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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 ) ) Alexcom, L.P. ) CSR No. 4568-D ) Petition for Special Relief ) MEMORANDUM OPINION AND ORDER Adopted: August 25, 1997 Released: August 27, 1997 By the Chief, Cable Services Bureau: I. INTRODUCTION 1. Here we address a petition for special relief ("Petition") in which Alexcom, L.P. ("Alexcom") seeks a waiver of the Commission's rules to the extent necessary to permit Alexcom to establish regulated cable rates on behalf of Tennessee Cablevision, Inc., ("Tennessee Cable") and Smyrna Cable TV, Inc. ("Smyrna Cable") 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"). Subsequently, Alexcom filed a letter ("Supplemental Letter") augmenting its earlier filing and providing further information on the systems in question. 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 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. Alexcom owns and operates two stand-alone cable systems: Tennessee Cable and Smyrna Cable. Alexcom is not affiliated with any other cable system. Alexcom states that, as of June 1, 1995, Tennessee Cable served a total of 18,549 subscribers and Smyrna Cable served a total of 23,990 subscribers, for a total of 42,539 subscribers, as compared to the definitions of a "small system" and a "small cable company," which contain subscribership caps of 15,000 and 400,000 subscribers, respectively. Therefore, while Alexcom easily qualifies as a small cable company under the Small System Order, Tennessee Cable and Smyrna Cable both exceed the 15,000-subscriber threshold for a small system, thus making each ineligible for the small system cost-of-service rules absent a waiver. 8. Alexcom argues that despite the fact that its two systems exceed the numerical subscriber cap for small systems, they are the sort of entities that the Commission has targeted for special relief. Alexcom notes that, as discussed above, the Commission found in the Small System Order that, in certain circumstances, flexibility may be appropriate in applying our standards for small system status. Alexcom argues that it would be illogical to deny its Tennessee Cable and Smyrna Cable small system status because Alexcom easily passes the definition of a small cable company and the two systems either closely resemble the average small system or at least fall between the two classifications of systems with fewer than 15,000 subscribers and systems with more than 15,000 subscribers. 9. In support of its Petition, Alexcom states that both Tennessee Cable and Smyrna Cable share the characteristics of the average small system set forth in the Small System Order. Specifically, Tennessee Cable: (a) yields an average monthly regulated revenue per channel per subscriber of $0.76, as compared to $0.86 yielded by the average small system; (b) serves an average of 35.4 subscribers per mile, versus 35.3 subscribers per mile served by the average small system; and (c) receives $39.00 in average annual premium revenue per subscriber, as compared to $41.00 received by the average small system. With respect to Smyrna Cable: (a) the average monthly regulated revenue per channel per subscriber is $0.72; (b) the average number of subscribers per mile is 56.7; and (c) the average annual premium revenue per subscriber is $65.00. We note that the respective figures for the average system with more than 15,000 subscribers are: (a) $0.44; (b) 68.7 subscribers; and (c) $73.13. Alexcom contends that the facts surrounding its Petition are more favorable than those surrounding a petition for special relief filed by Insight Communications Company, L.P. ("Insight"), where we granted small system status to three of Insight's cable systems that served 17,798, 16,328 and 16,348 subscribers, respectively, notwithstanding Insight's total subscribership of about 158,000 subscribers. 10. With respect to its costs of providing service, Alexcom states that its management team is comprised of only three people, and that its two systems face the same financial constraints as other small cable operators. Alexcom states that it cannot avail itself of bulk discounts for programming and equipment that typically are available to larger systems. Alexcom also asserts that its operating costs are relatively high because of its long-standing commitment to providing "first class" cable service. This service includes offering service in very low density areas, supporting local origination programming, participating in the "Cable in the Classroom" program, donating equipment to local educational institutions, and generally supporting the local community. Alexcom adds that its costs of obtaining financing are relatively high because larger systems typically enjoy many more options for raising capital. This circumstance makes it far easier for larger operators to increase revenues by rolling out new services, rebuilding plant and maintaining their quality of service. 11. Finally, Alexcom asserts that grant of its Petition will serve the public interest. Alexcom states that its "financial problems are exacerbated" by the costs of compliance with federal and local rate regulation, which are high on a per-subscriber basis. Alexcom states that the requested relief will alleviate some of these constraints and provide it with the financial certainty essential for definitive rates over a longer period of time. In turn, this financial certainty will help Alexcom to secure the financing needed to rebuild its systems so that "they can offer the full range of services the cable industry has to offer." III. DISCUSSION 12. We begin with a comparison of Alexcom's total subscribership to the definition of a small cable company, and of the respective subscriber bases of Tennessee Cable and Smyrna Cable to the definition of a small cable system. Since Alexcom is not affiliated with any other cable system, and its systems serve a total of 42,539 subscribers, Alexcom clearly falls below the 400,000-subscriber threshold for a small cable company. Both Tennessee Cable and Smyrna Cable exceed the 15,000- subscriber threshold for a small system, as the former serves 18,549 and the latter serves 23,990 subscribers. As stated in the Small System Order, special relief may be provided to cable systems which fail to meet the definition of either a small cable company or a small system but are able to demonstrate that they share relevant characteristics with qualifying systems. The threshold question is whether the amounts by which Tennessee Cable and Smyrna Cable exceed the small system definition defeat Alexcom's request in light of other relevant characteristics each may share with the average small system. 13. Based on the record before us, we find that Tennessee Cable is entitled to special relief in order to qualify for small system status. Tennessee Cable serves 18,549 subscribers, or 23.66% over the small system threshold. In light of other factors relevant to Tennessee Cable's status, we find that this disparity does not substantially impair Tennessee Cable's eligibility for regulatory relief. We have previously granted small system status to cable systems that exceed the 15,000 subscriber limit where it has been shown that the cable system shares other relevant characteristics with small systems. On a per subscriber basis, Tennessee Cable receives $0.76 in monthly regulated revenue per channel and $39.00 in annual premium revenues, which is closer to the amounts received by the average small system ($0.86 and $41.00, respectively) than to those of larger systems ($0.44 and $73.13, respectively). Moreover, Tennessee Cable serves 35.4 subscribers per mile, which is virtually the same as the average subscriber density observed on small systems (35.3). We find this last circumstance especially persuasive, because sparse subscriber density dictates that fewer subscribers are available to support a given amount of physical plant, leading to higher costs per subscriber. 14. We will also grant small system relief to Smyrna Cable. Although Smyrna Cable serves 23,990 subscribers, we note that we have previously granted regulatory relief for a system serving nearly 23,000 subscribers. In the Inter Mountain Order, we granted relief for a system serving 22,763 subscribers stating that it would be "somewhat anomalous to withhold from Inter Mountain the regulatory relief that is automatically available to much larger companies that seemingly are in less need of such relief, particularly given that Inter Mountain has only a single system." Alexcom, like Inter Mountain, falls well within the definition of a small cable company, and Alexcom owns only two systems that require special relief in order to qualify for small system status. In addition, Alexcom's Smyrna Cable system appears to share relevant characteristics with small systems. Smyrna Cable's average monthly regulated revenue per channel per subscriber of $0.72 is similar to the $0.86 received by small systems. Smyrna Cable's average subscriber density and average annual premium revenue per subscriber fall in between the averages for larger and small systems. Alexcom also claims that it is not able to acquire bulk discounts for programming or equipment, that it has high operating costs, and that it has fewer resources for obtaining financing than larger systems. Moreover, Alexcom's management team for both systems consists of only three people. We believe that adding to Alexcom's already high costs by denying rate relief to Smyrna Cable might unnecessarily hinder Alexcom's ability to serve subscribers, and that the financial benefits that result from small system relief will ultimately enable Alexcom to provide better service. 15. A final factor weighing in favor of granting small system status for Alexcom's Tennessee Cable and Smyrna Cable systems is the absence of any opposition to Alexcom's Petition, despite service of the Petition upon the relevant local franchising authorities and public notice of the Petition by the Commission. Based on all of the factors discussed above, we find that Alexcom's Tennessee Cable and Smyrna Cable systems are entitled to special relief and should be granted small system status. IV. SCOPE OF THE WAIVER 16. As a result of our grant of the Petition, Tennessee Cable and Smyrna Cable shall be deemed small systems for purposes of rate regulation. Accordingly, to the extent the systems' BST and/or CPST offerings are subject to rate regulation, the systems may now set rates prospectively in accordance with the small system cost-of-service methodology. 17. 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. 18. 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." 19. 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. 20. Since Tennessee Cable and Smyrna Cable already exceed 15,000 subscribers, there is no obvious numerical limit to serve as a cutoff for their continued eligibility for small system treatment. However, it is reasonable to presume that the systems 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 systems. 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. 21. Therefore, as we have ordered in the context of similar waiver situations, the waiver for Tennessee Cable and Smyrna Cable will terminate two years from the date of this order, subject to the conditions set forth below. During the waiver period, Tennessee Cable and Smyrna Cable may file only one Form 1230 for each franchise area they serve. This should give Tennessee Cable and Smyrna Cable adequate regulatory certainty for the foreseeable future, while still ensuring that the systems are not permitted to charge rates indefinitely under a scheme designed for smaller systems. Of course, Tennessee Cable and Smyrna Cable may seek continued eligibility for small system treatment by filing a petition for special relief at the end of the waiver period. 22. Limiting the waiver period to two years means that any Form 1230 to be filed by Tennessee Cable or Smyrna Cable must be submitted with the appropriate regulatory authorities within two years of the date of this order. In any franchise area where the systems are currently subject to regulation, Tennessee Cable and Smyrna Cable may reestablish their maximum permitted rates by filing Form 1230 at any time in the next two years. Where the systems are not currently subject to regulation but, within the next two years, become subject to regulation due to the certification of a local franchising authority or the filing of a rate complaint, Tennessee Cable and Smyrna Cable then may file Form 1230 within the normal response time. Where the systems are not now subject to regulation, and do not become subject to regulation until more than two years from now, Tennessee Cable and Smyrna Cable will not be eligible for small system treatment under this waiver. 23. After filing their initial Form 1230s and giving the required notice, Tennessee Cable and Smyrna Cable may set their 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 systems' rates during the waiver period. If the systems reach that cap and subsequently wish to raise rates further, they will have to justify the rate increase in accordance with our standard benchmark or cost-of-service rules. Alternatively, the systems can file another petition for special relief and seek continued treatment as a small system. Limiting Tennessee Cable and Smyrna Cable to a single Form 1230 filing for each franchise area provides further assurance that the systems will not have grown too large to be establishing rates under the small system cost-of-service methodology. V. ORDERING CLAUSES 24. Accordingly, IT IS ORDERED that the Petition for Special Relief filed by Alexcom, L.P. requesting a waiver of the Commission rules defining systems subject to small system rate relief IS GRANTED with respect to Tennessee Cablevision, Inc. and Smyrna Cablevision, Inc. 25. 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