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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 ) ) Booth American Company ) CSR 4668-D ) Petition for Special Relief ) MEMORANDUM OPINION AND ORDER Adopted: September 17, 1997 Released: September 18, 1997 By the Chief, Cable Services Bureau: I. INTRODUCTION 1. Here we address a petition for special relief ("Petition"), in which Booth American Company ("Booth") seeks a waiver of the Commission's rules to the extent necessary to permit Booth to establish regulated cable rates on behalf of a system in southeastern Michigan 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 Birmingham Area Cablecasting Board ("Birmingham") filed an opposition to the petition on behalf of the City of Birmingham, the Village of Beverly Hills, the Village of Bingham Farms, and the Village of Franklin. The Bloomfield Cable Communications Board ("Bloomfield") filed an opposition to the petition on behalf of the City of Bloomfield Hills and the Bloomfield Township. 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 regulatory 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 that is 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 may 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. ARGUMENTS OF THE PARTIES 7. Booth's system in southeastern Michigan serves six franchise areas. Birmingham is the franchising authority for four of the franchise areas and Bloomfield is the franchising authority for the other two franchise areas. Booth claims that it has always treated the system as two separate and distinct systems -- the Birmingham system and the Bloomfield system. Booth contends that the two systems share a common headend because Bloomfield required Booth to construct the Bloomfield headend at the site of the Birmingham headend. Booth argues that, despite the mandated headend linkage, the two systems are operationally and administratively distinct. According to Booth's Petition, the Birmingham system serves 10,660 subscribers and the Bloomfield system serves 13,635 subscribers. Given that Booth operates cable systems serving a total of less than 142,000 subscribers, Booth argues that each of these systems automatically qualifies for small system relief when considered individually. Booth acknowledges that the Commission defines a small system by the number of subscribers served by its principal headend rather than by the number of subscribers in a franchise area. It contends, however, that it is not seeking to define its systems by franchise area because both the Birmingham and Bloomfield systems serve multiple franchise areas. 8. Booth claims that, even when considered together, the two systems possess key small system characteristics sufficient to warrant relief. For instance, Booth asserts that the average subscriber density of the Birmingham system is 46 subscribers per mile and the average subscriber density of the Bloomfield system is 28 subscribers per mile. When the two systems are considered together, the average subscriber density is 31 subscribers per mile. In addition, Booth explains that it lost its programming discounts when it acquired the interest of its partner, an affiliate of Tele-Communications, Inc. ("TCI"). It claims that it has been forced to absorb approximately $750,000 in programming cost increases. Further, Booth argues that the systems are operationally and administratively distinct because they had different construction schedules, they are required to submit system-specific annual reports, and they are subject to different franchise requirements regarding public, educational and governmental access, local origination programming, and institutional networks. 9. Booth states that the Birmingham system has an average monthly regulated revenue per channel per subscriber of $0.43 and an average annual premium revenue per subscriber of $73.29. It further states that the Bloomfield system has an average monthly regulated revenue per channel per subscriber of $0.48 and an average annual premium revenue per subscriber of $91.66. Booth argues that, although the levels of its premium revenues are more like those of larger systems, its higher revenues do not equate to higher profits and have, in fact, been steadily declining since 1990. Booth claims that failure to grant small system relief will create a significant economic disincentive and will hinder its ability to compete. In addition, Booth argues that relief will benefit the local franchising authorities by reducing their administrative burdens. 10. In opposition to Booth's petition, Birmingham and Bloomfield both note that the Commission decided that small system relief should be based on the number of subscribers served by a system's principal headend, not on the number of subscribers in a franchise area. They claim that Booth agreed to the shared headend, which Booth concedes saved certain capital costs. In response to Booth's argument that the two systems are operationally and administratively distinct, the franchising authorities contend that all six communities are served by virtually the same personnel, including management, engineering staff, customer service representatives, and clerical staff. They are particularly disturbed by Booth's reliance on the fact that it lost its programming discounts once the system was no longer associated with a TCI affiliate. The franchising authorities assert that when Booth sought their approval to acquire its partner's interest in the system, it assured them that any resulting increases in programming costs would not have a materially adverse impact on either Booth or its subscribers. They also complain that Booth has not quantified the higher costs it claims to have. Finally, they contend that Booth's argument that small system relief will reduce the administrative burdens on the franchising authorities is misplaced because neither Birmingham nor Bloomfield wishes to have its regulatory authority limited and subscribers will not benefit from the resulting rate increases. 11. In its reply to the franchising authorities' oppositions, Booth first points out that the Telecommunications Act of 1996 contains a broader definition of a small cable company which, although not controlling, reflects greater regulatory flexibility on small system issues. Booth reiterates its argument that the Commission's principal headend standard should not apply in this case given that the headend linkage was mandated by franchise agreement. Booth also continues to maintain that low subscriber density, higher programming costs, higher costs relating to the operational and administrative separation of the systems, and costly franchise requirements demonstrate that the Birmingham and Bloomfield systems share key small system characteristics. Booth argues, therefore, that the Commission should discount the fact that its average revenues for regulated and premium services differ from small system averages. 12. In response to the franchising authorities' argument that Booth uses the same staff for the entire system, Booth asserts that the costs are still substantial because the staff must meet with two franchising authorities and must comply with different franchise requirements. In addition, Booth argues that its lack of programming discounts is a relevant factor in determining small system relief regardless of its assurances to the franchising authorities that the acquisition of its partner's interest would not create a material adverse impact. Booth's response to the franchising authorities' argument that small system relief will curtail their regulatory authority and lead to higher rates is that the Commission has recognized that small system relief may result in rate increases. 13. Finally, Birmingham and Bloomfield jointly filed a letter disputing Booth's claim that the shared headend was mandated by franchise agreement. They contend that Booth specifically proposed using the same headend to serve both Birmingham and Bloomfield. They argue that the franchising authorities merely agreed to Booth's proposal. III. DISCUSSION 14. As discussed above, a cable system that is entitled to small system relief is a system serving 15,000 or fewer subscribers that is not owned by a cable company serving more than 400,000 subscribers over all of its systems. Because Booth has approximately 142,000 subscribers, the system at issue here is affiliated with a small cable company with a total subscribership of less than 400,000. However, the system serves 24,295 subscribers. Thus, the issue in this case is whether the Commission should waive the 15,000 subscriber limit used to define a small system under its rules. 15. We first address Booth's argument that the system is actually two different systems that both automatically qualify for small system relief because, if viewed separately, each serves fewer than 15,000 subscribers. We will not grant relief on this basis because the definition of a small system is based on the number of subscribers served by the system's principal headend. In the Small System Order, the Commission explicitly rejected a definition based on the number of subscribers in a franchise area. The Commission stated that "determining small system size based on a system's principal headend best harmonizes our small system rate rules with most of our existing regulations on cable system size. . . . To use a franchise area definition would result in some segments of a single integrated cable operation being subject to a different regulatory structure than other segments of the same operation." Although Booth is not measuring its subscribership according to each of the six franchise areas served by the system, it is basing its calculations on the number of subscribers represented by each of the two franchising authorities. Similarly, Booth emphasizes that the system comprises two operationally and administratively distinct systems because it must comply with different franchise requirements. This argument is not persuasive because many cable systems serve multiple franchise areas, each with specific obligations and commitments. We also find Birmingham and Bloomfield's position that the system is administered as one system to be credible and not refuted by Booth. Again, Booth disregards the Commission's principal headend test, which requires an evaluation of the system as a whole. 16. Although we reject Booth's suggestion that the system should be viewed as two separate systems that automatically qualify as small systems, Booth's position must be considered when evaluating whether the system, as a whole, should be granted relief. As we stated in Inter Mountain Cable, Inc. ("Inter Mountain"), the Commission seeks to encourage the interconnection of multiple small systems where subscribers will benefit. Therefore, regardless of whether the shared headend was proposed by Booth or by the franchising authorities, we will consider the construction of a combined facility to be a beneficial cost- saving action that weighs in favor of Booth's request for small system relief. 17. We note that the average subscriber density for Booth's system is 31 subscribers per mile. We also recognize that Booth no longer receives programming discounts. However, we do not find that these factors alone are sufficient to overcome the countervailing factors that weigh against small system relief in this case. First, the system's subscribership of 24,295 exceeds the Commission's 15,000 ceiling by 62%. Although in Inter Mountain we granted relief to a system with 22,763 subscribers, that decision is distinguishable because other characteristics of the system in that case were particularly compelling for granting a waiver. The Inter Mountain system was a combination of extremely small systems that served, on average, fewer than 600 subscribers each. It had a subscriber density of only 21 subscribers per mile, as compared to the small system average of 35.3 subscribers per mile. Its annual premium revenues of $8.03 per subscriber were far below the small system average of $41.00 per subscriber. As with the Booth system, programming discounts were not available to the Inter Mountain system. The Commission also found it noteworthy that the petition in Inter Mountain was unopposed. The Commission decided that the combination of all of these factors outweighed the fact that the subscribership of the Inter Mountain system substantially exceeded the 15,000 limit. 18. Similarly, Alexcom, L.P. ("Alexcom") is also distinguishable, despite the fact that one of the systems granted relief in that decision served 23,990 subscribers. The Commission found that small system relief was appropriate in light of a number of balancing factors that sufficiently compensated for the large subscribership. For example, Alexcom owned only two cable systems serving a total of 42,539 subscribers, and its management team for both systems consisted of only three people. In contrast, Booth serves a total of approximately 142,000 subscribers in 47 communities in six states. In addition, whereas the regulated and premium revenues for Alexcom's system fell in between those of small and larger systems, the revenue figures for Booth are akin to those of larger systems, as described below. Lastly, we found it significant in Alexcom that the petition was unopposed. 19. Unlike in Inter Mountain and Alexcom, the relevant characteristics of the Booth system do not warrant an exception for a system where the subscribership exceeds the 15,000 ceiling by such a substantial amount. As mentioned above, Booth states that the monthly regulated revenues per subscriber per channel are $0.43 for the Birmingham system and $0.48 for the Bloomfield system. These figures are almost identical to the $0.44 figure that the Commission determined to be the average for systems with more than 15,000 subscribers (and far less than the $0.86 average for small systems). Likewise, the average annual premium revenues per subscriber for the Booth system are much closer to those of larger systems. Booth provides figures of $73.29 for the Birmingham system and $91.66 for the Bloomfield system, and the Commission determined that the average is $73.13 for larger systems and $41.00 for small systems. Therefore, with respect to both of these factors, the Booth system more closely resembles a larger system than a small system. Furthermore, in contrast with the unopposed petitions in Inter Mountain and Alexcom, both Birmingham and Bloomfield oppose Booth's petition and argue that small system relief will not benefit either the franchising authorities or the subscribers. Taking all of these factors into consideration, we do not believe that small system relief is warranted in this case. We therefore deny Booth's Petition. IV. ORDERING CLAUSES 20. Accordingly, IT IS ORDERED that the Petition for Special Relief filed by Booth American Company with respect to its system serving the Birmingham and Bloomfield communities in Michigan is hereby DENIED. 21. 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