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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 ) ) Benchmark Acquisition Fund I Limited ) CSR 4636-D Partnership d/b/a/ Cablevision of Loudoun) ) Petition for Special Relief ) MEMORANDUM OPINION AND ORDER Adopted: June 25, 1998 Released: June 30, 1998 By the Acting Chief, Cable Services Bureau: I. INTRODUCTION 1. Here we address a petition for special relief ("Petition"), in which Benchmark Acquisition Fund I Limited Partnership d/b/a Cablevision of Loudoun ("Benchmark") seeks a waiver of the Commission's rules to the extent necessary to permit Benchmark to establish regulated cable rates on behalf of its system in Leesburg, Virginia and Loudoun County, Virginia 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"). The Town of Leesburg, Virginia ("Leesburg") and Loudoun County, Virginia ("Loudoun County") filed letters opposing the Petition, and Benchmark filed a reply to the Leesburg opposition letter ("Reply"). Benchmark recently filed a supplemental filing ("Supplemental Filing") providing additional pertinent information. 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 those small systems that are 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 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." 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. ARGUMENTS OF THE PARTIES 7. Benchmark states that it served a total of approximately 71,300 subscribers as of December 31, 1994, and therefore qualifies as a small cable company. As of the same date, Benchmark's Leesburg/Loudoun County system served a total of approximately 21,900 subscribers, comprised of 5,940 subscribers formerly served by a Leesburg, Virginia headend, and 15,990 subscribers from the Loudoun County, Virginia headend. The Leesburg and Loudoun County facilities now constitute a single system because they are connected via a fiber optic link. 8. Benchmark concedes that the Leesburg/Loudoun County system exceeds the 15,000 subscriber cap, but argues that the system is precisely the sort for which the Small System Order established a special relief mechanism. Benchmark asserts that the degree to which a system fails to meet the numerical subscriber caps is the principal consideration in determining whether a waiver is appropriate, and notes that absent the fiber link, the portion of the system serving Leesburg would clearly fall under the 15,000 subscriber threshold. Benchmark states that while it was not specifically required by a franchising authority to combine the former Leesburg and Loudoun systems, it chose to combine the systems as part of an overall upgrade required by the Loudoun County franchise. 9. In addition, Benchmark asserts that its system faces many of the higher costs identified in the Small System Order that are associated with small systems. In this respect, Benchmark states that while it does not enjoy the same economies of scale available to larger systems in the areas of equipment purchasing, system maintenance or program acquisition, it has nonetheless made expenditures necessary to provide very high quality service. For example, it has expanded the system's channel capacity, installed addressable converters, added 45 miles of optical fiber, added stand-by power supplies at the head-end and distribution plant, and increased its customer service functions. Finally, Benchmark states that its financial situation has forced it to rely on cost-of-service rate justifications, which have high administrative costs for small cable operators on a per-subscriber basis. 10. In its Opposition, Loudoun County concedes that Benchmark is a small cable company, but argues that the system in question nonetheless substantially exceeds the small system ceiling of 15,000 subscribers. Leesburg observes that Benchmark failed to demonstrate that its system shares characteristics identified with small systems in the Small System Order, such as a higher average monthly regulated revenue per channel per subscriber, a lower subscriber density and a lower average annual premium revenue per subscriber. Leesburg also notes that neither its franchise agreement nor that of Loudoun County required an upgrade in Leesburg, and that Benchmark's decision to merge the two systems resulted in economic efficiencies for Benchmark, not increased costs. 11. In its Reply, Benchmark reiterates that but for the fiber optic link, the portion of the system in Leesburg would clearly qualify for small systems relief and the portion serving Loudoun County would exceed the threshold by about 900 subscribers. Benchmark argues that where the Small System Order invited petitions for special relief, it expressly recognized systems that would otherwise qualify as small systems, but for a fiber optic link. 12. As Leesburg noted, Benchmark's pleadings failed to include information pertaining to the three primary characteristics of small systems identified in the Small System Order. On August 1, 1997, the Cable Services Bureau offered Benchmark the opportunity to supplement its filings by providing figures for the system's: (1) average monthly regulated revenue per channel per subscriber; (2) average subscriber density; and (3) average annual premium revenue per subscriber. Benchmark responded on September 15, 1997 with a Supplemental Filing showing that as of December 31, 1993, its average monthly regulated revenue per channel per subscriber was $0.49 and its average annual premium revenue per subscriber was $71.94, and that as of December 31, 1994, its average subscriber density was 64 subscribers per mile. III. DISCUSSION 13. The Commission adopted the 15,000 subscriber threshold for small systems "on the basis of shared economic, physical, and financial characteristics" for any systems at or below that size. Based on the available data, the Commission found 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; and 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. 14. The magnitude of these differences between the two classes of systems indicated that the 15,000 subscriber threshold was the appropriate point of demarcation for purposes of providing for substantive and procedural regulatory relief. The Commission also stated its willingness to "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." In addition, while the Commission retained its rule that determines small system size based on the number of subscribers served from a system's principal headend, the Commission also noted that a qualifying system that is concerned that a fiber link could jeopardize its status as a small system may file a petition for special relief. 15. We note that we have granted special relief for systems that were composed of linked facilities and that exceeded the 15,000 subscriber threshold. Our decisions, however, were based on a demonstration that the systems shared relevant characteristics with other small cable systems. Benchmark's Supplemental Filing shows that the relevant characteristics of its system are comparable to those of larger systems. Its annual average monthly regulated revenue per channel per subscriber of $0.49 closely resembles the average of $0.44 for larger systems. Its average subscriber density of 64 subscribers per mile is similar to the larger system average of 68.7. Finally, its average annual premium revenue per subscriber of $71.94 is just shy of the larger system average of $73.13. Although Benchmark asserts that it is ineligible for significant bulk discounts, we previously have found that ineligibility for bulk discounts, in the absence of evidence of other characteristics shared with small systems, is not sufficient to warrant the requested waiver of our rules. Therefore, because Benchmark's system does not share the relevant small system characteristics identified in the Small System Order, we find that it is not eligible for small system relief. Although we invited petitions for special relief from qualifying systems that were concerned a fiber optic link would jeopardize their small system status, we did not state that relief should be granted for an interconnected system, simply because one portion of the system could have qualified as a small system without the fiber optic link, without a demonstration of the relevant characteristics the system shares with other small systems. 16. Benchmark states that it faces high operating costs due to its expansion of the system's channel capacity, installation of addressable converters, addition of 45 miles of optical fiber and addition of stand-by power supplies at the headend and distribution plant. While we support Benchmark in its efforts to configure its system as it sees fit, we do not believe that granting Benchmark's system small system status is necessarily relevant to the accomplishment of these goals. Our rules provide avenues for an operator to fund an upgrade of its systems. For example, an operator that undertakes a significant network upgrade requiring added capital investment may justify a rate increase via an abbreviated cost-of- service showing. Alternatively, an operator can utilize our standard cost-of-service rules that permit an operator to set regulated rates based on the specific costs it incurs in providing regulated service. 17. We also support Benchmark's commitment to quality customer service, including its expanded office hours and its adoption of an "on time guarantee" program. Benchmark fails to demonstrate, however, that its local efforts are somehow disproportionate to its size, and therefore generate higher than average costs per subscriber than larger cable systems. 18. Finally, Benchmark asserts that administrative costs associated with standard cost-of- service rate regulation are high for small cable operators, but it does not offer any specific evidence regarding the costs of regulation for its systems. The Commission has previously determined that the costs associated with regulation have a greater impact on small cable companies than on larger companies. However, Benchmark's general assertion does not justify our granting small system relief based on Benchmark's particular circumstances. In addition, we note that the 1996 Act may already provide Benchmark, and other MSOs its size, with a measure of relief from the burdens of standard cost- of-service rate regulation. 19. We find that Benchmark has failed to meet its burden under Section 76.7(c)(1) of establishing a need for special relief. Therefore, Benchmark's petition for special relief must be denied. IV. ORDERING CLAUSES 20. Accordingly, IT IS ORDERED that the Petition for Special Relief filed by Benchmark Acquisitions Fund I Limited Partnership d/b/a Cablevision of Loudoun requesting a waiver of the Commission rules defining systems subject to small system rate relief IS DENIED. 21. This action is taken pursuant to delegated authority under Section 0.321 of the Commission's rules. FEDERAL COMMUNICATIONS COMMISSION John E. Logan Acting Chief, Cable Services Bureau