pending against a cable operator as of the release date of that order (June 5, 1995) would be resolved in accordance with the small system cost-of-service rules, if the operator and the cable system in question met the small cable company and small system definitions as of that release date and as of the date the complaint was filed. DDC repeats its prior assertion that it and its systems in fact satisfied the small system and small cable company definitions as of the relevant dates and that no special relief is required in order to apply the small system rules to rate complaints that were pending as of June 5, 1995. On this basis, DDC characterizes as irrelevant the merger with Triax because that transaction is scheduled to close more than a year after June 5, 1995. DDC states that it filed its Petition on April 22, 1996 "out of an abundance of caution in order to provide additional documentation to support a waiver of the rules should the Bureau conclude that evidence previously provided does not conclusively establish [DDC]'s small cable company status." 18. In the alternative, DDC asserts that the merger is just one of several transactions proposed by Triax and that, after the consummation of all of these transactions, Triax will be serving fewer than 400,000 subscribers. As a result, the DDC-Triax merger "will simply result in a small cable company [Triax] owning small systems eligible to use streamlined small system cost-of-service rate rules." On this basis, DDC seeks to distinguish the instant case from the facts of a prior decision, In the Matter of Marcus Cable Properties, Inc. ("Marcus"), in which we denied a petition for special relief, based in part on transactions that occurred after the petition was filed. DDC notes that Marcus exceeded the small cable company definition when it filed its petition, and added an additional 700,000 subscribers shortly thereafter. In the proposed merger at issue in the present case, "ownership of the small systems in question will simply move from the hands of one small cable operator to another small cable operator," according to DDC. 19. DDC disputes the Cities' contention that granting the Petition could result in unreasonable rates, noting that the DDC systems will remain subject to rate regulation even if the Petition is granted. Further, DDC objects to the Cities' opposition because it was filed 11 days late. DISCUSSION 20. Pursuant to Section 1.3 of the rules, we find good cause to accept the Cities' late- filed Opposition. We note that the Opposition consists primarily of a copy of a completed and signed FCC Form 394 that has been filed on behalf of DDC and is publicly available. DDC does not challenge the authenticity or reliability of the document and claims no prejudice as a result of the late filing. Accordingly, we accept the Opposition. 21. Although DDC styles its initial pleading as a "Petition for Special Relief," both its Petition and its Reply assert, as an initial matter, that special relief is not necessary in order for DDC to establish rates in accordance with the small system rules. DDC states that it seeks special relief only to the extent we find that it fails to meet the eligibility criteria for small system relief. 22. An operator that believes it meets the criteria for small system rate need not file a petition; instead, it should file a completed Form 1230 with either its local franchising authority or the Commission or both, depending upon the circumstances. The franchising authority or the Commission then will determine whether the system meets the criteria and, if so, whether the operator has properly completed Form 1230. The special relief procedure, by contrast, is for the benefit of systems and operators that do not meet the small system criteria but that nonetheless seek to justify the application of the small system cost-of-service methodology in light of the particular circumstances they face. 23. Before filing its Petition, DDC pursued the first course of action described above by submitting a letter to the Commission claiming that it met the small system criteria and indicating its intent to file Forms 1230 on behalf of its regulated systems. In response to Bureau inquiries, DDC made further submissions seeking to substantiate its claim, but was unable to do so. Thereafter, DDC made a final submission stating that one of its prior filings was incorrect in that it overstated Hindery's interest in cable operator RMG. As discussed above, DDC argued that the cable subscribers of RMG should not be deemed attributable to Hindery because of an employee incentive program that allegedly reduced the value of Hindery's interest in RMG to below 20%. In particular, according to DDC certain employees are eligible to earn "points," with each point entitling the employee to a percentage of the profits the partnership receives upon the sale of any of its cable systems. It appears that but for the incentive program, these profits would have gone to Hindery rather than the employees. Although Hindery's partnership interest exceeds 20%, he will recover less than 20% of the profits upon the sale of the partnership's systems, according to DDC. For this reason, DDC argued that Hindery's ownership interest should be deemed to be less than 20% and therefore non-attributable. In that case, according to DDC, the total number of subscribers attributable to Hindery would have been fewer than 400,000 and DDC's affiliation with Hindery would not have precluded it from establishing rates in accordance with the small system rules. In its Petition, DDC reasserts this same argument. 24. As noted, we rejected this argument when DDC first made it. The significant factor under the Commission's affiliation rules is the percentage of an operator's interest in a cable system, not the value of that interest. Hindery's ownership interest in RMG exceeds 20%. In its Petition, DDC offers nothing new in support of its argument that the employee incentive program effectively dilutes Hindery's actual 20% ownership interest. Therefore we decline DDC's request to revisit our prior determination that the DDC systems were not eligible for small system relief as of June 5, 1995. 25. As for DDC's eligibility for special relief, we first must determine the significance, if any, of the DDC-Triax merger. We faced a similar issue in Marcus. In that case, the cable operator was serving approximately 480,000 subscribers when it filed its petition, but soon thereafter acquired additional systems that increased its subscriber base to over one million. We rejected the cable operator's argument that we should consider the merits of its petition for special relief without reference to this increase: Events that have transpired since the filing of the Petition may have a significant impact on the circumstances relied on to support the waiver. Given that the changed circumstance reflects a substantial increase in the degree to which the operator exceeds the small cable company definition, a factor specifically identified by the Commission as being relevant with respect to such petitions, we cannot ignore the substantial impact that [the post-Petition] transactions have. Moreover, our rules governing special relief petitions specifically recognize the potential significance of changes in circumstances that occur after the filing of a petition. We ultimately denied the petition in Marcus due, in part, to the extent by which the cable operator exceeded the 400,000-subscriber definition of a small cable company as a result of the post-petition cable system acquisitions. 26. We cannot determine a petitioning system's eligibility for small system relief based solely on a narrow snapshot of that system's subscriber counts at a given moment in time. We must take a broader perspective to determine whether granting the relief to the system in question is consistent with the goals of the Small System Order. For this reason, the Triax-DDC merger is highly relevant to resolving the Petition at issue here. As the Cities note, because of the merger announced on April 17, 1996, the information offered by DDC to support its waiver request of April 22, 1996 does not accurately depict the broader context. Most notably, the chain of affiliated interests that DDC carefully describes in its Petition has been replaced by an entirely different ownership structure. In addition, whereas before the merger DDC directly served 115,000 subscribers (disregarding affiliated entities), its successor, Triax, directly serves almost 490,000 subscribers. Ownership interests and subscriber counts are starting points for considering a petition such as the one before us. We cannot ignore the fundamental changes in these factors that have occurred as a result of the merger. 27. We also must keep in mind that the Commission adopted small system relief to assist smaller operators that were found to face burdens disproportionate to their size "in attempting simultaneously to provide good service to subscribers, to charge reasonable rates, to upgrade networks, and to prepare for potential competition." To the extent DDC faced such obstacles in the operation of its small systems, the Triax merger appears to have greatly alleviated any concerns. The attachment to the Form 394 seeking local franchising authority approval of the Triax-DDC merger states: The benefits of this transaction and the operating efficiencies it will produce will be felt by customers and the communities served. For example, additional and more sophisticated services, such as multi-channel pay-per-view and high-speed data links, which would not be economically or technically feasible in most small markets, now become possible. This transaction will allow Triax to bring the information super highway to those parts of rural America which it serves. Operational efficiencies will help reduce the upward pressure on customer rates while allowing improvements in customer service and technical quality. As the telecommunications environment continues to change, the communities served by the merged company will preserve the benefits of a strong national operator with a significant local presence, and gain the opportunity to receive advanced and affordable telecommunications services. * * * * * The communities currently served by DD Cable are almost without exception in close geographic proximity to existing Triax systems and/or share a community of interest such as school districts, economic development objectives and the like. Triax expects to derive significant economies of scale and operating efficiencies associated with regional clusters of systems. In turn, these operating efficiencies will pave the way for the availability of more programming choices, advanced telecommunications services improved customer service and technical performance. This description, which apparently was submitted to all of the communities served by DDC, aggressively predicts the extent of the benefits that will result when its systems are acquired by "a strong national operator" that will be able to provide "advanced and affordable telecommunications services." It appears that many of the burdens commonly encountered by small systems no longer burden the DDC systems and thus do not furnish a justification for waiving our rules regarding eligibility for the small system cost-of-service methodology. 28. Nevertheless, DDC contends that the merger is irrelevant. To the extent we determine otherwise, DDC argues that the merger is not a bar to granting the Petition if the merger is considered in the context of other transactions planned by Triax. We find these arguments unpersuasive. 29. In its first argument concerning the merger, DDC states that the object of the Petition is to apply the small system rules to rate complaints that were pending at the Commission as of June 5, 1995, the date the Small System Order was released. As DDC correctly states, to be eligible for this relief a cable company must show that the company and its systems were small as of June 5, 1995 and as of the date the complaints were filed. DDC asserts that a "proposed transaction, announced more than one year later and which has yet to be consummated, has no bearing on whether [DDC] met the small cable company definitions on June 5, 1995." We agree. Yet, as discussed above, DDC in fact did not meet the small cable company test as of June 5, 1995 because of its affiliation with Hindery, a cable operator who at that time was attributed with over 400,000 subscribers. Thus, we reject DDC's first argument because, irrespective of the Triax merger, DDC did not meet the small cable company definition as of June 5, 1995. 30. Second, DDC argues that if we do consider its merger with Triax, we also must consider other transactions planned by Triax that ultimately will result in Triax having a total subscriber base of fewer than 400,000 subscribers. As a result of the initial merger, the combined Triax-DDC cable operator now serves 487,135 customers, "making it one of the nation's 25 largest multiple system operators." According to DDC, however, Triax has contracted to sell other cable systems serving a total of 50,000 subscribers and "plans to sell" additional systems serving 200,000 subscribers. If all these transactions came to pass, DDC claims that Triax would have a subscriber count of under 400,000, and therefore its small systems would qualify for relief. 31. Absent special relief, a small system may set rates in accordance with the small system cost-of-service methodology if it is owned by a small cable operator, not simply because it expects to be owned by such an operator at some time in the future. As described by DDC, the transactions that allegedly will reduce Triax's subscriber base below 400,000 are far too indefinite and speculative to be considered here. For example, DDC simply states that Triax has contracted to sell systems serving a total of 50,000 subscribers. The Petition lacks relevant details such as when, or whether, this transaction is scheduled to close. In addition, there is no description of any conditions under which the agreement would be voided or the likelihood of such conditions occurring. Even were this transaction to be consummated, Triax-DDC would still serve in excess of 400,000 subscribers. To fall below this level and thus become eligible for small system relief, Triax would have to consummate additional system sales for which it has "plans" but which are not now even under contract. In contrast to the speculativeness of these transactions, we note that the Triax-DDC merger, that will result in Triax serving almost 490,000 subscribers, was scheduled to close as of a date certain and was conditioned only on the approval of the appropriate local franchising authorities. We cannot grant regulatory relief based on a cable operator's indefinite, and perhaps unattainable, "plans" to meet the conditions necessary to justify that relief. 32. Taking into account the DDC-Triax merger, and having concluded that the subsequent transactions planned by Triax are irrelevant, we find that the systems that are the subject of the Petition are owned by an operator with over 487,000 subscribers, well in excess of the small cable company cap. Therefore, these systems do not qualify for the small system cost-of-service methodology. Notably, at no point in its pleadings does DDC argue that a waiver is appropriate in this context. Rather, both of DDC's arguments that account for the Triax merger rest on the notion that the subscriber base of the relevant operator, either DDC or Triax, was or will be below 400,000 as of the pertinent dates, making special relief unnecessary. To the extent a waiver request may be implicit in this context, DDC provides none of the data that we need to consider such a request. In particular, the pleadings do not assert, and offer no factual basis on which we could conclude, that Triax differs in some relevant way from other cable operators of more than 400,000 subscribers. Since the record reveals no relevant distinctions between Triax and other large cable companies, there is no justification for exempting Triax from the general rule that precludes large cable companies from availing themselves of the small system cost-of-service methodology. Therefore, we must deny the Petition. 33. The denial of the Petition does not preclude the subject systems from becoming eligible for small system relief at some future time. For example, the Reply states that the systems are being conveyed from DDC to Triax and that Triax will be serving fewer than 400,000 subscribers after the consummation of all of the pending and planned transactions. If those transactions take place as described, each system then might qualify as a small system owned by a small cable company and thus would be eligible for small system relief as long as it serves no more than 15,000 subscribers. Of course, as with any petition for special relief, we will review all of the relevant circumstances if and when relief is again sought for these systems. It appears, for example, that Hindery will retain an attributable interest in DDC, even after the merger. In addition, Triax states that it plans to have representatives of DDC serve on an advisory board. These conditions could lead to a determination that, upon the consummation of all of the anticipated transactions, the systems that are the subject of the Petition will be affiliated with both Hindery and Triax. This result could affect our determination of the system's eligibility for small system rate relief. Variables such as these reinforce our prior observation that the small system waiver process is best-suited for a petitioner that has a fixed ownership and affiliation status, rather than one that is planning transactions that will alter that status. ORDERING CLAUSES 34. Accordingly, IT IS ORDERED that the Petition for Special Relief filed by D. D. Cable Holdings, Inc. and D.D. Cable Partners, L.P. IS DENIED. 35. This action is taken pursuant to delegated authority under Section 0.321 of the Commission's rules. FEDERAL COMMUNICATIONS COMMISSION Meredith J. Jones Chief, Cable Services Bureau