******************************************************** NOTICE ******************************************************** This document was converted from WordPerfect to ASCII Text format. Content from the original version of the document such as headers, footers, footnotes, endnotes, graphics, and page numbers will not show up in this text version. All text attributes such as bold, italic, underlining, etc. from the original document will not show up in this text version. Features of the original document layout such as columns, tables, line and letter spacing, pagination, and margins will not be preserved in the text version. If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) Booth American Company )CSR 4637-D ) 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 Booth American Company ("Booth") seeks a waiver of the Commission's rules to the extent necessary to permit Booth to establish regulated cable rates on behalf of a consolidated system of its Boone system and its Alpine system in North Carolina 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 that is affiliated with a small cable company, which is defined as a cable operator that serves a total of 400,000 or fewer subscribers over all of its systems. The Commission adopted this threshold because it roughly corresponds to $100 million in annual regulated revenues, a standard the Commission has used in other contexts to identify smaller entities deserving of relaxed regulatory treatment. The Commission found that cable companies exceeding this threshold would find it easier than smaller companies to attract the financing and investment necessary to maintain and improve service. In addition, the Commission determined that cable companies that exceeded the small company definition "are better able to absorb the costs and burdens of regulation due to their expanded administrative and technical resources." 5.In addition to adopting the new categories of small systems and small cable companies, the Small System Order introduced a form of rate regulation known as the small system cost-of-service methodology. This approach, which is available only to small systems owned by small cable companies, is more streamlined than the standard cost-of-service methodology available to cable operators generally. In addition, the small system rules include substantive differences from the standard cost-of-service rules to take account of the proportionately higher costs of providing service faced by small systems. Eligible systems establish their rates under this methodology by completing and filing FCC Form 1230. In order to qualify for the small system cost-of-service methodology, systems and companies must meet the new size standards as of either the effective date of the Small System Order, or on the date thereafter when they file the documents necessary to elect the relief they seek. 6.Cable systems that fail to meet the numerical definition of a small system, or whose operators do not qualify as small cable companies, may submit petitions for special relief requesting that the Commission grant a waiver of its rules to enable the petitioning systems to utilize the various forms of rate relief available to small systems owned by small cable companies. The Commission stated that petitioners should demonstrate that they "share relevant characteristics with qualifying systems." Other potentially pertinent factors include the degree by which the system fails to satisfy either or both definitions and evidence of increased costs (e.g., lack of programming or equipment discounts) faced by the operator. If the system fails to qualify for relief based on its affiliation with a larger cable company, the Commission will consider "the degree to which that affiliation exceeds our affiliation standards, and whether other attributes of the system warrant that it be treated as a small system notwithstanding the percentage ownership of the affiliate." The Commission also stated that "a qualifying system that seeks to obtain programming from a neighboring system by way of a fiber optic link, but that is concerned that interconnection of the two systems may jeopardize its status as a stand-alone small system, may file a petition for special relief to ask the Commission to find that it is eligible for small system relief." The Commission specifically stated that this list of relevant factors was not exclusive and invited petitioners to support their petitions with any other information and arguments they deemed relevant. II.THE PETITION 7.According to its Petition, Booth operates cable systems serving fewer than 142,000 subscribers across six states. Booth explains that consolidating the headends of two of its systems in North Carolina -- its Boone system and its Alpine system -- into the headend for the Boone system will reduce operating costs and will enable centralized service functions. It will also lower the cost of purchasing equipment needed to expand program offerings. Prior to consolidation, the Boone system served approximately 11,200 subscribers and the Alpine system served approximately 8,300 subscribers. 8.Thus, standing alone, the Boone system and the Alpine system separately qualify for small system regulatory treatment. Each system serves fewer than 15,000 subscribers and is affiliated with a small cable company serving fewer than 400,000 subscribers. After headend consolidation, the combined entity -- the High Country system -- will serve a total of about 19,600 subscribers. Booth argues that, despite its subscriber total, the High Country system will still share the attributes of a typical small system, including "a higher proportion of revenue from regulated service, low subscriber density, higher costs, and the need for relief from administrative burdens and costs." Booth asserts that the characteristics of the High Country system will closely resemble other systems entitled to small system treatment -- the relevant characteristics being an average subscriber density of 27 subscribers per mile, an average monthly regulated revenue of $0.53 per channel per subscriber, and an average annual premium revenue of $27.33 per subscriber. Furthermore, Booth claims that its cost structure reflects that of a small cable company, emphasizing that it does not benefit from programming discounts received by larger multiple system operators. Moreover, Booth notes the relatively costly nature of operating the High Country system in a rural and mountainous area. Booth also argues that relief from having to file multiple cost-of-service filings would significantly reduce the administrative burdens and costs for both the company and the relevant local franchising authorities. 9.In addition, Booth contends that the High Country system should be granted small system treatment because its subscriber total does not exceed the 15,000 subscriber limit by a significant amount. It notes that the Commission, in Insight Communications Company, L.P. ("Insight"), granted small system treatment to a system serving 18,000 subscribers over seven franchise areas. According to Booth, the High Country system exceeds the subscriber level of the Insight system by only 2,000 subscribers and serves subscribers across 16 rural franchises. III.DISCUSSION 10.As discussed above, a cable system that is entitled to small system relief is a system serving 15,000 or fewer subscribers that is not owned by a cable company serving more than 400,000 subscribers over all of its systems. Because Booth has approximately 142,000 subscribers, the High Country system is affiliated with a small cable company with a total subscribership of less than 400,000. However, the system serves approximately 19,600 subscribers. Thus, the issue in this case is whether the Commission should waive the 15,000 subscriber limit used to define a small system under its rules. 11.Our decision in Insight is instructive. In that decision, we granted small system status to three systems serving 16,348, 16,328 and 17,798 subscribers respectively. Even though those systems had subscriber totals in excess of the 15,000 ceiling, we determined that they were entitled to small system relief because they had many of the defining characteristics of small systems. For instance, the Insight systems generated between $45 and $52 per subscriber in annual premium revenues, a range closer to the small system average than the average for large systems. In addition, their subscriber density, ranging from 31 to 35 subscribers per mile, was close to the average density for small systems identified in the Small System Order. 12.Similarly, the High Country system possesses the same character as the typical small system described in the Small System Order. The average annual premium revenue per subscriber of $27.33 falls well below the average of $41 for small systems and also below the averages for the systems granted relief in Insight. Moreover, the average number of subscribers per mile served by the High Country system of 27 is less than the average density level of 35.3 identified for small systems in the Small System Order and also less than the density level of systems granted relief in the Insight case. Furthermore, the High Country system faces higher costs than a typical cable system due to the lack of programming discounts and the expense of operating in a rural and mountainous area. Although the average monthly regulated revenue of $0.53 per channel per subscriber for the High Country system is closer to the average of $0.44 for larger systems than the average of $0.86 for small systems, we do not believe that this single variance is sufficient to disqualify it for small system relief. Thus, we agree with Booth's unopposed claim that the consolidation of the Boone and Alpine headends maintains the small system character of the individual systems prior to the consolidation. 13.In addition, we note that the degree to which a system fails to meet the technical definition of a small system is relevant to our determination that a waiver from the technical requirements is justified. Although the High Country system exceeds the 15,000 ceiling by more than 4,000 subscribers, the margin above the ceiling is not significantly above the level of excess deemed acceptable in Insight. Finally, as we stated in Inter Mountain Cable, Inc. ("Inter Mountain"), the Commission seeks to encourage the interconnection of multiple small systems where subscribers will benefit. According to Booth, the consolidation of the Boone and Alpine headends will provide benefits to subscribers by resulting in better customer service, expanded programming, and improved operating efficiencies. Thus, as in Inter Mountain, granting small system regulatory relief will further the Commission's goal. Therefore, for all of the above reasons, we will grant Booth's Petition. IV.SCOPE OF THE WAIVER 14.As a result of our grant of the Petition, Booth's High Country system shall be deemed a small system for purposes of rate regulation. Accordingly, to the extent that High Country's BST and/or CPST offerings are subject to rate regulation, rates for the High Country system may be set in accordance with the small system cost-of-service methodology. 15.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. 16.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." 17.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. 18.Since the High Country system 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 that are in need of it due to their relatively small size. 19.Therefore, as we have ordered in the context of a similar waiver situation, the Booth waiver will terminate two years from the date of this order, subject to the conditions set forth below. During the waiver period, Booth may file only one Form 1230 for each franchise area it serves. This should afford Booth 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, Booth may seek continued eligibility for small system treatment by filing a petition for special relief at the end of the waiver period. 20.Limiting the waiver period to two years means that any Form 1230 to be filed by Booth 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, Booth 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, Booth 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, Booth will not be eligible for small system treatment under this waiver. 21.After filing its initial Form 1230 and giving the required notice, Booth may set its actual rates in the 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 the system 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, the system can file another petition for special relief and seek continued treatment as a small system. Limiting Booth 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 22.Accordingly, IT IS ORDERED that the Petition for Special Relief filed by Booth American Company with respect to the consolidation of its Alpine and Boone systems is hereby GRANTED. 23.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