FEDERAL COMMUNICATIONS COMMISSION FACT SHEET October 1995 CABLE TELEVISION FACT SHEET CABLE RATE REGULATIONS FOR SMALL SYSTEMS On May 5, 1995, the Federal Communications Commission modified its regulations governing rates for basic and cable programming services tiers by revising its definition of a "small system" and introducing a simplified form of rate regulation that will be available to small systems which are owned by small cable companies. The text of the order was released on June 5, 1995. These rules became effective on August 21, 1995. The new regulations permit regulated small systems that are owned by small cable companies to set rates in accordance with a small system cost-of-service showing by completing Form 1230 and filing it with the local franchising authority. Form 1230 greatly simplifies the regulatory obligations of small systems. In addition, small systems owned by small cable companies will be eligible for relief previously adopted for smaller cable entities. This fact sheet provides general answers to common questions regarding the effects of the cable rate rules on small systems. Q: What is the definition of a small system? Is the definition based on the number of subscribers served from the system's principal headend, or the number of subscribers served in the franchise area? A: The new rules will define a small system as one that serves 15,000 or fewer subscribers. This definition is based on the number of subscribers served from the system's principal headend. This includes any other headends or microwave receive sites that are technically integrated with the system's principal headend. Q: What is the definition of a "small cable company"? A: A "small cable company" is a cable operator that serves a total subscriber base of 400,000 or fewer customers over one or more cable systems. Q: Are small cable systems subject to rate regulation? A: Small cable systems became subject to rate regulation on May 15, 1994. As with larger systems, regulation of the basic service tier for small systems begins once the local franchising authority becomes certified by the FCC to regulate and notifies the cable system that it is regulating basic rates. Regulation of a small system's cable programming service tiers begins once a complaint about the rates for those tiers is filed with the FCC. Q: What about the terms "small operator" and "small multiple system operator ('small MSO')" that the FCC previously used? A: Those definitions will no longer appear in the rules and will be used only to the extent necessary to decide appeals of rate decisions issued by local franchising authorities prior to June 5, 1995. Q: What is the new form of rate regulation imposed on small systems? A: Since adopting rules to regulate cable rates generally, the FCC has issued a series of orders easing the impact of rate regulation for small cable entities, culminating with the order released June 5, 1995, which, among other things, expands the definition of a small system to include all systems serving 15,000 or fewer subscribers. The previous limit for a small system was 1,000 subscribers. Pursuant to the new small system cost-of-service regulations, small systems owned by small cable companies will be permitted to set rates in accordance with an extremely simple formula that requires the operator to insert system-specific operating data: number of subscribers, number of regulated channels, net rate base, operating expenses, and rate of return. The formula-generated rate is presumed reasonable if it is no more than $1.24 per channel for regulated programming and equipment. Even if the per-channel rate is higher than $1.24, the operator can still attempt to justify the rate on the basis of facts peculiar to that system. The system will file the completed FCC Form 1230 with its franchising authority, which then may review the form and ask the operator for certain additional information to verify the accuracy of the data supplied by the operator to calculate its permitted rate. The rate generated by Form 1230 is the total per-channel rate for both programming and equipment. However, operators must unbundle programming and equipment for billing purposes. Because equipment rates must be based on cost and billed separately, rates for programming should be below $1.24 per channel for them to be presumed reasonable. Q: Why did the FCC adopt this new form of regulation for small systems? A: Evidence indicated that existing forms of regulation were burdensome for smaller cable providers in two ways. First, smaller companies have more difficulty than larger companies in keeping up with the paperwork necessary to ensure compliance with the rules. Second, while the existing regulations affecting rates are appropriate for larger cable companies, smaller cable companies do not enjoy the same efficiencies as larger ones. For example, small systems do not qualify for volume discounts when purchasing cable programming and hardware. For reasons such as these, smaller systems need more flexibility than larger ones when it comes to setting rates. The new rules will allow small systems owned by small cable companies to set rates such that they can afford to maintain and improve the service they are providing to subscribers. Q: May a consumer file a complaint about the rates charged by a small system that has elected the new form of relief? A: Yes, for the basic service tier (i.e., the tier that includes the over-the-air broadcast stations), a complaint should be filed with the local franchising authority, and not the FCC. If the cable system offers a higher tier of cable programming services (i.e., a group of channels excluding pay-per-channel and pay-per-program), the FCC will accept consumer rate complaints. However, the complainant will carry the burden of proving the unreasonableness of the rates charged if the operator has elected the small system cost-of- service regulation and if Form 1230, as properly completed by the operator, produces a monthly, per-subscriber rate that does not exceed $1.24 per channel for all regulated programming and equipment. Q: Are there other forms of rate regulation available only for small systems owned by small cable companies? A: Yes. As noted above, the FCC established several different regulatory schemes designed to ease regulatory burdens for systems on the basis of their size. With one exception, all these existing forms of regulation will be available to small systems owned by small cable companies, as newly defined. The exception concerns what is known as "transition relief." A system that elected transition relief was not required to make the full rate reduction of up to 17% that applied to cable systems generally. There are two categories of systems that were eligible for transition relief: systems with 15,000 or fewer subscribers (formerly known as "small operators") and systems known as "low price" systems. After the effective date of the rules, only low price systems will be able to elect transition relief. Small systems that elected transition relief before the effective date of the new rules will have to convert to some other form of regulation within two years. Other forms of relief available to small systems owned by small cable companies include alternative rate agreements. These are contracts by which the local franchising authority and the cable operator agree to a rate structure, rather than relying on the forms and rules adopted by the FCC. Q: What if a small system needs additional time to comply with the FCC's revised rate rules? A: If complying with the FCC's rate regulations would result in severe economic hardship, a small system may seek an extension of time from the FCC in which to comply with the new rate rules. Filing a petition for an extension of time, however, will not toll the effective date of rate regulation for the small system or eliminate any refund liability for rates which exceed permitted levels. A small system which elects to file such a petition should consult the FCC's revised rate rules concerning filing requirements. Q: I have more questions about cable regulations. Can I call the FCC? A: Yes. For further information, please call our small system hotline at (202) 416-0818.