[Federal Register Volume 62, Number 61 (Monday, March 31, 1997)]
[Rules and Regulations]
[Pages 15118-15121]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-7976]
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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 76
[MM Docket No. 92-266; FCC 97-87]
Low-Price Cable Television System Rate Regulation
AGENCY: Federal Communications Commission.
ACTION: Final rule.
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SUMMARY: The Commission has adopted a Report and Order regarding low-
price system rate regulation. The Report and Order makes permanent the
transition relief afforded to low-price cable television systems, and
establishes final rules for low-price system rate regulation. Based on
data received in a cost survey conducted in the Fall of 1995, the
Report and Order finds that low-price system operators have lower cash
flow ratios and receive lower profit margins for their low-price
systems than operators of systems already regulated under the
Commission's revised benchmark approach receive for their systems. The
Report and Order, therefore, states that low-price system rates are
reasonable and that low-price systems will not be required to reduce
their rates by the full competitive differential or any lesser amount.
Low-price systems will be able to continue charging for cable services
in accordance with the current rules for such systems.
EFFECTIVE DATE: April 30, 1997.
ADDRESSES: In addition to filing comments with the Secretary, a copy of
any comments on the information collections contained herein should be
submitted to Dorothy Conway, Federal Communications Commission, Room
234, 1919 M Street, NW., Washington, DC 20554, or via the Internet to
dconway@fcc.gov, and to Timothy Fain, OMB Desk Officer, 10236 NEOB,
725--17th Street, NW., Washington, DC 20503 or via the Internet to
fain__t@al.eop.gov.
FOR FURTHER INFORMATION CONTACT: Rodney McDonald, Cable Services
Bureau, (202) 418-7200. For additional information concerning the
information collections contained in the Report and
[[Page 15119]]
Order, contact Dorothy Conway at (202) 418-0217, or via the Internet at
dconway@fcc.gov.
SUPPLEMENTARY INFORMATION: The main text of this decision is included
below. The full text of this decision is available for inspection and
copying during normal business hours in the FCC Reference Center (Room
239), 1919 M Street, NW., Washington, DC 20554, and may be purchased
from the Commission's copy contractor, International Transcription
Services, Inc. (202) 857-3800, 1919 M Street, NW., Washington, DC
20554.
I. Introduction
1. In this Report and Order, we terminate the transition status of
low-price systems and establish final rules for low-price system rate
regulation pursuant to the provisions of the Cable Television
Competition and Consumer Protection Act of 1992, Public Law 102-385,
106 Stat. 1460 (1992), 47 U.S.C. 521 et seq. (``1992 Cable Act''). We
rely on the results of our cost survey in particular, to determine
whether low-price systems should be required to reduce their rates by
the full competitive differential or any lesser amount.
II. Background
2. In the Report and Order and Further Notice of Proposed
Rulemaking in MM Docket No. 92-266, FCC 93-177, 58 FR 29736 (May 21,
1993) (``Rate Order''), the Commission found that ``our initial effort
to regulate rates for cable service should provide for reductions from
current rates of regulated cable systems with rates above competitive
levels.'' In order to simulate the rates that would be charged by
comparable cable systems subject to effective competition, we adopted a
``benchmark'' approach to regulate the basic service tier and the cable
programming services tier of systems not subject to effective
competition. The initial benchmark formula was primarily derived by
examining cable operator's revenues. The formula reflected an implicit
assumption that all cable operators faced similar cost conditions, but
it took into account variations in rates due to certain other economic
and demographic factors. Our initial analysis revealed that the ``rates
of systems not subject to effective competition (were), on average,
approximately 10 percent higher than rates of comparable systems
subject to effective competition.'' This 10% competitive differential
was incorporated into the benchmark system, and noncompetitive systems
whose rates exceeded the benchmark were deemed to be charging
unreasonable rates. These systems were thus required to reduce their
rates, at most by the full 10% competitive differential, but not below
the benchmark.
3. In the Second Order on Reconsideration, Fourth Report and Order,
and Fifth Notice of Proposed Rulemaking in MM Docket No. 92-266, FCC
94-38, 59 FR 17943 and 59 FR 18064 (April 15, 1994) (``Second Order on
Reconsideration''), the Commission adopted a 17% competitive
differential based on a revised analysis of its early competitive
survey of the cable industry; it concluded that the 17% differential
determined by the revised model more accurately estimated the
difference between effectively competitive and noncompetitive cable
rates than the ten percent differential established in the Rate Order.
The Commission recognized, however, that the rates developed under this
revised benchmark approach might not be appropriate for all cable
systems. The competitive survey used to establish the new benchmark
approach included several cost-related variables, but we remained
concerned that our analysis may have failed to identify unusual cost
influences that might indicate whether a system was charging
unreasonable rates. In particular, the Commission identified two types
of systems, small systems and low-price systems, that appeared to
exhibit significantly different prices and costs from most other cable
systems based on the initial data gathered. The Commission granted
transition relief to small systems and low-price systems finding that
these systems would not be required to use the new benchmark approach
until the Commission gathered further data regarding their particular
price/cost profiles. We defined low-price systems as ``(i) systems
whose March 31, 1994 rates are at (or) below the revised benchmark and
(ii) systems whose March 31, 1994 rates are above the benchmark but
whose permitted rates are at or below the benchmark.'' Pending this
determination, low-price systems were placed in a ``transition'' status
and were subject to ``transition relief'' as ``transition systems.''
4. The Commission established an alternate approach to rate
regulation for transition systems pending completion of our price/cost
analysis. During the transition period, low-price systems having March
31, 1994 rates below the new benchmark were not required to reduce
their rates at all. Low-price systems having March 31, 1994 rates above
the new benchmark but having permitted rates at or below the new
benchmark were only required to reduce their rates to the new
benchmark. We imposed a modified price cap on these transition rates
that allowed systems subject to such relief to increase their rates
``to reflect increases in external costs and increases caused by
channel changes that accrue after March 31, 1994.'' A transition system
was not, however, allowed to increase its transition rate due to
increases in inflation until its transition rate was equal to the rate
that would have resulted from a full 17% rate reduction under our
revised benchmark approach (i.e., their full reduction rate increased
by permitted inflation, and increases due to external costs and channel
changes). In this way, the transition rates of transition systems would
eventually become equal to the full reduction rates these systems would
have been required to charge under our new benchmark approach. The
Commission reasoned that a system's full reduction rate might
eventually exceed its transition rate because the full reduction rate
would increase with inflation as well as external costs and channel
changes. The Commission stated that transition treatment would
terminate at the completion of our price/cost analysis, and that
systems that had been provided transition relief would be required to
apply the 17% competitive differential upon termination of transition
treatment unless our analysis revealed that application of the 17%
competitive differential to these systems would be inappropriate.
5. Specifically, we said that we needed to further study whether
below-benchmark rates are more likely to be reasonable than above-
benchmark rates, because they are comparatively lower, and that in
light of this inquiry, it would not be appropriate, at the time, to
require regulated systems to reduce their rates below the benchmark
level. In addition, we stated that ``requiring any systems whose rates
are currently slightly above the benchmark to reduce their rate levels
to the full reduction levels, but not requiring below-benchmark systems
to reduce their rates at all, would result in inequitable treatment of
systems that may be fairly similarly situated.'' Therefore, we stated
that upon completion of our collection and analysis of low price system
prices and costs ``the regulated rates of such systems [would] be set
to reflect the full 17 percent differential if our analysis [did] not
show that the resulting rates would be unreasonably low--that is, the
rates would be lower than they would be if set by competitive pressures
as
[[Page 15120]]
determined by cost comparisons between noncompetitive systems and
systems subject to effective competition.''
6. The Commission subsequently made adjustments to the transition
relief initiated in the Second Order on Reconsideration. In the Ninth
Order on Reconsideration in MM Docket No. 92-266, FCC 95-43, 60 FR
10512 (February 27, 1995), the Commission allowed all systems subject
to transition relief to further adjust their rates based on inflation.
In the Sixth Report and Order and Eleventh Order on Reconsideration in
MM Docket Nos. 92-266 and 93-215, FCC 95-196, 60 FR 35854 (July 12,
1995) (``Small System Order'') we initiated ``the gradual termination
of transition relief for all but low-price systems,'' by limiting
transition relief for small systems to two years from the effective
date of the new rule. Consistent with our statements in the Second
Order on Reconsideration, however, we have continued transition relief
for low-price systems until the completion of our collection and
analysis of necessary cost data.
7. When the Second Order on Reconsideration was adopted, the
Commission noted that we lacked sufficient data regarding the costs
faced by low-price systems to establish whether these systems were
charging reasonable rates despite the fact that they were charging
relatively low rates as compared to the rates of other noncompetitive
cable systems. Therefore, the Commission delegated authority to the
Chief, Cable Services Bureau to conduct general cost studies of the
cable industry. Report and Order and Further Notice of Proposed
Rulemaking, in MM Docket No. 93-215 and CS Docket No. 94-28, FCC 94-39,
59 FR 18066 (April 15, 1994). A cable industry cost survey was
commenced pursuant to this authority in the Fall of 1995. See Order, in
MM Docket No. 92-266, 11 FCC Rcd 4003 (released September 29, 1995).
This Report and Order analyzes data from our cost survey, and compares
the cost and revenue data of noncompetitive low-price systems with the
cost and revenue data received for non-low-price systems that are
already regulated by the Commission under the revised benchmark
approach.
III. Discussion
A. Data
8. The cost survey we initiated in September of 1995 was based upon
a random sample of cable systems. Specifically, the survey was mailed
to cable operators owning 660 of the total 2,271 non-small cable
systems in the U.S. Small systems were not included in our survey
because their treatment was previously determined in the Small System
Order. The Commission received 359 usable questionnaires from the cable
operators surveyed. Of these 359 questionnaires, 40 were received for
low-price systems (``low-price group'') and 38 were received for
systems regulated by the Commission under the revised benchmark
approach (``non-low-price group''). Of the remaining 281 usable
questionnaires, two were received for systems facing effective
competition as defined in the 1992 Cable Act, and the remaining 279
were received for several categories of cable systems including those
regulated only at the local level, those for which a cost-of-service
showing was filed, those unregulated, and those subject to social
contracts.
9. Data provided in response to the cost survey included
information regarding system plant and equipment costs, intangible
assets, operating revenues and expenses, and capital structure as of
year end 1992 and year end 1994. We also received information regarding
system characteristics.
B. Analysis
10. The data received from our cost survey was analyzed to
determine the relative profitability of the low-price group compared
with the non-low-price group. In our analysis, we used a standard
measure of ``accounting'' profitability as a means of determining the
relative profitability of these two groups. Specifically, we used cash
flow ratios, which are commonly used in financial analyses of the cable
industry. One of the more frequently used cash flow measures is income
before interest, taxes, depreciation and amortization (``IBITDA''). We
applied this measure in the form of the following ratio: operating
revenues minus operating expenses before interest, taxes, depreciation,
and amortization divided by operating revenues.
11. We compared the average cash flow ratio of our low-price group
with the average cash flow ratio of our non-low-price group. We found
that the average cash flow ratio of our low-price group was 36.5% and
the average cash flow ratio of our non-low-price group was 39.7%. These
findings indicate that, on average, the operators of systems in our
low-price group received lower profit margins for their low-price
systems than the operators of systems in our non-low-price group
received for their non-low-price systems. Based on these findings, we
believe that the operators of low-price systems generally receive lower
profit margins for their low-price systems than the operators of
systems already regulated under the Commission's revised benchmark
approach. Under these conditions we believe that rates charged by low-
price systems are reasonable. We therefore find it unnecessary for the
operators of these systems to reduce the rates on these systems by the
full competitive differential or by any lesser amount.
12. We believe that the transition relief afforded low-price
systems was appropriate, however, we see no need to maintain the
transition status of low-price systems now that we have completed an
analysis of the necessary cost data particular to these systems.
Therefore, we make that relief permanent. We will allow low-price
systems to continue charging the rates they established under
transition relief and making appropriate rate increases in accordance
with our current rules. 47 CFR 76.922.
IV. Final Regulatory Flexibility Certification
13. As required by the Regulatory Flexibility Act, 5 U.S.C. 603
(RFA), an Initial Regulatory Flexibility Analysis (IRFA) for the Fifth
Notice of Proposed Rulemaking was incorporated in the Second Order on
Reconsideration, Fourth Report and Order, and Fifth Notice of Proposed
Rulemaking in MM Docket 92-266, FCC 94-38. The Commission therein
provided notice of its intent to establish further requirements
concerning the rates permitted for systems subject to transition
treatment, and sought written public comments on the IRFA. Comments
regarding the treatment of ``small'' transition systems were received
by the Commission and addressed in a previous order. Sixth Report and
Order and Eleventh Order on Reconsideration in MM Docket Nos. 92-266
and 93-215, FCC 95-196. No comments, however, were received regarding
the matter of ``low-price'' transition cable systems.
14. Although we performed an IRFA in the Fifth Notice of Proposed
Rulemaking, we received no comments in response to the IRFA with
respect to ``low-price'' transition systems and upon further
consideration we now believe that we can certify that no regulatory
flexibility analysis is necessary. This certification conforms to the
RFA, as amended by the Small Business Regulatory Enforcement Fairness
Act of 1996 (SBREFA). See Title II of the Contract with America
Advancement Act of 1996, Public Law 104-121, 110 Stat. 847, 857 (1996),
codified at 5 U.S.C. 601 et seq.
[[Page 15121]]
15. We do not believe that the amendments to the rules adopted in
this Report and Order will have a significant economic impact on a
substantial number of small entities as defined by statute, by our
rules, or by the Small Business Administration (SBA). See 47 U.S.C.
543(m)(2); 47 CFR 76.901(e); 13 CFR 121.201 (SIC 4841); 5 U.S.C.
605(b).
16. Our rules for regulating the rates of small systems owned by
small cable companies were established in a previous order, so this
Report and Order only concerns the permitted rates for low-price
systems. Based on the rule changes adopted here, low-price systems will
be permitted to maintain the rates originally established pursuant to
their status as systems subject to transition relief. Further, the
rules adopted in this Report and Order will allow low-price systems to
increase their rates in the same manner as our previous transition
rules for low-price systems. The rules adopted herein do not alter the
method by which low-price cable system rates currently are regulated,
and for this reason these amendments will not have a significant
economic impact on a substantial number of small cable operators, and
will not change the treatment of low-price systems.
17. The Commission will send a copy of this certification, along
with this Report and Order, in a report to Congress pursuant to the
Small Business Regulatory Enforcement Fairness Act of 1996, 5 U.S.C.
801(a)(1)(A), and to the Chief Counsel for Advocacy of the Small
Business Association, 5 U.S.C. 605(b). A copy of this certification
will also be published in the Federal Register. Id.
V. Ordering Clauses
18. Accordingly, it is ordered that, pursuant to sections 4(i),
4(j), 303(r), and 623 of the Communications Act of 1934, as amended, 47
U.S.C. 154(i), 154(j), 303(r), and 543, the rules, requirements and
policies discussed in this Report and Order are adopted and Sec. 76.922
of the Commission's rules, 47 CFR 76.922, is amended as set forth
below.
19. It is further ordered that the Secretary shall send a copy of
this Report and Order, including the Final 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, Public Law 96-354, 94 Stat. 1164, 5 U.S.C. 601 et seq.
(1981).
20. It is further ordered that the requirements and regulations
established in this decision shall become effective April 30, 1997.
List of Subjects in 47 CFR Part 76
Cable television.
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: 47 U.S.C. 151, 152, 153, 154, 301, 302, 303, 303a,
307, 308, 309, 312, 315, 317, 325, 503, 521, 522, 531, 532, 533,
534, 535, 536, 537, 543, 544, 544a, 545, 548, 552, 554, 556, 558,
560, 561, 571, 572, 573.
2. Section 76.922 is amended by revising paragraph (b)(4)(ii) to
read as follows:
Sec. 76.922 Rates for the basic service tier and cable programming
services tiers.
* * * * *
(b) * * *
(4) * * *
(ii) Low-price systems. Low-price systems shall be eligible to
establish a transition rate for a tier.
* * * * *
Note: This attachment will not be published in the Code of
Federal Regulations.
Attachment
Cash Flow Ratios
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Average
operating Income
expenses before
Average before interest,
operating interest, taxes, Cash flow
Category revenues taxes, depreciation ratios \1\
(million) depreciation and (percent)
and amortization
amortization (IBITDA)
(million) (million)
(A) (B) (A-B)
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Low-price group (40 systems).............................. $15.1 $9.6 $5.5 36.5
Non-low-price group (38 systems).......................... 12.5 7.5 5 39.7
Competitive group (2 systems)............................. 76.4 46.2 30.2 39.5
All other \2\ (279 systems)............................... 8.3 5.3 3 36.7
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\1\ Calculated on totals for each group prior to averaging (i.e., cash flow ratios equal total operating
revenues minus total operating expenses before interest, taxes, depreciation and amortization divided by total
operating revenues).
\2\ Includes systems for which a cost-of-service showing was filed, systems regulated only at the local level,
unregulated systems, and systems subject to social contracts.
[FR Doc. 97-7976 Filed 3-28-97; 8:45 am]
BILLING CODE 6712-01-P
