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File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ***************************************************************** ******** FCC 95-196 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of) ) Implementation of Sections of the ) MM Docket No. 92-266 Cable Television Consumer Protection ) and Competition Act of 1992: Rate Regulation ) MM Docket No. 93-215 ) SIXTH REPORT AND ORDER AND ELEVENTH ORDER ON RECONSIDERATION Adopted: May 5, 1995 Released: June 5, 1995 By the Commission: Commissioner Barrett issuing a statement. Table of Contents Paragraphs: I. Introduction 1 II. Summary 2 III. Background 4 IV. Comments16 V. Discussion A. The New Category of Systems And Operators Eligible for Relief 25 B. Application of Existing Rate and Administrative Relief 37 1. Transition Relief for Small Operators 40 2. Cost-of-Service 43 3. 90-Day "Grace Period" 44 4. Streamlined Rate Reductions 45 5. Going Forward Rules 46 6. Alternative Rate Regulation Agreements 47 7. Other Existing Relief 48 C. The Small Business Act 49 VI. Eleventh Order on Reconsideration 51 VII. Regulatory Flexibility Act Analysis 74 VIII. Paperwork Reduction Act 78 IX. Ordering Clauses79 Appendices I. INTRODUCTION 1. In this Sixth Report and Order and Eleventh Order on Reconsideration we amend our definitions of small cable entities to encompass a broader range of cable systems that will be eligible for special rate and administrative treatment. In addition to amending our definitions, we make available to this expanded category a new regulatory scheme that will be available immediately for use by certain small cable companies. This new form of regulation should provide both rate relief and reduced administrative burdens. II. SUMMARY 2. In amending our definitions and introducing a new, simplified form of small system rate relief, the Commission continues its ongoing efforts to offer small cable companies administrative relief from rate regulation in furtherance of congressional intent. In each of the orders that we have adopted in this rate proceeding, small cable companies have been afforded flexibility in how they can comply with rate regulations while reducing burdens on themselves and providing good service to subscribers. Through our actions today, the Commission expands the category of systems eligible for such opportunities to include approximately 66% of all cable systems in the nation serving approximately 12.1% of all cable subscribers. 3. Specifically, we amend our definitions so that systems serving 15,000 or fewer subscribers that are owned by small cable companies of 400,000 or fewer subscribers are eligible to elect small system cost-of-service relief, as well as certain other relief previously made available to small systems and small operators. The new cost-of-service approach will involve a very simple, five element calculation based upon a system's costs. The calculation will produce a per channel rate for regulated services that will be presumed reasonable if it is no higher than $1.24 per channel. If the formula generates a higher rate, the operator still will be permitted to charge that rate if not challenged by the franchising authority or, upon being challenged, if the operator meets its burden of proving that the rate is reasonable. This new regulation will accord these small systems substantial flexibility in establishing the types of costs to be included and in allocating those costs among services. Our analysis of cost data, when combined with our understanding of the many unique challenges facing small cable companies, leads us to conclude that a simplified approach will best serve a segment of the cable industry that needs assistance in coping with rate regulation in order to serve subscribers better and to grow its business. In addition, this approach should facilitate regulation of cable rates by small local franchising authorities who wish to have a procedure for doing so that is simpler than existing forms of regulation. III. BACKGROUND 4. The Cable Television Consumer Protection and Competition Act of 1992 ("the 1992 Cable Act") requires the Commission to reduce regulatory burdens and the cost of compliance for small systems. Pursuant to that mandate, the Commission introduced small system relief beginning with the initial Report and Order and Further Notice of Proposed Rulemaking ("Rate Order"), in which it allowed certified local franchising authorities to permit these small systems to simply certify that basic service and equipment rates are reasonable. This exempts small systems from having to file initial rate justification forms after becoming subject to regulation. We adopted this approach in recognition of the fact that franchising authorities are in the best position to weigh the costs of a formal rate review against the beneficial impact that such a review might have on basic service rates. Small systems also were exempt from rate regulation for more than six months while the Commission considered additional proposals for small system treatment. 5. Concurrent with lifting the stay of rate regulation in May 1994, and subsequently, the Commission has introduced several additional measures to assist small cable companies. First, we provided regulatory relief to a larger number of small cable companies than the Commission did initially, and we created special rate rules applicable to these classes of operators. 6. We adopted these alternative rules and definitions based upon information in the record that raised a legitimate question about the impact of rate regulation on smaller operators. In addition, evidence submitted by petitioners suggested that small systems face higher than average costs. We expressed concern that some small operators that did not meet the statutory definition of a small system might nonetheless lack the administrative and financial resources necessary to fully comply with rate regulation. Thus, we defined "small operators" as those operators with a total subscriber base of 15,000 or fewer subscribers that are not affiliated with or controlled by larger operators. We concluded that a small operator would be affiliated with or controlled by a larger company if that company holds a 20% equity interest (active or passive) or exercises de jure control, such as through a general partnership or majority voting shareholder interest. The Commission created this affiliate limitation because our concerns about small operators were limited to those companies that do not have access to the financial resources or other purchasing discounts available to larger companies. 7. These concerns led us to conclude that certain aspects of our rate and administrative relief should be made available only to independent small systems and those owned by small multiple system operators ("small MSOs"). We defined a small MSO as one with 250,000 or fewer total subscribers that owns only systems with fewer than 10,000, and has an average system size of 1,000 or fewer subscribers. We stated that the 250,000 subscriber cap would ensure that larger MSOs do not benefit from administrative or rate relief that they do not need because they are likely to have the resources necessary to comply fully with the rate regulation. We also indicated that the 10,000 and 1,000 subscriber limits helped to tailor relief to those operators most likely to own numerous small systems. 8. For small operators and independent small systems, the Commission created transition relief rate rules, exempting those operators and systems from the requirement that initial regulated rates be based on a 17% competitive rate reduction from September 30, 1992 levels. Rather, these systems may maintain their March 31, 1994 rates, with certain adjustments as determined under FCC Form 1200. These adjustments allow operators electing transition relief to increase their rates on a quarterly basis to reflect changes in permitted external costs and channel adjustments. Furthermore, small operators and independent small systems that elect transition relief also may recover inflation increases that have occurred since September 30, 1992. The Commission stated that transition relief would be available to qualifying operators pending analysis of cost data from small operators and low-price systems. 9. Systems electing transition relief must unbundle programming service charges from equipment charges when establishing initial regulated rates. However, an operator that owns more than one small system may establish its unbundled charges for regulated equipment based on the average equipment costs of all its small systems, or only some of them, rather than on a system-by-system basis. We made this relief available to all MSOs, regardless of their total subscriber base. Our rules also permit independent small systems and those owned by small MSOs to elect streamlined rate reductions under which they reduce each billed item of regulated cable service as of March 31, 1994 by 14% instead of setting rates based on 17% competitive rate reductions from September 30, 1992 levels. Streamlined rate reductions reduce administrative burdens by eliminating the need for these small systems to complete FCC Forms 1200 and 1205, and by eliminating the requirements to unbundle equipment and installation charges from programming service charges, and to set equipment and installation charges at actual cost. Independent small systems and small systems owned by small MSOs also may use simplified forms if they elect to use the interim cost-of-service approach to justify initial regulated rates, thus reducing the amount of information that the system must submit to justify higher rates. 10. Regardless of the approach taken to establish initial regulated rates, small operators are given a "grace period" of 60 days after regulation begins in which to complete and to file rate justifications and to notify subscribers of the new rates. All other operators must complete these tasks within 30 days of the date of initial regulation. Additionally, small operators have 90 days from the initial date of regulation in which to implement restructured rates, unlike all other operators who face up to a year of refund liability. A small operator also may make its initial basic tier rates effective on 30 days' notice without prior approval from the franchising authority, although the operator remains subject to refund liability. With regard to regulatory fees, the Commission has provided an assessment formula that is based upon an exact subscriber count. Thus, for example, a system with 100 subscribers does not have to pay the same regulatory fee as a system with 1,000 subscribers. This approach relieves all smaller cable systems of bearing a disproportionate burden of the aggregate cable service regulatory fee imposed upon the industry as a whole. 11. Our going forward rules provide cable operators generally with incentives to add new programming, but also specifically give qualifying small systems an opportunity to recover headend costs associated with adding new channels and providing better service to subscribers. Under the going forward rules, all operators may introduce New Product Tiers, which they are permitted to price as they elect. They also may add new channels to cable programming service tiers ("CPSTs") and recover a flat mark-up fee plus license fees, subject to certain restrictions. However, small systems that are independent or are owned by small MSOs may recover the flat mark-up fee for new channels, plus the actual cost of the headend equipment necessary to add new channels, not to exceed $5,000 per channel, plus the channel's licensing fee, if any, for adding not more than seven new channels to regulated service tiers over the next three years. The cost of the headend equipment must be amortized over the useful life of the equipment and qualifying systems will be allowed an 11.25% return on the undepreciated investment. This dual recovery for the addition of channels is also available to larger systems that are independent or are owned by small MSOs if the monthly per subscriber cost of the additional headend equipment necessary to receive an additional channel is one cent or more. 12. Finally, the Commission has permitted independent small systems, small systems owned by small MSOs, and certified local franchising authorities to create alternative rate regulation agreements. Through these agreements, the parties negotiate directly with each other to determine reasonable rates for basic service and cable programming service tiers. The agreements also may include provisions relating to rate increases and network upgrades. The agreements do not have to be based on the Commission's rules or forms, but must take into account the regulatory criteria of the 1992 Cable Act, and they must ensure that participating systems will not be required to charge rates lower than would be permitted by our benchmark rules. This approach provides for regulation of rates but relieves the parties of administrative burdens that sometimes may accompany implementation of our rules. Alternative rate regulation agreements also offer regulatory certainty to the parties, who are able to agree in advance to initial and future rates, as well as plans for network upgrades. In turn, this regulatory certainty may assist small systems in obtaining financial assistance needed to upgrade their networks and provide better service to subscribers. 13. We released the Further Notice of Proposed Rulemaking that gives rise to this Order for two reasons. First, in the course of adopting the relief described above, we stated that several of these measures might be modified or terminated following completion of our cost studies. Before completing those studies and adopting final rate rules, we believed we should seek comment on possible alternative definitions of small systems and small operators, rather than restricting ourselves to the existing definitions. 14. A second issue, raised earlier in this docket by two commenters, concerns the applicability of the Small Business Act. In 1992, Congress amended Section 3(a) of the Small Business Act to require federal agencies to use small business definitions created by the Small Business Administration ("SBA"), or in the alternative, to seek public comment on different definitions and obtain the approval of the Small Business Administrator with regard to any regulation applicable to small businesses, unless other statutory definitions apply. SBA rules currently define a small cable company as one with $11 million or less in gross revenues. The SBA's Office of Advocacy and the Small Cable Business Association ("SCBA") believe the current definitions in our rules defining eligibility for transition and administrative relief are underinclusive and were promulgated in violation of Section 3(a) of the Small Business Act. They urged us to re-evaluate the definitions and seek public input before deciding on permanent standards. Although we did not concur in these commenters' construction of the Small Business Act, we agreed that additional comment on existing and alternative definitions of small cable systems and small cable companies would aid our efforts to relieve deserving systems and companies of regulatory burdens. 15. Accordingly, we issued the Further Notice of Proposed Rulemaking seeking to establish a more complete record for purposes of promulgating final rate rules applicable to small operators, independent small systems, and small systems owned by small MSOs by soliciting comment on possible alternative definitions that we could use for purposes of determining eligibility for special rate or administrative treatment. We sought comment on whether we should retain current definitions or use different definitions for purposes of establishing special rate or administrative treatment for small systems and small operators. We specifically sought comment on these issues in light of Section 3(a) of the Small Business Act, and on whether we should employ the current SBA definition of a small cable company in our cable rules. III. COMMENTS 16. Commenters generally assert that the Commission should act quickly to adopt revised definitions. They point to a number of industry changes that have occurred since passage of the 1992 Cable Act, including consolidation of ownership and the development of potential competition from other sources of video programming. The Cable Telecommunications Association ("CATA") warns that these changes, when combined with current regulatory treatment, could result in some smaller operators discontinuing service to communities. CATA states that unless a broader range of smaller cable operators are provided with additional rate relief, these "small communities will be relegated to no service or to limited service from other multi-channel providers . . . who are unfettered by regulation and have no obligation to serve" some communities. 17. Commenters note that for smaller operators facing regulation, as well as franchise demands to provide certain community services, time and expertise needed to analyze and comply with existing rules are in short supply. According to Avenue Cable TV, et al. ("Avenue"), smaller operators have too few subscribers to generate the revenues sufficient to cover the expense of hiring enough employees to comply with existing rules, or to retain outside legal and accounting expertise. Commenters also contend that existing special rate rules for small systems and small operators do not properly reflect the unique business environments in which they operate. For example, Avenue and Cole point out that small operators do not qualify for programming and equipment discounts due to the low number of subscribers that they serve. Inability to qualify for these discounts often results in smaller operators using older equipment that is costly to maintain. At the same time, commenters observe 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. Commenters are unopposed in their conclusion that these factors, along with other economic realities (e.g., lower-income subscribers to whom many small systems and small operators provide service), constrain their ability to recover all of their costs or to increase revenue through local advertising or by offering new services. 18. Commenters contend that these unique business factors have a negative financial impact upon a far broader cross-section of cable companies than those small systems, small operators, and small MSOs currently eligible to take advantage of existing rate and administrative relief. In turn, they suggest that ineligibility for special rate relief makes it difficult for some of those small cable operators to attract capital necessary to upgrade their systems and to provide better service to their subscribers. While commenters unanimously agree that the Commission should broaden the definitions of small systems and small operators, the definitions they suggest vary widely, ranging from defining a small system as one with 3,500 or fewer subscribers to defining a small cable company as one with $100 million or less in annual regulated revenues or $40 million or less in annual gross revenues. In addition, some parties urge the Commission to amend the small system definition so that it is based upon the number of subscribers in the franchise area served, rather than the number of subscribers served by a common, principal headend as currently defined. Commenters also stated all small systems should be allowed to take advantage of regulatory relief, regardless of their affiliation with a larger company. 19. The National Cable Television Association ("NCTA"), SCBA, and the SBA's Office of Advocacy all support defining a small cable company as one that earns $100 million or less in annual regulated revenues. These commenters note that the Commission has used $100 million in annual regulated revenue as a tool in common carrier regulation to distinguish between large and small local exchange carriers. Small local exchange carriers (i.e., those earning less than $100 million in annual regulated revenues) enjoy relaxed regulation of their tariffs and exemption from other requirements. For example, small local exchange carriers are not required to file annual and quarterly financial and traffic reports that large local exchange carriers must file, and they are exempt from the Commission's expanded interconnection requirements. 20. The Commission adopted relaxed requirements for small local exchange carriers because they generally do not have the financial and administrative resources to comply with all aspects of common carrier regulation. NCTA, SCBA, and SBA's Office of Advocacy contend that small cable companies earning $100 million or less in annual regulated revenue are at the same disadvantage within the context of cable regulation. Therefore, they urge the Commission to expand upon our current definitions by defining a small cable company as one with $100 million or less in annual regulated revenue, and by providing this category with relief in the final rules which we adopt in this proceeding. 21. In the alternative, NCTA, SCBA, SBA's Office of Advocacy, and the National Telephone Cooperative Association encourage the Commission to look to more recent proceedings in the personal communications services ("PCS") docket, and, at a minimum, to define a small cable company as one earning $40 million or less in gross annual revenue. SCBA notes that in the Second Reconsideration Order, the Commission recognized that the size of a cable operator influences its ability to attract capital. We reached a similar conclusion in the Broadband PCS Order, where we determined that companies earning $40 million or less in annual gross revenue would have difficulty obtaining the capital necessary to enter the nascent PCS industry, and we therefore adopted specific measures designed to aid these smaller PCS companies. NCTA, SCBA, and SBA contend that the challenges facing smaller companies in the PCS market are the same that confront smaller cable companies. SCBA states that cable operators with annual revenues of less than $40 million should qualify "without question" as small operators eligible for special treatment. 22. Some other commenters offered subscriber-based definitions that, in some instances, are analogous to revenue-based definitions. For example, Cole argues that a small cable company should be defined as one serving 400,000 or fewer subscribers. Cole contends that such a definition would preclude the top 30 MSOs from being eligible for regulatory relief, because the top 30 MSOs each serve more than 400,000 subscribers; combined they serve approximately 85% of the nation's 55 million cable subscribers. Cole asserts that large local exchange carriers (i.e., those earning more than $100 million in annual regulated revenue) serve 85% of the nation's telephone customers. According to Cole: "Applying the telephone company standard to the cable industry would make possible the continued existence of the independently owned cable businesses that have been the pioneers and backbone of the cable industry." SBA's Office of Advocacy, while clearly preferring a revenue-based definition as discussed above, suggests that defining a small cable company as one serving 100,000 or fewer subscribers, similar to the rural telephone company definition adopted in the PCS proceedings, also could serve to make regulatory relief available to a significant number of cable operators. Interestingly, SBA's Office of Advocacy does not support adoption of SBA's own definition of a small cable company, a viewpoint generally shared by other commenters. SBA defines a small cable company as one that earns $11 million or less in annual gross revenues. SBA's Office of Advocacy notes parallels between the telephone and cable industries and believes the Commission should look to the regulation of telephony as model for developing size standards appropriate for the cable industry, rather than rely on SBA standards used to determine eligibility for loans. 23. CATA generally argues against a revenue-based definition because it believes that such a definition would "ignore the reality of the community-based cable business which must be self-supporting and profitable if they are to survive." CATA notes, however, that should the "Commission determine that a gross revenue figure is appropriate for some purposes, CATA would support the National Cable Television Association's (NCTA) filing in this proceeding." CATA suggests a small system be defined as one with 3,500 or fewer subscribers, noting that the Commission currently uses this subscriber-based standard to determine when systems must provide local origination and public, educational and government access channels. CATA further states that at about the 3,500 subscriber mark, systems begin to generate the revenue necessary to support these services. 24. Finally, almost all commenters argue that the Commission should not preclude a small system from regulatory relief based upon its affiliation with an MSO. They also urge the Commission to define a small system based upon the number of subscribers it serves in a franchise area, rather than from a system's principal headend. NCTA argues that Congress intended the Commission to provide relief to all small systems of 1,000 or fewer subscribers without regard to the size of the company that owns them. According to CATA, the "problems faced by small systems are the same, regardless of whether they are owned by a large company. The advantage of large company ownership may be that some programming is less expensive or that some equipment can be purchased in bulk, but surely that savings alone (where it exists) cannot begin to justify ignoring the basic mathematics that dictates that fixed costs spread over fewer subscribers produces less revenue." With regard to the basis for defining a small system, SCBA argues: "Although the Commission chose to adhere to its historic definition of what constitutes a system, it created a compliance system that is based on a different measure - franchise areas. The Commission needs to resolve the conflict by either requiring compliance only on a system level or by determining small system qualification on a franchise area by franchise area basis." V. DISCUSSION A. The New Category Of Systems and Operators Eligible for Relief 25. We acknowledge that a large number of smaller cable operators face difficult challenges in attempting simultaneously to provide good service to subscribers, to charge reasonable rates, to upgrade networks, and to prepare for potential competition. Since passage of the 1992 Cable Act, the Commission has worked continuously with the small cable industry to learn more about their legitimate business needs and how our rate regulations might better enable them to provide good service to subscribers while charging reasonable rates. Based on the record in this proceeding and our analysis of the rate justifications that have been submitted since our revised rate rules became effective in May 1994, we conclude that our definitions of small operators and small MSOs need to be changed to encompass the broader range of operators in need of rate relief. Therefore, we will expand upon the definition of a small system to include any system that serves 15,000 or fewer subscribers. Furthermore, we significantly expand upon the definition of a small operator, redefining it and renaming it as a "small cable company" serving a total of 400,000 or fewer subscribers over all of its systems. Finally, we will eliminate the existing definitions of a small operator and small MSO. We will extend to the expanded category of small systems owned by small cable companies certain rate and administrative relief as discussed below, and also the small system rate relief provisions adopted in the accompanying Eleventh Order on Reconsideration. 26. In the 1992 Cable Act and its legislative history, Congress made clear its belief that small systems would be in need of administrative and rate relief as a consequence of the re-regulation of the cable industry. We are convinced, however, that systems of up to 15,000 subscribers are likewise in need of relief and that we have the authority to extend relief to them. As more fully explained below, the comments in this proceeding and our review of benchmark and cost-of-service rate justifications leads us to conclude that these larger systems generally face many of the same challenges that systems of 1,000 or fewer subscribers do in providing cable service. In view of this finding, we believe the relaxation of certain rate rules that we hereby order is consistent with the 1992 Cable Act. We note in particular the Statement of Policy contained in the statute in which Congress expressed its intent, inter alia, to: (1) promote the availability to the public of a diversity of views and information through cable television . . .; (2) rely on the marketplace, to the maximum extent feasible, to achieve that availability; (3) ensure that cable operators continue to expand, where economically justified, their capacity and the programs offered over their cable systems . . . . Relaxing regulatory burdens should free up resources that affected operators currently devote to complying with existing regulations and should enhance those operators' ability to attract capital, thus enabling them to achieve the goals of Congress cited above. Moreover, in prescribing rules governing basic service rates, the Communications Act requires us to "seek to reduce the administrative burdens on subscribers, cable operators, franchising authorities, and the Commission . . . ." We believe this mandate authorizes us to expand the category of small systems and provide them with rate and administrative relief. Section 303(r) of the Communications Act further supports our decision to take Congress's goals into account in extending relief to systems with up to 15,000 subscribers. The action we take today should also ease burdens for local franchising authorities and the Commission, in furtherance of congressional intent. In particular, as we simplify matters for smaller cable companies, we do the same for smaller local franchising authorities, who we understand to be just as concerned as smaller cable operators with the potential burdens and costs of regulation. 27. The staff evaluated the 15,000 subscriber standard on the basis of shared economic, physical, and financial characteristics for systems above and below this size, in order to determine the significance of that breakpoint. To evaluate this standard, the staff used data from Warren Publishing Inc.'s cable services database, which was obtained by the Commission in the fall of 1994. This database contains detailed information on most of the country's 11,200 cable systems and 1,500 cable companies. Staff determined that systems with fewer than 15,000 subscribers differ from systems with more than 15,000 subscribers with respect to the following characteristics: a) the average monthly regulated revenue per channel per subscriber is $0.86 for systems with fewer than 15,000 subscribers and $0.44 for systems with more than 15,000 subscribers; b) the average number of subscribers per mile is 35.3 for systems with fewer than 15,000 subscribers and 68.7 for systems with more than 15,000 subscribers; c) the average annual premium revenue per subscriber is $41.00 for systems with fewer than 15,000 subscribers and $73.13 for systems with more than 15,000 subscribers. This confirms that the use of the 15,000 subscriber standard does result in two groups of systems that have significant distinctions between them. 28. As we have observed previously, our relief for smaller cable entities is aimed at those that do not have access to the financial resources, purchasing discounts, and other efficiencies of larger companies. Therefore, relief will be available only to small systems, as now defined, that are owned by small cable companies serving 400,000 or fewer subscribers over all of its systems. In defining a small cable company as one serving no more than 400,000 subscribers, we accepted the recommendations of commenters who urged that we define a small cable company as one that earns $100 million or less in annual regulated revenues. As explained below, establishing the company size in terms of subscribers, rather than dollars, will advance regulatory simplicity; in the cable context, $100 million in annual regulated revenues equates to approximately 400,000 subscribers. 29. With respect to the $100 million standard, we note in particular the recommendation of this measure of company size by SBA's Office of Advocacy. As it and other commenters point out, in the common carrier field entities having annual regulated revenues of more than $100 million are subject to much greater regulatory burdens than those earning less than that amount. For example, for various regulatory purposes the Common Carrier Bureau has created the Tier 1 category of local exchange carriers ("LECs"), consisting solely of LECs with at least $100 million in annual regulated revenues. In expanding LEC interconnection requirements, we limited the impact of our rules to Tier 1 LECs, citing the limited resources of smaller LECs, among other factors. Numerous common carrier reporting requirements apply solely to carriers having annual revenues in excess of $100 million. Likewise, the level of detail required under the Uniform System of Accounts applicable to telecommunications companies depends upon whether the regulated entity is a Class A or Class B company, the former having annual regulated revenues of $100 million or more and the latter having annual regulated revenues below that amount. 30. As SBA's Office of Advocacy states, the logic underlying these common carrier rules also can be applied in the cable context. Cable companies exceeding the $100 million standard are better able to absorb the costs and burdens of regulation due to their expanded administrative and technical resources. Further, we have noted in the telephone context that relaxation of regulatory burdens is justified for smaller entities even when those entities have significant market power. Accordingly, we believe that $100 million in annual regulated revenues is a reasonable standard at which to decrease regulatory burdens. 31. A cable company with an overall subscriber figure of 400,000 we have chosen is roughly equivalent to a cable company with $100 million in annual revenues. To establish this equivalency, the Commission used a regression methodology to estimate the statistical relationship between companies' regulated revenue and their subscribership. The data for this methodology were taken from the Warren Publishing Inc. cable services database mentioned above. According to this methodology, $100 million in annual regulated revenue is equivalent to 413,830 subscribers. We have rounded the exact figure to 400,000 subscribers for the administrative convenience of operators, franchising authorities, and the Commission. SCBA also equates $100 million in annual revenues with approximately 400,000 subscribers, based on its data showing average per subscriber revenues of about $20 per month. In defining a small cable company, we conclude that it would be better to continue to rely on the total number of subscribers, rather than to rely on a revenue figure. A definition based on subscribers is simpler to apply and will avoid the need to allocate revenues between regulated and unregulated services. Furthermore, evidence suggests that operating challenges faced by small cable companies are closely tied to the number of subscribers served rather than the revenues they generate. In addition, a subscriber-based standard should provide cable companies with the maximum flexibility to add new services and new programming, thereby increasing revenues without losing the benefits of rate relief. 32. At the same time, however, the Commission recognizes that a company's revenues will affect its ability to comply with significant regulatory responsibilities. As noted, in the common carrier field we have repeatedly used the standard of $100 million in annual revenues to allocate regulatory burdens. We believe that the impact of regulation on common carriers is similar to that imposed on cable companies. Small cable companies also must generate a minimum level of revenue in order to attract financing to upgrade their networks, to provide new programming to subscribers, and to introduce new services that are now being developed. Therefore, by targeting rate relief at small cable companies with 400,000 or fewer subscribers, we believe we will be assisting those companies earning $100 million or less in annual gross revenues to obtain financing needed to grow. 33. We expect that 66% of all cable systems will meet the expanded definitions of a small system owned by a small cable company. These systems serve only about 12.1% of the nation's subscribers. Consequently, regulatory relief provided to these eligible systems will affect a majority of systems in the industry but a relatively small number of subscribers, thus limiting the overall impact of any rate changes that these new definitions permit. 34. We have chosen to eliminate the existing definitions of a small operator and a small MSO because data made available to the Commission since adoption of the Second Order on Reconsideration leads us to conclude that these categories were not broad enough to include all those operators and systems in need of rate and administrative relief. For example, SCBA asserts that only 16 companies meet the definition of a small MSO. Moreover, the small cable industry and local franchising authorities generally state that they find the small operator and small MSO definitions confusing and difficult to understand and to implement. Therefore, the system, operator, and MSO size standards that currently define small operators and small MSOs will no longer be relevant, except for resolving certain pending disputes as discussed more particularly below. 35. In urging the expansion of the class of systems eligible for small system relief, several commenters recommend that we revise the method by which system size is calculated. A small system is currently defined based on the number of subscribers served from its principal headend. A number of commenters argue that the Commission should amend the definition of a small system so that it is defined based upon the number of subscribers served in a franchise area. Under this approach, a cable company that served two franchise areas would be treated for rate regulation purposes as if it operated two separate systems, even if both franchise areas were in fact served by one set of integrated transmission paths running from a single headend. The arguments in favor of this change have been raised before in this proceeding and were rejected by the Commission as unpersuasive. We continue to believe 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. For example, the existing exemptions for systems with 1,000 or fewer subscribers in the network non-duplication, public inspection, and technical regulations are based on a system's headend rather than franchise area. 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. Therefore, we again reject commenters' suggestions and in expanding current definitions to include systems with 15,000 or fewer subscribers we shall base eligibility on the number of subscribers served from a system's principal headend. 36. We recognize that establishing a numerical test can exclude some systems which may also be in need of rate relief. Therefore, we will entertain petitions for special relief from systems who fail to meet the new definitions but are able to demonstrate that they share relevant characteristics with qualifying systems and therefore should be entitled to the same regulatory treatment. Absent such an avenue, the regulatory treatment of two smaller, nearly identical systems could vary significantly merely because, for example, one is just under, and the other just over, 15,000 subscribers, or because the size of their respective owners varies by a few hundred subscribers. In considering such petitions, relevant factors will 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 the small system definition because it is affiliated with a cable company that serves over 400,000 subscribers, we 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. Likewise, 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. This is not an exhaustive list of the factors we will consider in reviewing petitions for special relief; operators may support their petitions with whatever information and arguments they deem relevant. B. Application of Existing Rate and Administrative Relief 37. We have summarized above the steps we have taken previously to ease burdens on smaller systems and operators. We now address the eligibility of systems that have 15,000 or fewer subscribers and are owned by small cable companies to take advantage of these measures. We also initiate the gradual termination of transition relief for all but low- price systems. 38. To qualify for any existing form of 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. In completing and filing that documentation, the system may use the most recent subscriber data available to it. 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. The ability to remain eligible for small system relief even after being acquired by a larger operator should increase the value of the system in the eyes of operators and, more importantly, lenders and investors. The enhanced value of the system thus will strengthen its viability and actually increase its ability to remain independent if it so chooses. 39. In most instances, eligibility for small system relief will terminate after the system exceeds 15,000 subscribers. As discussed in the subsections that follow, the manner in which relief will be terminated when the system reaches this subscriber threshold will vary depending upon the type of relief at issue. 1. Transition Relief for Small Operators 40. In the Second Order on Reconsideration, we stated that transition relief would be available pending the adoption of final rate rules. We adopt final rate rules in the accompanying Eleventh Order on Reconsideration. Therefore, we provide herein for the termination of transition relief. Systems currently operating under transition relief may continue to do so until two years from the effective date of this order. We establish this period to allow transition systems adequate time to plan for the conversion to some other form of regulation, rather than requiring an immediate conversion. Such a sudden shift would be disruptive not only to operators, but also to subscribers and franchising authorities who are now accustomed to their operators' regulatory status. Until the termination of transition relief, transition systems shall continue to adjust their transition rates in accordance with existing rules. However, systems need not wait the full two years to convert from transition relief. Thus, for example, a transition system may convert at any time by filing the documentation necessary to establish rates in accordance with our benchmark or cost-of- service rules. 41. Unless the operator terminates its transition status sooner as described above, such relief shall terminate two years from the effective date of this item. By that date, a current transition system must have restructured its rates and satisfied all notice and filing requirements pursuant to either our benchmark or cost-of-service rules, the latter of which include the small system cost-of-service regulations adopted in the accompanying Eleventh Order on Reconsideration. 42. Transition relief shall remain available only to small systems that already are operating pursuant to that form of relief. In particular, satisfaction of the new system and company size definitions shall not qualify a system for transition relief. Moreover, no small system that first becomes subject to regulation hereafter shall be entitled to transition relief, including systems that satisfy our existing definition of a small operator. Nothing herein shall affect the applicability of transition relief to low-price systems. 2. Cost-of-Service 43. Systems of 15,000 or fewer subscribers owned by small cable companies may now use FCC Form 1225 to justify higher rates through a cost-of-service showing. This "short form" reduces the number of reporting categories and involves fewer calculations. Qualifying systems that have not previously established rates in accordance with Form 1225 may do so on a prospective basis only. Upon exceeding 15,000 subscribers, any system that has established rates based on Form 1225 may continue to charge its then permitted rate and may adjust rates in accordance with all rules applicable to systems that have more than 15,000 subscribers. We believe it unduly burdensome and disruptive to require operators to engage in the standard benchmark or cost-of-service showing immediately upon passing the 15,000 subscriber threshold. This is particularly true in the case of cost-of-service systems since their permitted rates reflect their cost of debt, amortization schedules, and other items that will be established before the system reaches that threshold and will remain constant thereafter. Depriving Form 1225 filers of adjustments for inflation, external cost increases, and channel additions would be inconsistent with the form of relief elected by the operator. Of course, to make a cost-of-service showing after exceeding the 15,000 subscriber threshold, a system will have to use Form 1220. 3. 90-Day "Grace Period" 44. Systems serving 15,000 or fewer subscribers owned by small cable companies currently may avail themselves of the 90-day "grace period" after regulation begins in which to complete and file rate justifications, notify subscribers, and implement restructured rates. Thus, eligible systems are not required to establish rates and service offerings that comply with our rules for 90 days after the initial date of regulation, and they may take up to 60 days from the date of initial regulation to file necessary rate justification forms with their local franchising authority, or the Commission where appropriate. Qualifying systems must continue to give 30 days notice to subscribers prior to implementing rate and service changes. Additionally, eligible systems may make their initial basic tier rates, established in accordance with the Commission's revised rate regulations, effective on 30 days' notice without prior approval from their local franchising authority. If, upon subsequent examination of a rate justification, a local franchising authority or the Commission finds that the system has implemented rates in excess of the maximum permitted rate, refunds may be ordered in accordance with our regulations. If a system exceeds the 15,000-subscriber threshold during a grace period that already is running, or if the first day of regulation is no more than 90 days after the system exceeds 15,000 subscribers, the system shall still be entitled to the full 90-day and 60-day periods described above, beginning with the initial date of regulation. 4. Streamlined Rate Reductions 45. We will expand the category of systems eligible for streamlined rate reductions to include those serving 15,000 or fewer subscribers owned by a small cable company. Thus, eligible systems may choose to reduce each billed item of regulated cable service as of March 31, 1994 by 14% as adjusted for subsequent changes in inflation, external costs, and channel additions and deletions. This will enable more systems to reduce administrative burdens because eligible systems choosing streamlined rate reductions are not required to complete FCC Forms 1200 and 1205, unbundle equipment and installation charges from programming service charges, or set equipment and installation charges at actual cost. Qualifying systems may establish rates in accordance with this relief upon satisfaction of all notice and filing requirements. After reaching 15,000 subscribers, these systems will be able to make all rate adjustments permitted of any system with more than 15,000 subscribers, including increases for inflation and external costs. Systems that have elected streamlined rate relief have set their initial permitted rates to reflect the full reduction rate, as adjusted for inflation. Therefore, these systems should be permitted to adjust rates hereafter to reflect subsequent increases in inflation and external costs even after exceeding 15,000 subscribers. 5. Going Forward Rules 46. Systems of any size that are owned by small cable companies and that incur additional monthly per subscriber headend costs of one full cent or more for the addition of a channel may recover the flat mark-up fee for the new channel, plus the actual cost of the headend equipment necessary to add new channels, not to exceed $5,000 per channel, plus the channel's licensing fee, if any, for adding not more than seven new channels to CPS tiers over the next three years, if the monthly per subscriber cost of the additional headend equipment necessary to receive an additional channel is one cent or more. The cost of the headend equipment must be amortized over the useful life of the equipment and small systems will be allowed an 11.25% return on the undepreciated investment. Qualifying systems may elect this relief only with respect to channels added after the effective date of this order. Of course, these systems also may offer New Product Tiers which they are permitted to price as they elect, subject to certain conditions. We note that under the existing rule, small systems owned by small MSOs, as those terms were originally defined, could take advantage of this headend upgrade incentive, even if they could not show that the additional monthly per subscriber headend cost of adding a channel was at least one cent. Under the new rule, a system must meet the "one cent rule" in order to qualify for this form of relief. In theory, our revision of the rule could take away this form of relief from systems of under 1,000 subscribers who cannot satisfy the one cent rule. In practice, however, this should not be the case, because the additional cost of headend equipment, when spread over no more than 1,000 subscribers and depreciated reasonably, will always produce a per subscriber monthly cost of at least one cent. If we are incorrect in this conclusion, however, we will entertain petitions for special relief from systems that currently qualify for this form of relief but who would not qualify under the new rule. 6. Alternative Rate Regulation Agreements 47. Systems of 15,000 or fewer subscribers owned by small cable companies will be given the opportunity to work with certified local franchising authorities to create alternative rate regulation agreements in accordance with the Eighth Order on Reconsideration. In expanding eligibility, we believe the benefits of alternative rate regulation agreements, i.e., reasonable rates and reduced regulatory burdens, will flow to a greater number of subscribers, cable systems, and local franchising authorities. An agreement made while the system has 15,000 or fewer subscribers shall be enforceable for the term provided in the agreement. Thus, the agreement shall not be terminable simply because the system subsequently exceeds 15,000 subscribers, unless the agreement itself provides for termination at that time. 7. Other Existing Relief 48. Subject to approval of the franchising authority, any system meeting the new small system definition shall be permitted to certify that its rates are reasonable, regardless of the size of the operator. In addition, an operator of any size that owns more than one system with 15,000 or fewer subscribers may establish its unbundled charges for regulated equipment based on the average equipment costs of all such small systems, or only some of them, rather than on a system-by-system basis. C. The Small Business Act 49. The Commission does not believe that SBA size standards, to which federal agencies may be required to adhere under Section 3 of the Small Business Act, are applicable to the Commission's definitions of small systems and small cable companies under the 1992 Cable Act. Section 3(a) of the Small Business Act provides that SBA size standards apply for the purposes of all legislation, unless the legislation specifically authorizes different size standards. The 1992 Cable Act in fact suggests one system size definition that the Commission may use as one with 1,000 or fewer subscribers. The Commission has implemented the statutory provision regarding small system relief in a more flexible manner than is explicitly mandated by the Cable Act and is now extending relief to additional systems. But this does not alter the fact that the Commission is implementing a statute with an explicit small business size standard. Therefore, Section 3(a) of the Small Business Act is inapplicable. Section 3(a) is also inapplicable because the SBA defines a small-business concern as one "which is not dominant in its field of operation." Cable systems subject to rate regulation are by definition dominant in their field of operation because they do not face effective competition. 50. Moreover, even if the SBA rules defining a small cable system as one with $11 million or less in gross annual revenues were applicable, the definitions we are adopting today are designed to provide relief to such companies. This Order extends relief to cable companies with 400,000 or fewer subscribers, a standard we equate with $100 million in annual regulated revenues as advocated by SBA's Office of Advocacy. Thus, we believe that our standards are more protective of small businesses than is the $11 million dollar standard promulgated by the SBA. In any event, we are directing the Commission's Secretary to provide a copy of this order to the SBA. VI. ELEVENTH ORDER ON RECONSIDERATION 51. Having redefined the class of systems entitled to relief on the basis of system size, we here adopt expanded relief for such systems. Again, the system may establish its initial eligibility with respect to the system and company size limitations as of the effective date of this order or as of the date the system files the documentation necessary to seek the relief. 52. In adopting transition relief, we stated that when cost studies were completed, we might make permanent, eliminate, or modify such relief for qualifying systems and operators. We also stated that when we develop average equipment cost schedules, we could terminate or modify our provisions for streamlined rate reductions. Finally, we gave notice that in our final cost proceeding, we may modify our requirements for cost showings by small systems. 53. The comments received in response to the Further Notice of Proposed Rulemaking suggest that many smaller cable operators and companies have an immediate need for further relief from certain aspects of rate regulation currently applicable to them. Moreover, we believe that the data we already have accumulated is sufficient to design additional relief for those systems most in need. In such circumstances, we see no reason to impose on smaller systems the burdens and delay that a formal cost study would entail. Therefore, based on the comments received in this proceeding, and in light of other pending petitions for reconsideration, we reconsider on our own motion the Second Reconsideration Order as it relates to rate regulation of smaller systems, and hereby make certain relief available to systems that have 15,000 or fewer subscribers and that are owned by a small cable company, as we have now defined that term. 54. As explained more fully below, eligible systems will be able to establish their permitted rates on the basis of an extremely simple formula that requires the operator to supply only five items of data: total operating expenses, net rate base, rate of return, channel count and subscribers. These five items will be used in an easy formula that will generate a per-channel rate that will be presumed reasonable if it is no more than $1.24 per channel. To disapprove such a rate, the franchising authority will have the burden of showing that the cable operator did not reasonably interpret and allocate its cost and expense data in coming up with the operating expense, net rate base, and rate of return figures claimed by the operator in calculating its permitted rate. If the formula-generated rate exceeds $1.24, the burden will be on the operator to establish the reasonableness of its calculations, if the franchising authority elects to question the requested rate. This new optional mechanism will replace most other forms, used to compute rates, including FCC Form 1205. Equipment rates will be set to comply with 47 U.S.C.  623(b)(3). This new mechanism can be used by any qualifying company, regardless of what rate regulation methodology has been used to justify existing rates or an increase in rates. 55. We adopt these measures partly in response to comments received pursuant to the Further Notice of Proposed Rulemaking which we have summarized in the preceding Sixth Report and Order. We will not repeat that summary here, except to note again that the comments indicate that smaller cable companies are unduly burdened by the current scheme of rate regulation in two ways. First, the comments suggest that our rate rules do not adequately take into account the higher costs of doing business, and particularly the higher costs of capital, faced by smaller companies. Second, many operators claim that our rules place an inordinate hardship upon them in terms of the labor and other resources that must be devoted to ensuring compliance. Such comments suggest that some operators may be facing the dilemma of desiring to impose rates that our cost-of-service rules may well permit, but at the same time being averse to risking the resources that a cost-of-service showing entails since they cannot be guaranteed that the showing will be successful. In crafting the relief we adopt today, we have attempted to alleviate both the substantive and the procedural burdens of which smaller cable companies complain. 56. We are particularly sensitive to the notion that smaller systems face disproportionately higher costs. In adopting rate rules, the Commission is required to consider operator-specific cost data. Thus, any scheme we adopt must take into account the cost data of the individual operator and give the operator the opportunity to recover its actual, reasonable costs. To some extent, however, the inclusion of operator-specific data in our scheme of rate regulation conflicts with the goal of simplifying the regulatory process. Establishing permitted rates on the basis of precise and detailed data entails more work for the operator that must compile that information from its own records and reproduce it in accordance with whatever forms and formulas we devise. For example, we have estimated that it takes 60 hours to complete the simplified cost-of-service form, FCC Form 1225, which requires operators to provide substantial data regarding the costs incurred in operating the system. Such regulation also imposes a burden on regulatory authorities that must review the data. We note that in many cases small local franchising authorities have scarce resources to review complicated cost-of-service filings. Yet to the extent we lessen the regulatory burden on operators and franchising authorities by reducing the amount of data that must be assembled and reviewed to calculate permitted rates, we are also concerned that we have confidence that the operator's rates are reasonable. 57. Having reviewed the criteria identified by Congress as being relevant to the establishment of rate regulations, we have created a formula for generating permitted rates that entails as small a burden as possible while still producing a rate that reflects with reasonable accuracy the operating costs and capital investments of the operator. The formula can be expressed as follows: Per channel per = Annual operating expenses* + (Net rate base* x rate of return) subscriber rate* Number of regulated channels x Number of subscribers *For regulated services only This formula is designed to establish the annual per-channel per-subscriber revenue requirements of the regulated system. The formula permits a regulated cable company to set a per-channel per-subscriber rate that will both cover operating expenses and provide a reasonable return on investments. Such a recovery is necessary to guarantee the operator the opportunity to attract new capital, promote innovation, and cover all essential costs of operating a cable system. The new method can be used to justify existing rates, or establish new rates, regardless of what rate regulation has been used in the past. Operators may rely on previously existing information, such as tax forms or company financial statements, rather than recreating financial calculations. 58. To ensure that the per-channel revenue requirement is reasonable, all operating costs must be covered. Therefore, wages, salaries, programming, advertising, electricity, maintenance, depreciation, amortization and all other relevant costs are included in the total operating expenses. This is not an exhaustive list, however, and operators may recover other reasonable and legitimate costs of providing service. As under our standard benchmark and cost-of-service regulations, when calculating operating expenses the operator must take into account only those expenses related to providing regulated channels. Congress specifically provided that regulation of rates for the basic service tier ("BST") should take into account general operating costs only to the extent those costs are allocable to basic service. With respect to regulation of both BST and CPST rates, inclusion of costs related to unregulated services would distort the revenue requirement for the regulated channels and equipment, since there are no restrictions on the discretion of cable operators in establishing rates for unregulated services. More specifically, inclusion of costs related to the provision of unregulated services could result in those services being subsidized by revenues from regulated channels. Clearly, Congress did not intend such a result. However, to further our goal of minimizing regulatory burdens, we are granting small cable systems owned by small cable companies substantial flexibility to fairly allocate costs between BST, CPST, equipment and unregulated services. We further stress that, when the requested rate does not exceed $1.24 per channel, the burden will be on the franchising authority to show that the operator was unreasonable in making allocations such as these. 59. The net rate base is included in the formula to reflect net investment. The net rate base consists of the depreciated value of property. It provides the proper basis for calculating a fair rate of return on investment. For the reasons stated in the preceding paragraph, only assets associated with providing regulated services may be included in the calculation of the net rate base. However, the operator shall have substantial flexibility in calculating its net rate base. The presumptions and restrictions applicable to standard cost-of- service proceedings shall not apply. Thus, for example, we will not presume it unreasonable to include in the rate base start-up losses that exceed the first two years of operating expenses. Having isolated a category of systems for whom our standard rules need to be relaxed due to the particular characteristics of those systems, we seek to ensure that those systems will be permitted to establish rates in accordance with such characteristics, rather than in accordance with characteristics of cable systems generally. 60. Likewise, we will not presumptively exclude intangibles such as acquisition costs from the net rate base. In the Cost Order, we presumptively excluded acquisition costs for reasons that, again, were more applicable to cable systems as a whole than to the subset of systems at issue in this proceeding. For example, whereas we found that acquisition costs were attributable in part to the growing number of programs and channels available only by subscribing to cable service, the limited channel line-ups of smaller systems means that a greater portion of their offerings consist of broadcast channels that many consumers can view for free without subscribing to cable. Thus, the acquisition costs of a smaller system are less likely to include a supra-competitive valuation of services over which the system has exclusive control. Likewise, in the Cost Order we concluded that excess acquisition costs reflected, in part, the value of unregulated services, such as premium and pay-per-view programming, that should not be included in regulated rates. Smaller systems with more limited channel line-ups are less likely to have such programming available. As we noted above, the average premium revenue per subscriber is more than $32.00 less for systems with fewer than 15,000 subscribers than for systems with more than 15,000 subscribers. Thus, acquisition costs for small systems will reflect more accurately the value of the regulated services, a value which the operator should be able to recover. 61. At a minimum, the permitted rate of return shall equal the operator's actual cost of debt as set forth in any loan agreements with third parties. However, the operator may make reasonable adjustments to this rate to reflect other relevant factors such as, but not limited to, its cost of equity and its capital structure. The operator will have substantial discretion in determining the precise manner in which its rate of return is calculated. Thus, the operator will not be limited to the single methodology for establishing cost of equity that we identified in the Cost Order. We selected that methodology because it included a large group of publicly traded companies that we found to be representative of the universe of nonregulated firms. While such a sampling is an appropriate source of surrogates for regulated cable service generally, we believe that small systems owned by small cable companies should be able to pursue any methodology that is appropriate based on their individual characteristics. Likewise, operators will not be limited to the range of debt-to- equity ratios applicable in a standard cost-of-service showing, but instead may establish a system-specific or assumed ratio. 62. Finally, eligible systems shall not face the heavy burden imposed on operators seeking rates of return higher than 11.25% in standard cost-of-service proceedings. On the basis of the comments in this proceeding, we now recognize that, of all cable companies, smaller systems and operators are the ones for whom this rate is most likely to be inadequate to compensate them for the risks they encounter in providing service. Therefore, for operators seeking to establish rates no higher than $1.24 per channel, the rate of return claimed by the operator will be subject to the same strong presumption of reasonableness that will apply to all other aspects of the operator's calculation of its permitted rate. 63. Because it takes into account all operating expenses and the net rate base, the formula will generate a rate that covers the cost of providing all regulated services and all equipment necessary to receive those services. Thus, eligible systems will not be required to make a separate showing with respect to equipment. Operators may establish equipment rates in the manner they choose, so long as this results in equipment rates that comply with the 1992 Cable Act. 64. To implement this scheme of rate regulation, we have created FCC Form 1230, a one-page form on which the system inserts its expense, rate base, rate of return, channel count and subscriber count figures and then calculates its permitted rate. The system can set rates at any level up to the rate generated by FCC Form 1230. Before increasing rates, the system must comply with the 30-day notice requirement applicable whenever a system takes a rate increase. In giving notice to the certified local franchising authority of its first rate increase taken pursuant to this procedure, the operator shall include the completed FCC Form 1230 showing the maximum permitted rate, although the system need not raise rates to the maximum permitted level. As noted above, when filing the form the system shall not be required to file documentation or calculations underlying the expense and rate base figures included on the form. Upon filing of the form, however, our existing rules, permitting a certified local franchising authority to review the proposed rates, to request additional information, and to toll the effective date of the proposed rates, will then apply, subject to certain conditions set forth below. Because Form 1230 is a modified cost-of- service showing, the franchising authority may toll the rate for up to 150 days. 65. In view of our intent to minimize burdens upon operators, local franchising authorities, and the Commission, we urge franchising authorities to carefully limit their requests for information, should they deem it necessary to request further information upon the filing of Form 1230. We recognize that certified franchise authorities have a responsibility to protect consumers from the exercise of market power by cable operators and may have a legitimate need to request information to verify operators' rate requests. We believe that, particularly since operators have been given wide discretion in choosing methods of calculating operating costs, rate base, and rate of return, franchise authorities should have access to the information necessary for judging the validity of methods used for calculating these costs. With respect to requested rates not exceeding $1.24 per channel, a reasonable request for information, if deemed necessary at all, should seek only existing, relevant documents or other data compilations and should not require the operator to create documents, although the operator should replicate responsive documents that are missing or destroyed. Where the requested rate exceeds $1.24 per channel, a broader request for supporting documentation, and greater scrutiny of that documentation, will be permitted. 66. In order to guard against burdensome and unnecessary data requests from franchising authorities, cable operators will be permitted to seek relief from the Commission. If a request for information by the franchising authority exceeds a reasonable scope as described above, or if the franchising authority tolls a rate request, the operator may file an interlocutory appeal requesting the Commission to quash the request. The appeal of a request for information or a rate suspension may be by an informal letter to the chief of the Cable Services Bureau rather than by way of a formal pleading. The appeal will be handled pursuant to the following expedited procedure. The franchising authority is required to respond to an interlocutory appeal in seven days; the cable operator's optional reply date is four days thereafter. The operator will not be required to respond to a franchising authority's request for information while an appeal is pending at the Commission. The Commission will resolve those appeals expeditiously. 67. The operator may appeal a request for information or a tolling order even if its requested rate exceeds $1.24 per channel. However, where the requested rate is no more than $1.24 per channel, our review of the appeal will be guided by the presumption of reasonableness that will attach to rates not exceeding that amount and by our conception of what constitutes a reasonable request for information, as described above. A decision by the Commission to sustain an operator's interlocutory appeal will be accompanied by an order directing the franchising authority to issue the appropriate order based upon the documentation previously supplied by the operator. 68. We have adopted the rate of $1.24 per channel for the purposes set forth above based on the 35 FCC Form 1220 cost-of-service filings that have been submitted by systems with 15,000 or fewer subscribers owned by what we have defined here as small cable companies. We expect to adjust this figure in the future to account for changes in the relevant economic data, such as inflation. Using the rate-setting formula that we hereby adopt, staff found that the subscriber-weighted average cost per channel for eligible systems that had filed FCC Form 1220 amounted to $.93. Because this is an average figure, we know that, according to the data provided on the forms, a fair number of these Form 1220 filers would be entitled to rates exceeding $.93 per channel, presumably because of higher costs or recent capital improvements that justified a higher than average rate. Using the $.93 figure for purposes of establishing presumptions of reasonableness would have imposed an unfair burden on many systems for whom a higher rate is well justified. Therefore, one standard deviation was added to the $.93 per channel rate, producing a per channel rate of $1.24. We therefore believe that a strong presumption of reasonableness should attach to a rate at or below this level when established by an eligible operator. As noted above, to disapprove a rate that does not exceed $1.24 per channel, the burden will be upon the franchising authority to show that the cable operator did not reasonably interpret and allocate its cost and expense data in coming up with the operating expense, net rate base, and rate of return figures claimed by the operator in calculating its permitted rate. 69. Once the operator has established rates at a level permitted by Form 1230, it may increase rates thereafter at its discretion until it reaches the maximum level permitted by the form, subject only to the 30 days' notice requirement. Even though the operator is charging less than the maximum rate permitted by Form 1230, the operator may adjust that maximum rate. For example, an operator may adjust its maximum permitted rate to take account of inflation and increases in external costs. Likewise, when adding channels an operator may use the going-forward methodology to adjust its maximum permitted rate. While making these adjustments to the maximum permitted rate, the operator simultaneously may, but need not, increase the actual rate charged. Thus, adjustments to the actual rate charged may be made independent of adjustments to the maximum rate permitted. As long as the actual rate does not exceed the maximum permitted rate, the operator may adjust its actual rate as and when it desires, subject to the notice requirement. In addition, at any time an operator may adjust its maximum permitted rate simply by filing a new Form 1230. 70. Once the operator has established rates at the maximum level permitted by Form 1230, the operator will be able to increase its actual rate by adjusting its maximum permitted rate in accordance with our normal rules to reflect increases in inflation and external costs. When adding channels, an operator may establish its new rate by filing a new Form 1230 or by complying with the going forward rules. In determining the number of channels for which a small system owned by a small cable company may claim the alternative going-forward treatment that we adopted in the Sixth Reconsideration Order, only those channels added after the system files its first Form 1230 shall be counted. Therefore, if an operator added channels under the alternative going-forward rules before filing its initial Form 1230, the previously added channels will not be counted against the maximum of seven channels that an operator may add for purposes of those rules. However, the filing of a second or subsequent Form 1230 shall not increase the number of channel additions qualifying for the alternative going-forward treatment. 71. The cable system and any other participant in the rate making proceeding at the franchising authority level may appeal to the Commission for review of the final decision of the franchising authority under our normal appellate procedure. If the rate decision is appealed by the operator, we first will review any challenged request for information that was not the subject of an interlocutory appeal by the operator. If, under the standards outlined above, we find no proper grounds for the request for information, we will have the ability to permit the operator to charge the requested rate without proceeding further. Thus, where the requested rate does not exceed $1.24, if a franchising authority denies the request on the basis of information that goes beyond the reasonable scope described above, we will reverse the rate decision. If the scope of information requested by the franchising authority is not at issue up on appeal of the final rate decision, the franchising authority will have the burden of proving the reasonableness of its decision to deny any requested rate that does not exceed $1.24, and the operator will have the burden of establishing the reasonableness of the requested rate if it exceeds that amount. Thus, we will look more closely at rates exceeding $1.24 per channel and, as noted above, will be less restrictive with respect to the permissible scope of information which the franchising authority may request and rely upon in determining the reasonableness of the rate. If we uphold a franchising authority decision to request further information, we will permit an operator to present its arguments as to why its rate is reasonable. 72. Complaints regarding CPST rates will be resolved by the Commission, as required by the 1992 Cable Act. In reviewing CPST rates pursuant to a complaint, we will apply the same standard that is to be applied by a certified franchising authority when an operator files its Form 1230. 73. A system's initial and continued eligibility for this new form of relief shall be determined in the same manner as any other relief now available to them. Thus, if a system qualifies for relief under this approach as of the effective date of this order or as of the date it files Form 1230, it shall remain eligible for so long as it serves 15,000 or fewer subscribers, regardless of whether it, or the cable operator that owns the system, is subsequently acquired by a company that exceeds the 400,000 subscriber limit, or if its current operator subsequently exceeds 400,000 subscribers due to the normal growth of its systems. When a system that has established rates in accordance with Form 1230 exceeds 15,000 subscribers, the system 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. 74. Finally, we must address the applicability of this new form of relief to pending matters. We have little reason to question those commenters who contend that our existing rules have significantly burdened small systems. Accordingly, we will direct franchising authorities to permit systems to use the small system cost-of-service approach to justify rates in any proceeding that is pending as of the date this item is released, using data that was accurate as of the time the rates were charged. To apply the small cable system cost-of- service relief to a pending case, the system must show that it met the new definitions of a small system owned by a small cable company as of the date this item is released and as of the period during which the disputed rates were in effect. Our adoption of this new form of relief shall not affect the validity of a final rate decision made by a franchising authority before the release date of this item. If such a decision is appealed to the Commission, we will review the decision in accordance with the rules that were in effect at the time the rates were charged and the decision was made. We believe that the interests of administrative finality warrant this treatment of cases already decided by a final decision of the franchising authority. 75. In any proceeding before the Commission involving a CPST complaint in which a final decision had not been issued as of the release date of this item, a small system owned by a small cable company may elect the form of rate regulation set forth in this section to justify rates charged prior to the adoption of this rule and to establish new rates. This approach will apply regardless of the current phase of the proceedings. Thus, a small system owned by a small cable company may file its Form 1230 to oppose a CPST rate complaint, to support a timely petition for reconsideration of a previous Bureau or Commission decision regarding a CPST complaint, or to support a petition for Commission review of a Bureau decision regarding a CPST complaint. As with cases pending before franchising authorities, to apply the small cable system cost-of-service relief to a case currently pending before the Commission, the system must show that it met the new definitions of a small system owned by a small cable company as of the date this item is released and as of the period during which the disputed rates were in effect. VII. REGULATORY FLEXIBILITY ANALYSIS 76. Pursuant to the Regulatory Flexibility Act of 1980, 5 U.S.C.  601-12, the Commission's final analysis with respect to the Sixth Report and Order and Eleventh Order on Reconsideration is as follows: 77. Need and purpose of this action: The Commission, in compliance with section 3(i) of the Cable Television Consumer Protection and Competition Act of 1992 pertaining to rate regulation, adopts rules and procedures intended to ensure cable subscribers of reasonable rates for cable services with minimum regulatory and administrative burden on cable entities. 78. Summary of issues raised by the public comments in response to the Initial Regulatory Flexibility Analysis: There were no comments submitted in response to the Initial Regulatory Flexibility Analysis contained in the Further Notice of Proposed Rulemaking. The Chief Counsel for Advocacy of the United States Small Business Administration filed comments in the original rulemaking order. The Commission addressed these comments in the Rate Order. The Chief Counsel for Advocacy of the United States Small Business Administration also filed comments in response to the Further Notice of Proposed Rulemaking. Those comments are addressed herein. 79. Significant alternatives considered and rejected. Petitioners representing cable interests and franchising authorities submitted several alternatives aimed at minimizing administrative burdens. The Commission responded to these comments in this order which will significantly reduce the burdens on small cable systems and small cable companies. VIII. Paperwork Reduction Act 80. The requirements adopted herein have been analyzed with respect to the Paperwork Reduction Act of 1980 and found to impose new or modified information collection requirements on the public. Implementation of any new or modified requirement will be subject to approval by the Office of Management and Budget as prescribed by the Act. IX. Ordering Clauses 81. Accordingly, IT IS ORDERED that, pursuant to Sections 4(i), 4(j), 303 (r), 612, and 623 of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 154(j), 303(r), 532, and 543 the rules, requirements and policies discussed in this Sixth Report and Order and Eleventh Order on Reconsideration ARE ADOPTED and Section 76.934 of the Commission's rules, 47 C.F.R. Section 76.934, IS AMENDED as set forth in Appendix B. 82. IT IS FURTHER ORDERED that the Secretary shall send a copy of this Order to the Chief Counsel for Advocacy of the United States Small Business Administration. 83. IT IS FURTHER ORDERED that, the requirements and regulations established in this decision shall become effective upon approval by the Office of Management and Budget of the new information collection requirements adopted herein, but no sooner than thirty (30) days after publication in the Federal Register. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary APPENDIX A LIST OF COMMENTERS Comments Antietam Cable, et al. Community Antenna Television Association National Cable Television Association Small Cable Business Association U.S. Small Business Administration Reply Comments Antietam Cable, et al. Avenue TV Cable, et al. Community Antenna Television Association National Cable Television Association National Telephone Cooperative Association APPENDIX B RULE CHANGES Part 76 of Title 47 of the Code of Federal Regulations is amended to read as follows: Part 76 Cable Television Service 1. Section 76.901 is amended by revising paragraph (c) and paragraph (e) to read as follows:  76.901 Definitions. ***** (c) Small System. A small system is a cable television system that serves 15,000 or fewer subscribers. The service area of a small system shall be determined by the number of subscribers that are served by the system's principal headend, including any other headends or microwave receive sites that are technically integrated to the principal headend. ***** (e) Small cable company. A small cable company is a cable television operator that serves a total of 400,000 or fewer subscribers over one or more cable systems. 2. Section 76.922 is amended by revising paragraphs (b)(4)(A), (b)(4)(B), (b)(5)(A), (b)(5)(B), (b)(5)(C) and (e)(7) to read as follows.  76.922 Rates for the basic service tier and cable programming services tiers. ***** (b) *** (4) *** (A) Termination of transition relief for systems other than low price systems. Systems other than low-price systems that already have established a transition rate as of the effective date of this rule may maintain their current rates, as adjusted under the price cap requirements of Section 76.922(d), until two years from the effective date of this rule. These systems must begin charging reasonable rates in accordance with applicable rules, other than transition relief, no later than that date. (B) Low-price systems. Low price systems shall be eligible to establish a transition rate for a tier, pending a further order of the Commission. (1) A low-price system is a system (a) Whose March 31, 1994 rate is below its March 31, 1994 benchmark rate, or (b) whose March 31, 1994 rate is above its March 31, 1994 benchmark rate, but whose March 31, 1994 full reduction rate is below its March 31, 1994 benchmark rate, as defined in Section 76.922(b)(2), above. (2) The transition rate on May 15, 1994 for a system whose March 31, 1994 rate is below its March 31, 1994 benchmark rate is the system's March 31, 1994 rate. The March 31, 1994 rate is in both cases adjusted: (a) To establish permitted rates for equipment as required by Section 76.923 if such rates have not already been established; and (b) For changes in external costs incurred between the earlier of initial date of regulation of any tier or February 28, 1994, and March 31, 1994, to the extent changes in such costs are not already reflected in the system's March 31, 1994 rate. The transition rate on May 15, 1994 for a system whose March 31, 1994 adjusted rate is above its March 31, 1994 benchmark rate, but whose March 31, 1994 full reduction rate is below its March 31, 1994 benchmark rate, is the March 31, 1994 benchmark rate, adjusted to establish permitted rates for equipment as required by Section 76.923 if such rates have not already been established. ****** (5) *** (A) Small systems that are owned by small cable companies and that have not already restructured their rates to comply with the Commission's rules may establish rates for regulated program services and equipment by making a streamlined rate reduction. Small systems owned by small cable companies shall not be eligible for streamlined rate reductions if they are owned or controlled by, or are under common control or affiliated with, a cable operator that exceeds these subscriber limits. For purposes of this rule, a small system will be considered "affiliated with" such an operator if the operator has a 20 percent or greater equity interest in the small system. (B) The streamlined rate for a tier on May 15, 1994 shall be the system's March 31, 1994 rate for the tier, reduced by 14 percent. A small system that elects to establish its rate for a tier by implementing this streamlined rate reduction must also reduce, at the same time, each billed item of regulated cable service, including equipment, by 14 percent. Regulated rates established using the streamlined rate reduction process shall remain in effect until: (1) Adoption of a further order by the Commission establishing a schedule of average equipment costs; (2) The system increases its rates using the calculations and time periods set forth in FCC Form 1211; or (3) The system elects to establish permitted rates under another available option set forth in paragraph (b)(1) of this Section. (C) Implementation and notification. An eligible small system that elects to use the streamlined rate reduction process must implement the required rate reductions and provide written notice of such reductions to subscribers, the local franchising authority and the Commission according to the following schedule: (1) Within 60 days from the date it receives the initial notice of regulation from the franchising authority or the Commission, the small system must provide written notice to subscribers and the franchising authority, or to the Commission if the Commission is regulating the basic tier, that it is electing to set its regulated rates by the streamlined rate reduction process. The system must then implement the streamlined rate reductions within 30 days after the written notification has been provided to subscribers and the local franchise authority or Commission. (2) If a cable programming services complaint is filed against the system, the system must provide the required written notice, described in (C)(1) above, to subscribers, the local franchising authority or the Commission within 60 days after the complaint is filed. The system must then implement the streamlined rate reductions within 30 days after the written notification has been provided. (3) A small system is required to give written notice of, and to implement, the rates that are produced by the streamlined rate reduction process only once. If a system has already provided notice of, and implemented, the streamlined rate reductions when a given tier becomes subject to regulation, it must report to the relevant regulator (either the franchising authority or the Commission) in writing within 30 days of becoming subject to regulation that it has already provided the required notice and implemented the required rate reductions. ***** (e) *** (7) Headend upgrades. When adding channels to CPSTs and single-tier systems, cable systems that are owned by a small cable company and incur additional monthly per subscriber headend costs of one full cent or more for an additional channel may choose among the methodologies set forth in paragraphs (e)(2) and (e)(3) of this Section. In addition, such systems may increase rates to recover the actual cost of the headend equipment required to add up to seven such channels to CPSTs and single-tier systems, not to exceed $5,000 per additional channel. Rate increases pursuant to this paragraph may occur between January 1, 1995, and December 31, 1997, as a result of additional channels offered on those tiers after May 14, 1994. Headend costs shall be depreciated over the useful life of the equipment. The rate of return on this investment shall not exceed 11.25 percent. In order to recover costs for headend equipment pursuant to this paragraph, systems must certify to the Commission their eligibility to use this paragraph, and the level of costs they have actually incurred for adding the headend equipment and the depreciation schedule for the equipment. ***** 3. Section 76.924 is amended by revising paragraph (d) to read as follows:  76.924 Cost accounting and cost allocation requirements. ***** (d) Summary accounts. (1) Cable operators filing for cost-of-service regulation, other than small systems owned by small cable companies, shall report all investments, expenses, and revenue and income adjustments accounted for at the franchise, system, regional and/or company level(s) to the summary accounts listed below. RATEBASE Net Working Capital Headend Trunk and Distribution Facilities Drops Customer Premises Equipment Construction/Maintenance Facilities and Equipment Programming Production Facilities and Equipment Business Offices Facilities and Equipment Other Tangible Assets Accumulated Depreciation Plant Under Construction Organizational and Franchise Costs Subscriber Lists Capitalized Start-up Losses Goodwill Other Intangibles Accumulated Amortization Deferred Taxes OPERATING EXPENSES Cable Plant Employee Payroll Cable Plant Power Expense Pole Rental, Duct, Other Rental for Cable Plant Cable Plant Depreciation Expense Cable Plant Expenses - Other Plant Support Employee Payroll Expense Plant Support Depreciation Expense Plant Support Expense - Other Programming Activities Employee Payroll Programming Acquisition Expense Programming Activities Depreciation Expense Programming Expense - Other Customer Services Expense Advertising Activities Expense Management Fees General and Administrative Expenses Selling General and Administrative Depreciation Expenses Selling General and Administrative Expenses - Other Amortization Expense - Franchise and Organizational Costs Amortization Expense - Customer Lists Amortization Expense - Capitalized Start-up Loss Amortization Expense - Goodwill Amortization Expense - Other Intangibles Operating Taxes Other Expenses (Excluding Franchise Fees) Franchise Fees Interest on Funded Debt Interest on Capital Leases Other Interest Expenses REVENUE AND INCOME ADJUSTMENTS Advertising Revenues Other Cable Revenue Offsets Gains and Losses on Sale of Assets Extraordinary Items Other Adjustments (2) Except as provided in Section 76.934(h), small systems owned by small cable companies that file for cost-of-service regulation shall report all investments, expenses, and revenue and income adjustments accounted for at the franchise, system, regional and/or company level(s) to the following summary accounts: RATEBASE Net Working Capital Headend, Trunk and Distribution System and Support Facilities and Equipment Drops Customer Premises Equipment Production and Office Facilities, Furniture and Equipment Other Tangible Assets Accumulated Depreciation Plant Under Construction Goodwill Other Intangibles Accumulated Amortization Deferred Taxes OPERATING EXPENSES Cable Plant Maintenance, Support and Operations Expense Programming Production and Acquisition Expense Customer Services Expense Advertising Activities Expense Management Fees Selling, General and Administrative Expenses Depreciation Expense Amortization Expense - Goodwill Amortization Expense - Other Intangibles Other Operating Expense (Excluding Franchise Fees) Franchise Fees Interest Expense REVENUE AND INCOME ADJUSTMENTS Advertising Revenues Other Cable Revenue Offsets Gains and Losses on Sale of Assets Extraordinary Items Other Adjustments ***** 4. Section 76.934 is revised to read as follows:  76.934 Small systems and small cable companies. (a) For purposes of rules governing the reasonableness of rates charged by small systems, the size of a system or company shall be determined by reference to its size as of the date the system files with its franchising authority or the Commission the documentation necessary to qualify for the relief sought or, at the option of the company, by reference to system or company size as of the effective date of this paragraph. Where relief is dependent upon the size of both the system and the company, the operator must measure the size of both the system and the company as of the same date. A small system shall be considered affiliated with a cable company if the company holds a 20 percent or greater equity interest in the system or exercises de jure control over the system. (b) A franchising authority that has been certified, pursuant to  76.910, to regulate rates for basic service and associated equipment may permit a small system as defined in  76.901 to certify that the small system's rates for basic service and associated equipment comply with  76.922, the Commission's substantive rate regulations. (c) Initial regulation of small systems (1) If certified by the Commission, a local franchising authority may provide an initial notice of regulation to a small system, as defined by Section 76.901(c), on May 15, 1994. Any initial notice of regulation issued by a certified local franchising authority prior to May 15, 1994 shall be considered as having been issued on May 15, 1994. (2) The Commission will accept complaints concerning the rates for cable programming service tiers provided by small systems on or after May 15, 1994. Any complaints filed with the Commission about the rates for a cable programming service tier provided by a small system prior to May 15, 1994 shall be considered as having been filed on May 15, 1994. (3) A small system that receives an initial notice of regulation from its local franchising authority, or a complaint filed with the Commission for its cable programming service tier, must respond within the time periods prescribed in Sections 76.930 and 76.956. (d) Statutory period for filing initial complaint. A complaint concerning a rate for cable programming service or associated equipment provided by a small system that was in effect on May 15, 1994 must be filed within 180 days from May 15, 1994. (e) Petitions for extension of time. Small systems may obtain an extension of time to establish compliance with rate regulations provided they can demonstrate that timely compliance would result in severe economic hardship. Requests for extension of time should be addressed to the local franchising authority concerning basic service and equipment rates and to the Commission concerning rates for a cable programming service tier and associated equipment. The filing of a request for an extension of time to comply with the rate regulations will not toll the effective date of rate regulation for small systems or alter refund liability for rates that exceed permitted levels after May 15, 1994. (f) Small Systems owned by Small Cable Companies. Small systems owned by small cable companies shall have 90 days from their initial date of regulation on a tier to bring their rates for that tier into compliance with the requirements of Sections 76.922 and 76.923. Such systems shall have sixty days from the initial date of regulation to file FCC Forms 1200, 1205, 1210, 1211, 1215, 1220, 1225, and 1230 and any similar forms as appropriate. Rates established during the 90-day period shall not be subject to prior approval by franchising authorities or the Commission, but shall be subject to refund pursuant to sections 76.942 and 76.961 of these rules. (g) Alternative rate regulation agreements. (1) Local franchising authorities, certified pursuant to  76.910, and small systems owned by small cable companies may enter into alternative rate regulation agreements affecting the basic service tier and the cable programming service tier. (i) Small systems must file with the Commission a copy of the operative alternative rate regulation agreement within 30 days after its effective date. (2) Alternative rate regulation agreements affecting the basic service tier shall take into account the following: (i) The rates for cable systems that are subject to effective competition; (ii) The direct costs of obtaining, transmitting, and otherwise providing signals carried on the basic service tier, including signals and services carried on the basic service tier pursuant to  76.56 and 76.64 of this subpart, and changes in such costs; (iii) Only such portion of the joint and common costs of obtaining, transmitting, and otherwise providing such signals as is determined to be reasonably and properly allocable to the basic service tier, and changes in such costs; (iv) The revenues received by a cable operator from advertising from programming that is carried as part of the basic service tier or from other consideration obtained in connection with the basic service tier; (v) The reasonably and properly allocable portion of any amount assessed as a franchise fee, tax, or charge of any kind imposed by any State or local authority on the transactions between cable operators and cable subscribers or any other fee, tax, or assessment of general applicability imposed by a governmental entity applied against cable operators or cable subscribers; (vi) Any amount required to satisfy franchise requirements to support public, educational, or governmental channels or the use of such channels or any other services required under the franchise; and (vii) A reasonable profit. The rate agreed to in such an alternative rate regulation agreement shall be deemed to be a reasonable rate. (3) Alternative rate regulation agreements affecting the cable programming service tier shall take into account, among other factors, the following: (i) The rates for similarly situated cable systems offering comparable cable programming services, taking into account similarities in facilities, regulatory and governmental costs, the number of subscribers, and other relevant factors; (ii) The rates for cable systems, if any, that are subject to effective competition; (iii) The history of the rates for cable programming services of the system, including the relationship of such rates to changes in general consumer prices; (iv) The rates, as a whole, for all the cable programming, cable equipment, and cable services provided by the system, other than programming provided on a per channel or per program basis; (v) Capital and operating costs of the cable system, including the quality and costs of the customer service provided by the cable system; and (vi) The revenues received by a cable operator from advertising from programming that is carried as part of the service for which a rate is being established, and changes in such revenues, or from other consideration obtained in connection with the cable programming services concerned. The rate agreed to in such an alternative rate regulation agreement shall be deemed to be a reasonable rate. (4) Certified local franchising authorities shall provide a reasonable opportunity for consideration of the views of interested parties prior to finally entering into an alternative rate regulation agreement. (5) A basic service rate decision by a certified local franchising authority made pursuant to an alternative rate regulation agreement may be appealed by an interested party to the Commission pursuant to 76.944 as if the decision were made according to  76.922 and 76.923. (h) Small system cost-of-service showings. (1) At any time, a small system owned by a small cable company may establish new rates, or justify existing rates, for regulated program services in accordance with the small cable company cost-of-service methodology described below. (2) The maximum annual per subscriber rate permitted initially by the small cable company cost-of-service methodology shall be calculated by adding (i) The system's annual operating expenses to (ii) The product of its net rate base and its rate of return, and then dividing that sum by (iii) the product of (A) The total number of channels carried on the system's basic and cable programming service tiers and (B) The number of subscribers. The annual rate so calculated must then be divided by 12 to arrive at a monthly rate. (3) The system shall calculate its maximum permitted rate as described in paragraph (b) of this section by completing Form 1230. The system shall file Form 1230 as follows: (i) Where the franchising authority has been certified by the Commission to regulate the system's basic service tier rates, the system shall file Form 1230 with the franchising authority. (ii) Where the Commission is regulating the system's basic service tier rates, the system shall file Form 1230 with the Commission. (iii) Where a complaint about the system's cable programming service rates is filed with the Commission, the system shall file Form 1230 with the Commission. (4) In completing Form 1230: (i) The annual operating expenses reported by the system shall equal the system's operating expenses allocable to its basic and cable programming service tiers for the most recent 12 month period for which the system has the relevant data readily available, adjusted for known and measurable changes occurring between the end of the 12 month period and the effective date of the rate. Expenses shall include all regular expenses normally incurred by a cable operator in the provision of regulated cable service, but shall not include any lobbying expense, charitable contributions, penalties and fines paid on account of statutes or rules, or membership fees in social service, recreational or athletic clubs or associations. (ii) The net rate base of a system is the value of all of the system's assets, less depreciation. (iii) The rate of return claimed by the system shall reflect the operator's actual cost of debt, its cost of equity, or an assumed cost of equity, and its capital structure, or an assumed capital structure. (iv) The number of subscribers reported by the system shall be calculated according to the most recent reliable data maintained by the system. (v) The number of channels reported by the system shall be the number of channels it has on its basic and cable programming service tiers on the day it files Form 1230. (vi) In establishing its operating expenses, net rate base, and reasonable rate of return, a system may rely on previously existing information such as tax forms or company financial statements, rather than create or recreate financial calculations. To the extent existing information is incomplete or otherwise insufficient to make exact calculations, the system may establish its operating expenses, net rate base, and reasonable rate of return on the basis of reasonable, good faith estimates. (5) After the system files Form 1230, review by the franchising authority, or the Commission when appropriate, shall be governed by Section 76.933, subject to the following conditions. (i) If the maximum rate established on Form 1230 does not exceed $1.24 per channel, the rate shall be rebuttably presumed reasonable. To disallow such a rate, the franchising authority shall bear the burden of showing that the operator did not reasonably interpret and allocate its cost and expense data in deriving its annual operating expenses, its net rate base, and a reasonable rate of return. (ii) In the course of reviewing Form 1230, a franchising authority shall be permitted to obtain from the cable operator the information necessary for judging the validity of methods used for calculating its operating costs, rate base, and rate of return. If the maximum rate established on Form 1230 does not exceed $1.24 per channel, any request for information by the franchising authority shall be limited to existing relevant documents or other data compilations and should not require the operator to create documents, although the operator should replicate responsive documents that are missing or destroyed. (iii) A system may file with the Cable Services Bureau an interlocutory appeal from any decision by the franchising authority requesting information from the system or tolling the effective date of a system's proposed rates. The appeal may be made by an informal letter to the Chief of the Cable Services Bureau, served on the franchising authority. The franchising authority must respond within seven days of its receipt of the appeal and shall serve the operator with its response. The operator shall have four days from its receipt of the response in which to file a reply, if desired. If the maximum rate established on Form 1230 does not exceed $1.24 per channel, the burden shall be on the franchising authority to show the reasonableness of its order. If the maximum rate established on Form 1230 exceeds $1.24 per channel, the burden shall be on the operator to show the unreasonableness of the order. (iv) In reviewing Form 1230 and issuing a decision, the franchising authority shall determine the reasonableness of the maximum rate permitted by the form, not simply the rate which the operator intends to establish. (v) A final decision of the franchising authority with respect to the requested rate shall be subject to appeal pursuant to section 76.944. The filing of an appeal shall stay the effectiveness of the final decision pending the disposition of the appeal by the Commission. An operator may bifurcate its appeal of a final rate decision by initially limiting the scope of the appeal to the reasonableness of any request for information made by the franchising authority. The operator may defer addressing the substantive rate-setting decision of the franchising authority until after the Commission has ruled on the reasonableness of the request for information. At its option, the operator may forego the bifurcated appeal and address both the request for documentation and the substantive rate-setting decision in a single appeal. When filing an appeal from a final rate-setting decision by the franchising authority, the operator may raise as an issue the scope of the request for information only if that request was not approved by the Commission on a previous interlocutory appeal by the operator. (6) Complaints concerning the rates charged for a cable programming services tier by a system that has elected the small cable company cost-of-service methodology may be filed pursuant to Section 76.957. Upon receipt of a complaint, the Commission shall review the system's rates in accordance with the standards set forth above with respect to basic tier rates. (7) Unless otherwise ordered by the franchising authority or the Commission, the system may establish its per channel rate at any level that does not exceed the maximum rate permitted by Form 1230, provided that the system has given the required written notice to subscribers. If the system establishes its per channel rate at a level that is less than the maximum amount permitted by the form, it may increase rates at any time thereafter to the maximum amount upon providing the required written notice to subscribers. (8) After determining the maximum rate permitted by Form 1230, the system may adjust that rate in accordance with this paragraph. Electing to adjust rates pursuant to one of the options set forth below shall not prohibit the system from electing a different option when adjusting rates thereafter. The system may adjust its maximum permitted rate without adjusting the actual rate it charges subscribers. (i) The system may adjust its maximum permitted rate in accordance with the price cap requirements set forth in Section 76.922(d). (ii) The system may adjust its maximum permitted rate in accordance with the requirements set forth in Section 76.922(e) for changes in the number of channels on regulated tiers. For any system that files Form 1230, no rate adjustments made prior to the effective date of this rule shall be charged against the system's Operator's Cap and License Reserve Fee described in Section 76.922(e)(3). (iii) The system may adjust its maximum permitted rate by filing a new Form 1230 that permits a higher rate. (iv) The system may adjust its maximum permitted rate by complying with any of the options set forth in Section 76.922(b)(1) for which it qualifies or under an alternative rate agreement as provided in paragraph (g) of this section. (9) In any rate proceeding before a franchising authority in which a final decision had not been issued as of June 5, 1995, a small system owned by a small cable company may elect the form of rate regulation set forth in this section to justify the rates that are the subject of the proceeding, if the system and affiliated company were a small system and small company respectively as of the effective date of this rule and as of the period during which the disputed rates were in effect. This rule shall not affect the validity of a final rate decision made by a franchising authority before June 5, 1995. (10) In any proceeding before the Commission involving a cable programming services tier complaint in which a final decision had not been issued as of June 5, 1995, a small system owned by a small cable company may elect the form of rate regulation set forth in this section to justify rates charged prior to the adoption of this rule and to establish new rates. For purposes of this paragraph, a decision shall not be deemed final until the operator has exhausted or is time-barred from pursuing any avenue of appeal, review, or reconsideration. 5. Section 76.953 is amended by removing paragraph (a) and redesignating paragraph (b) and paragraph (c) as paragraph (a) and paragraph (b) respectively.