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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) Mid-Hudson Cablevision, Inc./ )CSR 4561-D Catskill Mountain Cablevision ) ) Petition for Special Relief ) MEMORANDUM OPINION AND ORDER Adopted: July 26, 1997Released: August 1, 1997 By the Chief, Cable Services Bureau: I.INTRODUCTION 1.Here we address a petition for special relief ("Petition") in which Mid-Hudson Cablevision, Inc. and Catskill Mountain Cablevision, a division of Home Entertainment Company (collectively, "Mid- Hudson") seeks a waiver of the Commission's rules to the extent necessary to permit Mid-Hudson to establish regulated cable rates in accordance with the small system cost-of-service methodology adopted in the Sixth Report and Order and Eleventh Order on Reconsideration in MM Docket Nos. 92-266 and 93-215 ("Small System Order"). No oppositions were filed in this proceeding. 2.Section 623(i) of the Communications Act of 1934, as amended ("Communications Act"), requires that the Commission design rate regulations that reduce the administrative burdens and the cost of regulatory compliance for cable systems with 1,000 or fewer subscribers. Accordingly, in the course of establishing the standard benchmark and cost-of-service ratemaking methodologies generally available to cable operators, the Commission adopted various measures aimed specifically at easing regulatory burdens for these smaller systems. In the Small System Order, the Commission further extended small system rate relief to certain systems that exceed the 1,000-subscriber standard. These systems were deemed eligible for small system rate relief because they were found to face higher costs and other burdens disproportionate to their size. 3.The Small System Order defines a small system as any system that serves 15,000 or fewer subscribers. The Commission recognized that systems with no more than 15,000 subscribers were qualitatively different from larger systems with respect to a number of characteristics, including: (1) average monthly regulated revenues per channel per subscriber; (2) average number of subscribers per mile; and (3) average annual premium revenues per subscriber. The magnitude of the differences between the two classes of systems as to these characteristics indicated that the 15,000 subscriber threshold was the appropriate point of demarcation for purposes of providing for substantive and procedural regulatory relief. 4.Rate relief provided under the Small System Order and the Commission's rules is also available only to a small system affiliated with a small cable company, which is defined as a cable operator that serves a total of 400,000 or fewer subscribers over all of its systems. The Commission adopted this threshold because it roughly corresponds to $100 million in annual regulated revenues, a standard the Commission has used in other contexts to identify smaller entities deserving of relaxed regulatory treatment. The Commission found that cable companies exceeding this threshold would find it easier than smaller companies to attract the financing and investment necessary to maintain and improve service. In addition, the Commission determined that cable companies that exceeded the small cable company definition "are better able to absorb the costs and burdens of regulation due to their expanded administrative and technical resources." 5.In addition to adopting the new categories of small systems and small cable companies, the Small System Order introduced a form of rate regulation known as the small system cost-of-service methodology. This approach, which is available only to small systems owned by small cable companies, is more streamlined than the standard cost-of-service methodology available to cable operators generally. In addition, the small system rules include substantive differences from the standard cost-of-service rules to take account of the proportionately higher costs of providing service faced by small systems. Eligible systems establish their rates under this methodology by completing and filing FCC Form 1230. In order to qualify for the small system cost-of-service methodology, systems and companies must meet the new size standards as of either the effective date of the Small System Order, or on the date thereafter when they file the documents necessary to elect the relief they seek. 6.Cable systems that fail to meet the numerical definition of a small system, or whose operators do not qualify as small cable companies, may submit petitions for special relief requesting that the Commission grant a waiver of its rules to enable the petitioning systems to utilize the various forms of rate relief available to small systems owned by small cable companies. The Commission stated that petitioners should demonstrate that they "share relevant characteristics with qualifying systems." Other potentially pertinent factors include the degree by which the system fails to satisfy either or both definitions and evidence of increased costs (e.g., lack of programming or equipment discounts) faced by the operator. If the system fails to qualify for relief based on its affiliation with a larger cable company, the Commission will consider "the degree to which that affiliation exceeds our affiliation standards, and whether other attributes of the system warrant that it be treated as a small system notwithstanding the percentage ownership of the affiliate." The Commission also stated that "a qualifying system that seeks to obtain programming from a neighboring system by way of a fiber optic link, but is concerned that interconnection of the two systems may jeopardize its status as a stand-alone small system, may file a petition for special relief to ask the Commission to find that it is eligible for small system relief." The Commission specifically stated that this list of relevant factors was not exclusive and invited petitioners to support their petitions with any other information and arguments they deemed relevant. II.THE PETITION 7.Mid-Hudson serves a total of 18,077 subscribers residing in 22 communities in three primarily rural counties. All of Mid-Hudson's cable subscribers are served by a single cable system. While Mid-Hudson qualifies as a small cable company, its system exceeds the 15,000 subscriber threshold, thus making it ineligible for the small system cost-of-service rules absent a waiver. 8.Mid-Hudson contends that it should be accorded small system status because it exceeds the 15,000-subscriber threshold by only a minimal amount and is not affiliated with a larger operator. The Petition argues that it would be unreasonable to deny small system status to the single system owned by Mid- Hudson, given that an operator with 20 or more systems, each only slightly smaller than the Mid-Hudson system, could qualify for relief as to each of those systems. Mid-Hudson also states that it shares relevant characteristics with small systems, including ineligibility for bulk discounts and low subscriber density. III.DISCUSSION 9.We begin with a comparison of Mid-Hudson's subscriber base to the small system and small cable company definitions. Because the 18,077 subscriber system at issue here is the only system it owns, Mid-Hudson falls substantially below the 400,000 subscriber threshold for small cable companies. In the Small System Order, the Commission noted that the strict application of absolute numerical thresholds could lead to disparate regulatory treatment of systems or companies based on insignificant distinctions: "Absent such an avenue [i.e., the availability of special relief], 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." 10.As stated in its Petition, Mid-Hudson "could be more than twenty times larger and still qualify as a small cable company." Mid-Hudson shares relevant characteristics with small systems. Mid- Hudson has just over 30 subscribers per mile, which is less than the average of small systems generally and less than half of the subscriber density of larger systems. Mid-Hudson has plans to extend service into lower density areas and has numerous extensions with fewer than 20 homes passed per mile. Lower subscriber density is one of several factors specifically relied upon by the Commission in establishing the 15,000 subscriber threshold for small systems. As the Commission stated: "[C]ommenters observe that a smaller system serving a large rural area faces increased 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." 11.As with small systems generally, Mid-Hudson does not enjoy bulk discounts in the purchase of programming and equipment often made available to large operators. As Mid-Hudson notes, "bulk discounts can provide operators with substantial savings." Mid-Hudson also reports high administrative costs associated with rate regulation. The Commission has recognized that the costs associated with regulation have a greater impact on small cable companies than on larger companies. 12.Mid-Hudson interconnects its facilities by microwave links. Adding channels by way of interconnection often will be more efficient than the alternative method of installing a new satellite receiver and additional headend equipment. Facilities interconnected to a common headend, however, generally constitute a single system. As noted, the Commission specifically noted the appropriateness of a special relief petition filed by a "qualifying system that seeks to obtain programming from a neighboring system . . . , but that is concerned that interconnection of the two systems will jeopardize its status as a stand- alone system . . . ." 13.In this case, 1,567 subscribers are served by Mid-Hudson's Catskill Mountain facility, which is located twelve miles away from the remainder of the Mid-Hudson system and is connected to the system by a microwave link. Absent the microwave link, the Catskill Mountain property would constitute a cable system with 1,567 subscribers and be eligible for small system status. In addition, the subscriber base of the remainder of the system, absent the link, would be close to the 15,000-subscriber threshold. 14.The Mid-Hudson system serves 22 small communities spread over three primarily rural counties. Mid-Hudson expects only modest growth, rather than a significant increase in subscribers that could lead to greater revenues and efficiencies. This indicates that Mid-Hudson will continue to manifest the characteristics of a small system for the foreseeable future. 15.We note that Mid-Hudson has not attempted to justify its Petition with reference to either its annual regulated revenues or its annual premium revenues, two factors as to which small systems were found to differ significantly from larger systems. This information is relevant and often significant to our review. We do not find the absence of these data to be dispositive here, given the strength of Mid-Hudson's overall showing and the absence of any opposition to the Petition. 16.Under Section 76.7(c)(1) of the Commission's rules, a petition for special relief "shall state fully and precisely all pertinent facts and considerations relied on to demonstrate the need for the relief requested and to support a determination that a grant of such relief would serve the public interest." Mid- Hudson has adequately established its "need for the relief requested," as required by Section 76.7(c)(1). In making this finding, we note the Commission's decision in the Small System Order to target rate relief at small systems owned by operators with fewer than 400,000 subscribers based on the recognition that the then-existing rate rules did not sufficiently take account of the higher costs of business faced by smaller companies. In addition, the Commission found that qualifying systems and companies were in need of relief from the procedural burdens imposed upon such entities by the other forms of rate regulation. The Commission found that alleviating the substantive and procedural burdens associated with the standard benchmark and cost-of-service methodologies "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," as set forth in the 1992 Cable Act. 17.Mid-Hudson clearly qualifies as a small cable company with a subscriber base substantially below 400,000. Although Mid-Hudson is composed of a single system that exceeds the 15,000-subscriber threshold for small systems, for the reasons stated above we conclude that this condition does not create a material distinction between Mid-Hudson and the class of systems specifically targeted by the Commission for relief. Based on the reasons described above, we find that the characteristics of the Mid-Hudson system comport with our small system requirements. 18.Granting Mid-Hudson's request will reduce its burden of complying with federal regulations, and allow more of its limited revenue to be used for the improvement of service. As indicated above, in the Small System Order the Commission found that extending rate relief to those operators in need of it furthers specific congressional goals set forth in the 1992 Cable Act. Having concluded that Mid-Hudson qualifies for this relief, granting the Petition will serve the same congressional goals that were furthered by the adoption of the Small System Order. IV.SCOPE OF THE WAIVER 19.As a result of our grant of the Petition, the Mid-Hudson system shall be deemed a small system for purposes of rate regulation. Accordingly, to the extent that Mid-Hudson's BST and/or CPST offerings are subject to rate regulation, the system may now set rates prospectively in accordance with the small system cost-of-service methodology. 20.We next must determine the duration of the waiver. In the Small System Order, after establishing the new small system and small cable company definitions, the Commission stated: To qualify for any existing form of [small system] relief, systems and companies must meet the new size standards as of either the effective date of this order or on the date thereafter when they file whatever documentation is necessary to elect the relief they seek, at their election. . . . A system that is eligible for small system relief on either of the dates described above shall remain eligible for so long as the system has 15,000 or fewer subscribers, regardless of a change in the status of the company that owns the system. Thus, a qualifying system will remain eligible for relief even if the company owning the system subsequently exceeds the 400,000 subscriber cap. Likewise, a system that qualifies shall remain eligible for relief even if it is subsequently acquired by a company that serves a total of more than 400,000 subscribers. 21.The Commission adopted this grandfathering treatment for qualifying systems to enhance their value "in the eyes of operators and, more importantly, lenders and investors." As the Commission stated: "The enhanced value of the system thus will strengthen its viability and actually increase its ability to remain independent if it so chooses." 22.Upon exceeding the 15,000 subscriber threshold, a system that has established its rates in accordance with the small system cost-of-service methodology: . . . may maintain its then existing rates. However, any further adjustments shall not reflect increases in external costs, inflation or channel additions until the system has re-established initial permitted rates in accordance with our benchmark or cost-of-service rules. 23.Since the Mid-Hudson system already exceeds 15,000 subscribers, there is no obvious numerical limit to serve as a cutoff for its continued eligibility for small system treatment. However, it is reasonable to presume that the system will continue to grow. Thus, we must place some duration on the waiver, since the alternative would be to grant small system status indefinitely, regardless of the eventual size of the system. This latter alternative is clearly inconsistent with the Commission's decision to limit small system relief to systems who are in need of it due to their relatively small size. 24.Therefore, as we have ordered in the context of similar waiver situations, the Mid-Hudson waiver will terminate two years from the date of this order, subject to the conditions set forth below. During the waiver period, Mid-Hudson may file only one Form 1230 for each franchise area served by its system. This should give Mid-Hudson adequate regulatory certainty for the foreseeable future, while still ensuring that the system is not permitted to charge rates indefinitely under a scheme designed for smaller systems. Of course, Mid-Hudson may seek continued eligibility for small system treatment by filing a petition for special relief at the end of the waiver period. 25.Limiting the waiver period to two years means that any Form 1230 to be filed by Mid- Hudson must be submitted with the appropriate regulatory authorities within two years of the date of this order. In any franchise area where the system is currently subject to regulation, Mid-Hudson may reestablish its maximum permitted rates by filing Form 1230 at any time in the next two years. Where the system is not currently subject to regulation but becomes subject to regulation within the next two years, Mid-Hudson then may file Form 1230 within the normal response time. Where the system is not now subject to regulation, and does not become subject to regulation until more than two years from now, Mid-Hudson will not be eligible for small system treatment under this waiver. 26.After filing its initial Form 1230 and giving the required notice, Mid-Hudson may set its actual rates in a particular franchise area at any level that does not exceed the maximum rate, subject to the standard rate review process. Subsequent increases, not to exceed the maximum rate established by the Form 1230, shall be permitted, subject to the 30 days' notice requirement of the Commission's rules. As noted, the maximum rate established by the initial Form 1230 shall be a cap on the system's rates during the waiver period. If Mid-Hudson reaches that cap and subsequently wishes to raise rates further, it will have to justify the rate increase in accordance with our standard benchmark or cost-of-service rules. Alternatively, Mid- Hudson can file another petition for special relief and seek continued treatment as a small system. Limiting Mid-Hudson to a single Form 1230 filing for each franchise area provides further assurance that the system will not have grown too large to be establishing rates under the small system cost-of-service methodology. V.ORDERING CLAUSES 27.Accordingly, IT IS ORDERED that the Petition for Special Relief filed by Mid-Hudson Cablevision, Inc. and Catskill Mountain Cablevision requesting waiver of the Commission rules defining systems subject to small system rate relief IS GRANTED. 28.This action is taken pursuant to delegated authority under Section 0.321 of the Commission's rules. FEDERAL COMMUNICATIONS COMMISSION Meredith J. Jones Chief, Cable Services Bureau