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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 ) ) C-TEC Cable Systems ) CSR 4674-D of Michigan, Inc. ) ) 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 C-TEC Cable Systems of Michigan, Inc. ("C-TEC") seeks a waiver of the Commission's rules to the extent necessary to permit C-TEC 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"), with respect to four of its Ottawa County, Michigan cable systems. A group of local franchising authorities with jurisdiction over C-TEC's regulated cable service rates in many of the affected communities ("Michigan LFAs") jointly filed the only opposition to C-TEC's Petition ("Opposition"). 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. A small system is deemed affiliated with a cable company if the company "holds more than a 20 percent equity interest (active or passive) in the system or exercises de jure control (such as through a general partnership or majority voting shareholder interest)." 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 company 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. BACKGROUND A. C-TEC's Petition 7. C-TEC filed its Petition on behalf of four of its cable systems -- Allendale, Grand Haven, Holland and Hudsonville. C-TEC states that each of the four systems serves fewer than 15,000 subscribers. C-TEC thus states that, when considered individually, each system clearly falls within the definition of small system in the Small System Order and is "entitled" to establish regulated rates in accordance with the small system cost-of-service methodology set forth in the Small System Order. C-TEC states that the four systems will be consolidated by fiber optic links, and indicates that the interconnected systems will serve a total of 31,032 subscribers. 8. C-TEC asserts that it also qualifies as a "small cable company" under the Small System Order" because, as of December 31, 1995, C-TEC and its "affiliated companies" served a total of 372,773 subscribers. On May 20, 1996, we denied C-TEC's petition contending that it was a small cable company. 9. C-TEC requests that the Commission waive its regulations to the extent necessary to permit these four systems to "retain" their eligibility for small system relief after the systems are interconnected "even though the aggregate number of subscribers will exceed the 15,000 threshold." Pursuant to the Small System Order, C-TEC attempts to demonstrate that the combined system is entitled to small system status because, notwithstanding the combined system's service to more than 31,000 subscribers, the combined system will continue to "share relevant characteristics with qualifying systems." Specifically, the combined system will: (a) yield an average monthly regulated revenue per channel per subscriber of $0.57, as compared to $0.86 for the average small system and $0.44 for the average system with more than 15,000 subscribers; (b) serve an average of 34.5 subscribers per mile, versus the 35.3 subscribers per mile served by the average small system and 68.7 served by the average larger system; and (c) receive $44.21 in average premium revenue per subscriber, as compared to $41.00 received by the average small system and $73.13 by the average larger system. 10. C-TEC states that the similarity between its combined system and the average small system is "even stronger" once a rate adjustment in February 1996 is reflected in rates and revenues. Specifically, the combined system's average monthly regulated revenues per channel per subscriber increases from $0.57 to $0.71, and the average premium revenue per subscriber decreases from $44.21 to $40.45, respectively. 11. C-TEC contends that according the combined system small system status will serve the public interest, and states that the Commission has previously granted similar petitions for special relief from the threshold requirements of the Small System Order. C-TEC states that it faces difficulties in negotiating discounts because of its limited size, and adds that, while these difficulties will not diminish appreciably after interconnection of the systems, the benefits of interconnection for subscribers will be "significant." C-TEC also states that the resulting increase in capacity will permit it to add a channel called Music Choice to all of the systems, and will allow C-TEC to add other services in the future. C-TEC relates that consolidation will reduce equipment and maintenance costs, and generally improve the quality and reliability of service to subscribers in the relevant areas. In addition, interconnection will permit C-TEC to use the headends that are no longer needed to expand service in other smaller areas. B. Michigan LFAs' Opposition 12. The Michigan LFAs note that, once the four systems that are the subject of the Petition are interconnected by fiber optic links, they will serve a total of more than 31,000 subscribers, or more than double the 15,000 subscriber threshold set forth in the Small System Order. The Michigan LFAs argue that C-TEC's systems are not eligible for small system status. 13. The Michigan LFAs argue that C-TEC also does not qualify as a small cable company under the Commission's definition of that term. Under the Small System Order, a cable system is deemed to be affiliated with a cable company if the company holds more than 20% equity interest, whether active or passive, in the system or exercises de jure control. The Michigan LFAs note that C-TEC holds a 40% interest in Megacable, and argues that, when these 177,000 subscribers are added to C-TEC's 372,733 domestic subscribers, C-TEC serves well over the 400,000 threshold. 14. The Michigan LFAs state that the regulations adopted in the Small System Order are intended to provide relief to small cable companies who "do not have access to the financial resources or other purchasing discounts of larger companies." They believe that C-TEC errs in arguing that Megacable's subscribers "are not under the jurisdiction of the FCC and [thus] are irrelevant;" rather, the relevant question is whether C-TEC has access to the "resources it needs to grow." The Michigan LFAs state that, for purposes of small system relief, the Commission is not regulating C-TEC's Megacable subscribers, but is merely determining the overall number of subscribers served by C-TEC and its affiliated systems. 15. The Michigan LFAs state that the definition of a small cable company is not limited to include only subscribers in the United States, and that location of subscribers is not relevant to measuring the financial resources of a cable operator. The Michigan LFAs state that C-TEC and its affiliates (including non-cable assets) have annual revenues in excess of $250 million, and that C-TEC's "ultimate" parent company, Peter Kiewit and Sons, Inc., has approximately $3 billion in annual revenues. The Michigan LFAs contend that, unlike other small cable companies that are truly entitled to small system status, C-TEC's interconnected system has easy access to "vast" financial, technical and managerial resources. According to the Michigan LFAs, it is "doubtful" that the Commission intended small system relief for a cable company of C-TEC's size and resources. 16. The Michigan LFAs add that, even if C-TEC is granted small system status, it is prohibited from filing a cost-of-service showing in the areas regulated by the Michigan LFAs. The Michigan LFAs state that, in order to resolve a number of rate regulation disputes, C-TEC entered into a contract with the Michigan LFAs and approximately 70 other local franchising authorities that regulate service provided by C-TEC and its affiliates in Michigan (Settlement Agreement"). The Michigan LFAs state that, under the Settlement Agreement, C-TEC expressly agreed to "not file a new cost-of-service analysis . . . with the Community or the FCC for the purpose of changing the price cap" until September 1, 1997. C-TEC also agreed to certain rate reductions and refunds, and to withhold any rate increases for regulated rates until April 1, 1995, and thereafter to raise regulated rates only to reflect inflation or programming cost increases until September 1, 1997. 17. The Michigan LFAs state that "the key" for the Commission is that the Settlement Agreement resolved major disputes between C-TEC with respect to preceding cost-of-service filings submitted by C-TEC to the involved local franchising authorities. The Michigan LFAs urge the Commission to safeguard its general policy of encouraging the settlement of rate disputes by prohibiting C- TEC from now reneging on a critical element of this agreement, namely, its voluntary moratorium on the filing of cost-of-service showings until September 1, 1997. If C-TEC is permitted to raise its rates in a manner that is inconsistent with the Settlement Agreement, then the affected subscribers will not receive the full benefits they are due under the agreement. The Michigan LFAs argue that C-TEC is not eligible for streamlined small system relief, or in the alternative, not eligible until after September 1, 1997. III. DISCUSSION A. Small Cable System 18. We begin by comparing the small system subscribership limit of 15,000 to the subscriber base of the four systems that are the subject of the Petition. C-TEC states that two of the four systems each serve approximately 12,500 subscribers, while the other two each serve less than 4,000. Each system thus falls within the 15,000 threshold on an individual basis. However, after the four systems are interconnected by fiber optic links, the combined system will serve 31,032 subscribers, or more than twice the threshold. We find that C-TEC's subscribership level of 31,032 exceeds the 15,000 cap by too wide a margin to allow us to grant a waiver, and therefore C-TEC does not qualify for the small system relief it requests in its petition. 19. It is true that in the Small System Order, the Commission encouraged the interconnection of cable systems where it would provide benefits to subscribers, and invited such parties to petition the Commission for special relief if the systems shared relevant characteristics with qualifying systems. However, as the Commission also stated in the Small System Order, the "degree by which the system fails to satisfy either or both definitions" will be a relevant factor in considering all such petitions for special relief. We believe that a system should not be entitled to special relief if it, like C-TEC's interconnected system, serves more than twice as many subscribers as are included in the small system definition. The fact that C-TEC's interconnected system would exceed the small system threshold by such a great degree weighs against C-TEC's arguments that its system will nevertheless share relevant characteristics with qualifying systems. Therefore, we find that C-TEC's interconnected system will not be entitled to special relief. B. Small Cable Company 20. In the Small System Order, the Commission also required that operators meet the definition of a small cable company in order to qualify for small system relief. We have previously determined that C-TEC does not meet the definition of a small cable company. Nothing submitted in this record persuades us that the decision in our previous order was incorrect or that circumstances have changed. 21. Furthermore, C-TEC does not appear to face any financial or economic difficulties because of its size. Relief is intended for those systems that lack access to the financial resources, discounts, and other economic efficiencies of larger companies. Our conclusion in the Insight Order is instructive in this regard. Insight owned 32 cable systems that complied with the definition of a small cable system. With respect to the definition of a small cable company, although Insight directly served a total of only about 158,000 subscribers, Continental Cablevision, Inc. ("Continental"), which served more than 3 million subscribers, held a 34% ownership interest in Insight, thus in excess of the 20% standard. 22. We noted, however, the Commission's pledge in the Small System Order that if a 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 . . . whether other attributes of the system warrant that it be treated as a small system notwithstanding the percentage ownership of the affiliate." Based on the record, we found that Insight gained no meaningful access to financial resources as a result of its affiliation with Continental. We noted that Continental had never loaned Insight any money and that in borrowing money from others, Continental had never guaranteed any indebtedness of Insight. Moreover, Insight had to pay a significantly higher origination fee and interest rate than Continental could secure. We also noted that no officers or directors of Continental sat as officers or directors of Insight, that Continental played no role in the day-to-day management of Insight, and that Continental did not provide Insight with any experience or expertise regarding the raising of debt and capital, programming, budgets, mergers and acquisitions, or the disposition of property. Based on this merely "passive" relationship between Continental and Insight, we found Insight eligible for small system status. 23. C-TEC states only that it faces "disadvantages . . . in negotiating discounts and in other matters." Unlike Insight, however, C-TEC fails to provide any financial data to demonstrate these difficulties. C-TEC also states that interconnection will allow it to offer a "channel called Music Choice, previously available only in the more urban Grand Haven system . . . to all subscribers to the interconnected system," and that "[t]here will be room for C-TEC to add more services in the future as well." C-TEC adds that "[e]quipment and maintenance costs will be reduced by consolidation . . . [a]nd the equipment from the eliminated headends will be used to beef up the capabilities of other, smaller C-TEC systems." C-TEC similarly fails to provide any evidence that interconnection and the benefits derived therefrom could or would not be accomplished without grant of the Petition. 24. Moreover, as the Michigan LFAs note, C-TEC and its affiliates have annual revenues in excess of $250 million, and that C-TEC's "ultimate" parent company, Peter Kiewit and Sons, Inc., has approximately $3 billion in annual revenues. It is clear that C-TEC does not require relief from its regulatory burdens in order to attract capital. As the Michigan LFAs state, a company the size of C-TEC is not without the resources necessary to improve, manage or maintain its service. We agree with the Michigan LFAs that C-TEC is generally not the type of company envisioned to be eligible for the streamlined cost-of-service process. 25. Therefore, we find that not only has C-TEC failed to demonstrate that its system is eligible for relief as a small cable system, but it has also failed to meet the definition of a small cable company. V. ORDERING CLAUSES 26. Accordingly, IT IS ORDERED that the Petition for Special Relief filed by C-TEC Cable Systems of Michigan, Inc. requesting a waiver of the Commission rules defining systems subject to small system rate relief IS DENIED. 27. 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 ATTACHMENT A Allendale: Allendale Twp. (MI0487); Blendon Twp. - Allendale (MI ); Coopersville City (MI0486); Polkton Twp. (MI0875); Tallmadge Twp. (MI0971); Wright Twp. (MI1339). Grand Haven: Crockery Twp. (MI0970); Fruitport Village (MI1536); Grand Haven City (MI0371); Grand Haven Twp. (MI0372); Robinson Twp. (MI1610); Spring Lake Twp. (MI0374); Spring Lake Village (MI0373). Holland: Fillmore Twp. (MI1551); Holland Twp. (MI0344); Laketown Twp. (MI0874); Park Twp. (MI0345); Zeeland City (MI0435); Zeeland Twp. - Holland (MI0683). Hudsonville: Blendon Twp. - Hudsonville (MI0700); Georgetown Twp. (MI1692); Hudsonville City (MI0700); Olive Twp. (MI1521); Zeeland Twp. - Hudsonville (MI1522).