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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) Lake Cablevision, Inc. and )CSR 4754-D Lake Cablevision (Winder), Inc.) ) Petition for Special Relief ) MEMORANDUM OPINION AND ORDER Adopted: July 26, 1997Released: August 1, 1997 By the Chief, Cable Services Bureau: I.INTRODUCTION 1.Here we address a petition for special relief ("Petition") in which Lake Cablevision, Inc. and Lake Cablevision (Winder), Inc. ("Lake") seeks a waiver of the Commission's rules to the extent necessary to permit Lake to establish regulated cable rates on behalf of its Winder, Georgia system (CUID Nos. GA0278, GA0490, and GA0491) 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 Commission received two oppositions to Lake's Petition. 2.Section 623(i) of the Communications Act of 1934, as amended ("Communications Act"), requires that the Commission design rate regulations that 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.Rate relief provided under the Small System Order and the Commission's rules is also available only to a small system affiliated with 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 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 also stated that "a qualifying system that seeks to obtain programming from a neighboring system by way of a fiber optic link, but that is concerned that interconnection of the two systems will jeopardize its status as a stand-alone small system, may file a petition for special relief to ask the Commission to find that it is eligible for small system relief." 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. II.THE PETITION 7.In its Petition, Lake seeks authority to establish regulated rates for its Winder system in accordance with the small system cost-of-service methodology. As noted, that form of rate regulation is only available to small systems owned by small cable companies. According to the Petition, as of December 31, 1995, Lake served a total of approximately 39,000 subscribers across all of its systems. Lake states that it therefore qualifies as a small cable company. Nevertheless, Lake is in need of special relief because its Winder system exceeds the 15,000 subscriber limit for small systems. As of December 31, 1995, Lake's Winder cable system served an average of approximately 16,286 subscribers. 8.In support of its Petition, Lake notes that it easily qualifies as a small operator, and that its Winder system fails to meet the numerical definition of a small system by only a small degree. In addition, Lake argues that its Winder system shares several relevant characteristics with qualifying small systems even though its system does not meet the numerical definition of a small system. According to the Petition, the Winder system serves approximately 16.6 subscribers per mile, which is below the average number of 35.3 subscribers per mile served by systems with fewer than 15,000 subscribers, and far below the average number of 68.7 subscribers per mile served by systems with more than 15,000 subscribers. The Winder system also has an average monthly regulated revenue per channel per subscriber of approximately $0.58, as compared to the $0.86 average monthly regulated revenue per channel per subscriber for systems serving fewer than 15,000 subscribers. Finally, the Petition indicates that the Winder system has an average annual premium revenue per subscriber of $53.80. This figure is closer to the average of $41.00 for systems with fewer than 15,000 subscribers than it is to the average of $73.13 for systems with more than 15,000 subscribers. 9.In further support of the Petition, Lake argues that a grant of special relief would be in the public interest. Lake contends that it faces financial constraints similar to those faced by other small cable operators. Specifically, the Petition indicates that Lake cannot "achieve economies of scale available to much larger systems in the area of equipment purchasing, system maintenance, or program acquisition." Lake further argues that it faces high operating costs because it has been committed to "providing first class cable service, notwithstanding the limited size of its subscriber base." 10.On June 10, 1996 the City of Lula, Georgia filed an Opposition to the Petition for Special Relief. On June 17, 1996 the City of Winder, Georgia also filed an Opposition to the Petition for Special Relief. Lake filed a consolidated Reply to Oppositions to Petition for Special Relief on June 20, 1996. The substance of the oppositions and Lake's reply are discussed in Section III below. III.DISCUSSION 11.In the Small System Order, the Commission defined a small cable company as a cable company "serving 400,000 or fewer subscribers over all of its systems." The Commission also defined a small cable system as a system that "serves 15,000 or fewer subscribers." Lake serves a total of approximately 39,000 subscribers across all of its systems, and thus easily falls within the definition of a small cable company, but its Winder system exceeds the small system definition with a total of approximately 16,286 subscribers. Lake may not, therefore, establish regulated rates for its Winder system in accordance with the small system cost-of-service methodology absent special relief. 12.We believe that Lake is entitled to special relief for its Winder system. We previously have granted small system status to systems that exceed the 15,000 subscriber limit by only a small amount where it has been shown that the system in question shares relevant characteristics with systems serving fewer than 15,000 subscribers. In Insight, we granted special relief so that the cable operator could use the small system rate rules for its systems serving 16,348, 16,328 and 17,798 subscribers, respectively. We found that "even the largest of the three systems exceed[ed] the 15,000 subscriber standard by only a relatively small amount." With only 16,286 subscribers, Lake's Winder system is smaller than any of the above mentioned Insight systems and exceeds the 15,000 subscriber limit by only 1,286 subscribers. 13.In Insight, we also found that there was no evidence that the systems in question were "experiencing, or anticipate[d] experiencing, a high rate of subscriber growth." The cities of Lula and Winder, Georgia claim that the Winder system's growth rate during 1994 and 1995 averaged 16.5% annually and that the system serves sections of Gwinnett County that will continue to experience a high growth rate according to data gathered by the county. However, Lake states, in its Reply to Oppositions, that the difference in subscribers noted by the cities did not result from an increase in the number of people choosing to receive Lake's services, but rather resulted from "a system-wide audit which discovered hundreds of non- paying users of Lake's service." Lake also disputes the accuracy of the rates for population growth estimated by Gwinnett County and cited in the cities' oppositions. Lake claims that data compiled by the U.S. Census Bureau indicate a much lower growth rate for the two cities. We note that the rate of population growth in the county does not serve as direct evidence that Lake's subscribership is likely to grow at any particular rate. 14.In the Small System Order, the Commission observed that systems with fewer than 15,000 subscribers differed from systems with more than 15,000 subscribers with respect to three main characteristics, including average number of subscribers per mile, regulated revenues, and non-regulated (or premium) revenues. With respect to subscriber density, Lake's Winder system serves an average of only 16.6 subscribers per mile, which is less than half of the small system average of 35.3 subscribers per mile and less than a quarter of the larger system average of 68.7 subscribers per mile. Low subscriber density was specifically relied on by the Commission to establish the 15,000 subscriber threshold for small systems. The Commission noted in the Small System Order that commenters had observed that "a smaller system serving a large rural area faces increased construction costs due to the increased amount of cable that must be installed to reach the entire area and increased operating costs given the greater amount of facilities that must be maintained." 15.The Commission also found that the average monthly regulated revenue per channel per subscriber is $0.86 for systems with fewer than 15,000 subscribers. The $0.58 average monthly regulated revenue per channel per subscriber of Lake's Winder system compares favorably with this small system standard. 16.The Winder system furthermore reports an average annual premium revenue per subscriber of only $53.80, which is closer to the $41 average for smaller systems than it is to the $73.13 average for larger systems. This disparity with respect to unregulated or premium revenues was another factor specifically recognized in the Small System Order as a justification for the small system definition. 17. In the Small System Order, the Commission stated that it would also consider "evidence of increased costs (e.g., lack of programming or equipment discounts) faced by the operator." The cities of Lula and Winder, Georgia claim that Lake does not provide any data in its Petition indicating that the costs for its Winder system are similar to those of systems that meet the small system definition. The cities also suggest that Lake simply recover any additional costs that it may incur through a standard cost-of-service showing. As we have previously noted, small systems with a low subscribership density often face increased costs. The Petition indicates that, with an average of only 16.6 subscribers per mile, Lake has a very limited subscribership resembling that of a small system, and Lake claims that it cannot "achieve economies of scale available to much larger systems in the area of equipment purchasing, system maintenance, or program acquisition." Lake also argues that it faces "high operating costs" due to several improvements and expenditures that it has made in an attempt to improve service to its limited subscribership. According to Lake, most of its "subscriber growth will come via line extensions, not urban growth, thereby exacerbating the cost and operational challenges" it faces. 18.We believe that Lake should be allowed to defray its increased costs using the small system cost-of-service methodology. In the Small System Order, the Commission adjusted its definition of small systems in order to further Congress' goal of reducing the regulatory burdens and cost of compliance for smaller cable concerns. The Commission noted that the goals expressed by Congress in the 1992 Cable Act Statement of Policy would also be furthered if it expanded the category of small systems entitled to reduced regulatory burdens. The Small System Order allows for the filing of petitions for special relief so that systems that fail to meet the numerical small system definition may still show that they are similar to systems that meet the definition, and are therefore entitled to relief. Lake's Winder system exceeds the small system definition by only a small amount. Lake has also shown that its Winder system has characteristics that compare favorably with the various characteristics that the Commission used to determine the category of systems deserving of regulatory relief. For these reasons, we believe that granting the Petition will further the intent of Congress and will therefore serve the public interest. IV.SCOPE OF THE WAIVER 19.As a result of our grant of the Petition, Lake's Winder system shall be deemed a small system for purposes of rate regulation. Accordingly, to the extent Winder's basic service tier and/or cable programming service tier offerings are subject to rate regulation, Lake may now set rates prospectively in accordance with the small system cost-of-service methodology. 20.We next must determine the duration of the waiver. In the Small System Order, after establishing the new small system and small cable company definitions, the Commission stated: To qualify for any existing form of [small system] relief, systems and companies must meet the new size standards as of either the effective date of this order or on the date thereafter when they file whatever documentation is necessary to elect the relief they seek, at their election. . . . A system that is eligible for small system relief on either of the dates described above shall remain eligible for so long as the system has 15,000 or fewer subscribers, regardless of a change in the status of the company that owns the system. Thus, a qualifying system will remain eligible for relief even if the company owning the system subsequently exceeds the 400,000 subscriber cap. Likewise, a system that qualifies shall remain eligible for relief even if it is subsequently acquired by a company that serves a total of more than 400,000 subscribers. 21.The Commission adopted this grandfathering treatment for qualifying systems to enhance their value "in the eyes of operators and, more importantly, lenders and investors." As the Commission stated: "The enhanced value of the system thus will strengthen its viability and actually increase its ability to remain independent if it so chooses." 22.Upon exceeding the 15,000 subscriber threshold, a system that has established its rates in accordance with the small system cost-of-service methodology: . . . may maintain its then existing rates. However, any further adjustments shall not reflect increases in external costs, inflation or channel additions until the system has re-established initial permitted rates in accordance with our benchmark or cost-of-service rules. 23.Since Lake's Winder system has already exceeded 15,000 subscribers, there is no obvious numerical limit to serve as a cutoff for its continued eligibility for small system treatment. Although Lake does not anticipate that its Winder system's subscribership will move very far from the 15,000 limit for some time, we believe it is reasonable to presume that the system will continue to grow. Thus, we must place some duration on the waiver, since the alternative would be to grant small system status indefinitely, regardless of the eventual size of the system. This latter alternative is clearly inconsistent with the Commission's decision to limit small system relief to systems who are in need of it due to their relatively small size. 24.Therefore, as we have ordered in the context of a similar waiver situation, the Lake waiver will terminate two years from the date of this order, subject to the conditions set forth below. During the waiver period, Lake may file only one Form 1230 for each franchise area it serves. This should give Lake adequate regulatory certainty for the foreseeable future, while still ensuring that the system is not permitted to charge rates indefinitely under a scheme designed for smaller systems. Of course, Lake may seek continued eligibility for small system treatment by filing a petition for special relief at the end of the waiver period. 25.Limiting the waiver period to two years means that any Form 1230 to be filed by Lake must be submitted with the appropriate regulatory authorities within two years of the date of this order. In any franchise area where the system is currently subject to regulation, Lake may reestablish its maximum permitted rates by filing Form 1230 at any time in the next two years. Where the system is not currently subject to regulation but becomes subject to regulation within the next two years, Lake may then file Form 1230 within the normal response time. Where the system is not now subject to regulation, and does not become subject to regulation until more than two years from now, Lake will not be eligible for small system treatment under this waiver. 26.After filing its initial Form 1230 and giving the required notice, Lake may set its actual rates in the franchise area at any level that does not exceed the maximum rate, subject to the standard rate review process. Subsequent increases, not to exceed the maximum rate established by the Form 1230, shall be permitted, subject to the 30 days' notice requirement of the Commission's rules. As noted, the maximum rate established by the initial Form 1230 shall be a cap on the system's rates during the waiver period. If the system reaches that cap and subsequently wishes to raise rates further, it will have to justify the rate increase in accordance with our standard benchmark or cost-of-service rules. Alternatively, the system can file another petition for special relief and seek continued treatment as a small system. Limiting Lake to a single Form 1230 filing for each franchise area provides further assurance that the system will not have grown too large to be establishing rates under the small system cost-of-service methodology. V.ORDERING CLAUSES 27.Accordingly, IT IS ORDERED that the Petition for Special Relief filed by Lake Cablevision, Inc. and Lake Cablevision (Winder), Inc. IS GRANTED. 28.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