Before the

**Federal Communications Commission**

**Washington, D.C. 20554**

In the Matter of )

)

Revisions to Cable Television Rate ) MB Docket No. 02-144

Regulations )

)

Implementation of Sections of ) MM Docket No. 92-266

The Cable Television Consumer )

Protection and Competition Act )

of 1992: Rate Regulation )

)

Implementation of Sections of ) MM Docket No. 93-215

The Cable Television Consumer )

Protection and Competition Act )

of 1992: Rate Regulation )

)

Adoption of a Uniform Accounting ) CS Docket No. 94-28

System for the Provision of Regulated )

Cable Service )

)

Cable Pricing Flexibility ) CS Docket No. 96-157

NOTICE OF PROPOSED RULEMAKING AND ORDER

**Adopted: June 13, 2002 Released: June 19, 2002**

**Comment Date:** 60 days after publication in the Federal Register

**Reply Comment Date:** 90 days after publication in the Federal
Register

By the Commission:

**TABLE OF CONTENTS**

Paragraph

I. BACKGROUND AND INTRODUCTION

II\. ISSUES FOR COMMENT

A. Deletion or modification of the rules that address CPS tier rates

B. Rate adjustments when channels are added to or deleted from the BST

1\. Calculating rate adjustments

2\. "Single Tier" Systems

C. Headend upgrades

D. Digital broadcast television rate adjustment issues

E. Initial regulated rates

F. Rate structures and uniform regional rates

G. Rates for commercial subscribers

H. Small system issues

I. Cost-of-service rate process

J. Abbreviated cost-of-service showing on FCC Form 1235

K. Rates of interest

L. Unbundling

M. Refunds

N. Re-evaluation of the BST rate regulation process

1\. Recalibration of the "competitive differential"

2\. Other approaches to BST rate regulation

O. Equipment and inside wiring rate regulation

P. Recovery of lost revenues for equipment and installation due to
subsequently reversed rate orders

Q. Charges for changes in service tiers

R. Effective competition showings

S. Procedures for Commission review of local rate decisions

III\. ORDER: INTERIM RATE ADJUSTMENTS FOR bst CHANNEL CHANGES

IV\. ADMINISTRATIVE MATTERS

A. Initial Regulatory Flexibility Analysis

1\. Need for, and Objectives of, the Proposed Rules

2\. Legal Basis

3\. Description and Estimate of the Number of Small Entities to Which
the Proposed Rules Will Apply

4\. Description of Projected Reporting, Recordkeeping and Other
Compliance Requirements for Small Entities

5\. Steps Taken to Minimize Significant Impact on Small Entities and
Significant Alternatives Considered

6\. Federal Rules Which Duplicate, Overlap, or Conflict with the
Commission's Proposed Rules

B. Initial Paperwork Reduction Act of 1995 Analysis

C. Procedural Provisions

V. ORDERING CLAUSES

# BACKGROUND AND INTRODUCTION

1.  In this proceeding we seek comment on potential revisions to our
    cable television rate regulations in light of the March 1999 end of
    cable programming service tier rate regulation and the experience
    gained with our current regulations.

2.  Section 623 of the Communications Act,[^1] adopted as part of the
    Cable Television Consumer Protection and Competition Act of
    1992,[^2] governs the cable television rate regulation process. As
    adopted, section 623 provided for rate regulation of the basic
    service tier ("BST")[^3] of cable service and for most cable
    customer premises equipment by local municipal franchise
    authorities.[^4] Cable programming service tier (CPST) rate
    regulation would be undertaken by the Commission on a complaint
    basis.[^5] Services offered on a per-channel or per-program charge
    basis were not subject to rate regulation. In communities where
    "effective competition" was found to exist there would be no rate
    regulation.[^6] The Commission was charged with responsibility for
    adopting regulations to govern basic service tier, equipment, and
    CPST rates, and establishing procedures to govern appeals of local
    franchise authority rate decisions to the Commission. The Act
    instructs the Commission to establish regulations that "ensure that
    the rates for the basic service tier are reasonable\[,\]" and are
    "designed to achieve the goal of protecting subscribers ... from
    rates ... that exceed the rates that would be charged for the basic
    service tier if such cable system were subject to effective
    competition."[^7] In a series of proceedings undertaken pursuant to
    section 623, the Commission adopted the necessary rules and
    standards to govern the rate regulation process.[^8]

3.  The Telecommunications Act of 1996 amended section 623 to provide
    that cable programming service tier rates would no longer be subject
    to regulation after March 31, 1999.[^9] Consequently, although the
    Commission has continued to address remaining complaints concerning
    earlier rates, CPST rates no longer are regulated.[^10] In this
    proceeding we seek comment on rule changes that may be necessary or
    desirable in order to account for changes in the regulatory process
    resulting from the cessation of federal CPST rate regulation. In
    addition, we intend to refresh the record in or terminate other
    pending proceedings relating to the rate regulation process. We
    intend in this proceeding to focus on mechanical and procedural
    changes to the existing rules and forms that may be useful in order
    to make the existing basic tier and equipment rate rules more
    effective in the absence of CPS tier rate regulation. In addition,
    however, we solicit comment on the possibility of broader conceptual
    changes to the theory and mechanisms of basic tier and equipment
    rate regulation that might logically follow from the changed scope
    of regulation and intervening developments subsequent to the
    adoption of the initial rules.

4.  The rate rules, when adopted, were primarily based on a benchmark
    and price cap approach to setting rates for regulated cable service.
    Under the benchmark approach, existing rates for cable service were
    compared to a benchmark that reflected the rates charged by cable
    systems subject to effective competition with the same number of
    subscribers and channels. Initial regulated rates were based on the
    higher of either the benchmark adjusted for changes in external
    costs through March 31, 1994, or the operator's rates in effect on
    September 30, 1992, reduced by the general differential between
    competitive and non-competitive systems and adjusted for certain
    intervening changes in inflation, external costs, and the number of
    regulated channels.[^11] Forms and associated instructions were
    adopted for computing the benchmark comparisons and rate reductions
    and for unbundling equipment and installation costs from programming
    rates.[^12] Once initial rates were determined, rates were governed
    on a going-forward basis by a price cap mechanism. The price cap
    permitted periodic adjustments for inflation, changes in the number
    of regulated channels, and changes in external costs generally
    beyond the operator's control, including programming costs, costs of
    franchise requirements, state and local taxes on cable service, and
    franchise fees. The rates determined by the competitive differential
    were expected to allow cable operators to cover their costs and
    obtain a reasonable profit, and operators could adjust those rates
    in the future for changes in external costs.[^13] The Commission
    provided a cost-of-service option as a safety valve for cable
    operators unable to cover costs after applying the competitive
    differential through the benchmarking process. [^14]

5.  Although BST rates were subject to prior approval by local
    authorities and CPST rates were subject to adjustment and refunds on
    complaint to the Commission, the Commission carried out its
    substantive rate rule responsibilities by developing a common set of
    "tier-neutral" benchmarks and regulations so that the same
    methodology was to be used to set rates for the basic service tier
    and for cable programming service tiers.[^15] The tier-neutral
    approach was designed to ensure that the rate regulations themselves
    did not create an incentive to place services in any particular
    rate-regulated tier. Cable system operators were thus able to
    determine whether to market a "fat basic" service with a large
    number of channels on the basic tier and a smaller optional CPS tier
    or, in the alternative, a "thin" lower cost basic tier with a larger
    optional CPS tier or tiers. The Commission subsequently created
    limited rate incentives for operators to add new programming
    services to the CPST or to single tier systems, but otherwise
    retained the tier-neutral approach to rate setting and required that
    the movement of channels between tiers of regulated services be
    revenue neutral.[^16]

# ISSUES FOR COMMENT

6.  The primary focus of this proceeding is intended to be on
    improvements within this existing regulatory structure. Although the
    elimination of CPST rate regulation with the associated concept of a
    tier neutral regulatory process changes one of the predicates for
    the rules, this structure has come to be understood by both
    operators and local governments involved in the rate regulation
    process. There would be considerable regulatory cost involved in
    changing to an entirely new basic tier rate setting process. Thus,
    we intend to concentrate here on making improvements in the existing
    process rather than creating a new one. However, as discussed below,
    comments suggesting broader changes are also being solicited.

7.  In this notice, we address deletion of rules pertaining to CPST
    rates, changes in the BST channel count, headend upgrades, digital
    broadcast television rate issues**,** determining the initial
    regulated rate when a system first comes under rate regulation, rate
    structure flexibility, rates for commercial subscribers, small
    system issues, the cost-of-service process, FCC Form 1235 issues,
    equipment and inside wiring rate regulation, other equipment rate
    issues, effective competition showings, and procedures for
    Commission review of local rate decisions. We additionally seek
    comment on recalibrating the competitive differential between rates
    of systems subjected to effective competition and noncompetitive
    systems and question whether there may be a different approach to
    establishing reasonable rates for the BST.

## Deletion or modification of the rules that address CPS tier rates

8.  The initial task in this proceeding is to separate out and eliminate
    all of those rules that pertain solely to the regulation of CPST
    rates, which are no longer relevant. Although this appears to be
    largely a ministerial task, we seek comment on what rules should be
    changed or eliminated. Are there, for example, linkages between the
    BST and CPST rules or forms that might not readily be recognized and
    that would need to be accounted for? Regardless of the rule changes
    made in this proceeding, the existing rules would continue to apply
    to all pending CPST matters.

9.  We propose to delete the following rule sections or paragraphs:
    76.901(d); 76.922(c)(4); 76.924(e)(1)(ii); 76.924(e)(2)(ii);
    76.934(c)(2); 76.934(d); 76.934(h)(3)(iii); 76.934(h)(6);
    76.934(h)(10); 76.950; 76.951; 76.953; 76.954; 76.955; 76.956;
    76.957; 76.960; 76.961; 76.962; 76.963(b); 76.980(b), (d)-(f);
    76.985 (FCC Form 329 and Instructions); 76.986; 76.987; 76.1402;
    76.1605; and 76.1606. Other rules continue to be applicable to BST
    rate making but should be updated or amended to eliminate references
    to CPST or to reflect the end of CPST rate regulation. These rule
    sections or paragraphs are: 76.922(a); 76.922(b)(5); 76.922(b)(7);
    76.922(e)(2)(iii)(C); 76.922(f)(4); 76.922(f)(8); 76.922(g);
    76.922(i)(1), (2); 76.922(k); 76.924(a); 76.924(e)(1)(iii);
    76.933(e); 76.933(g)(5); 76.934(c)(3); 76.934(e); 76.934(f);
    76.934(g)(1); 76.934(g)(2) (retaining the last sentence);
    76.934(h)(2)(ii)(A); 76.934(h)(4)(i), (v); 76.934(h)(8)(ii);
    76.963(a); 76.990(a); 76.990(b)(3); 76.1800. We seek comment on
    these proposed changes and on whether the sunset of CPST rate
    regulation should be reflected by changes to other rules.

10. Other rules should be eliminated as obsolete. These rule sections or
    paragraphs are: 76.922(b)(6)(ii); 76.922(e)(3)(ii); 76.922(e)(4);
    and 76.934(h)(8)(ii)(last sentence). We seek comment on these
    changes and on whether additional rules have become obsolete and
    should be removed.

11. We also propose to modify or eliminate the rate forms and rate form
    instructions consistent with changes made to our rules in this
    proceeding. The forms used for rate regulation are FCC Forms 1200,
    1205, 1210, 1220, 1230, 1235, and 1240.[^17] We seek comment on
    changes needed to rate forms and instructions to reflect the end of
    CPST rate regulation. The Commission's rules contain references to
    FCC Forms 1215 and 1225.[^18] The Commission advised the Office of
    Management and Budget that it would no longer support use of these
    forms, and dropped these forms from its information collection
    budget effective April 30, 1997. Absent a showing of need for
    reinstatement of these forms, we propose to eliminate references to
    these forms from the rules.[^19]

## Rate adjustments when channels are added to or deleted from the BST

### Calculating rate adjustments

12. We next address issues that arise when channels are added to or
    deleted from a tier or moved from one tier to another.[^20] When the
    Commission first addressed adding and deleting channels from
    regulated tiers of service in March 1994, it allowed operators to
    adjust the "residual" component of the tier charge by a specified
    per channel adjustment set forth in a \"mark-up\" table in the
    rules.[^21] The "residual" was the tier charge less external costs
    and could be roughly analogized to the costs of providing and
    maintaining the network and offering the service. The amount of the
    adjustment varied with the number of regulated channels on the
    system as a whole, decreasing as the number of channels increased
    and increasing as the number of channels decreased.[^22] This
    adjustment was intended to incorporate the efficiencies and
    economies of scale reflected in the benchmark rates. The Commission
    additionally allowed operators to recover their external costs and
    to mark-up new programming expenses by 7.5%. Operators were required
    to reduce rates for decreases in programming expenses plus an
    additional 7.5%.[^23]

13. In November 1994, when the Commission revisited the rate adjustment
    rule for changes in the number of regulated channels in the *Going
    Forward Order*, it retained the mark-up table and 7.5% mark-up on
    programming costs for channels added to the BST in section
    76.922(g)(2),[^24] and provided an optional alternative channel
    adjustment methodology, the \"caps\" methodology in section
    76.922(g)(3), [^25] for channels added to the CPST or to systems
    with only a single programming tier. This caps methodology was
    available through 1997 as an incentive for operators to add channels
    to their CPST. Under this methodology a fixed increase per channel
    (generally \$0.20 plus an additional limited amount to reflect
    license fees) could be added for a limited number of channels.

14. At that time, the Commission also specified how operators should
    adjust rates when deleting channels or moving channels between
    regulated tiers.[^26] Operators dropping a channel were to reflect
    the net reduction in external costs in the tier rate and also to
    reduce the tier rate by the residual associated with the
    channel.[^27] When shifting a channel between regulated tiers,
    operators were to shift the residual and programming cost associated
    with the channel. The residual was to be shifted on a revenue
    neutral basis by taking into account the different numbers of
    subscribers on the tiers involved. Operators substituting channels
    on a tier did not take a per channel adjustment but were required to
    reflect net changes in external costs in their rates. These
    provisions were codified in section 76.922(g)(4)-(6) of the
    Commission\'s rules. [^28]

15. Section 76.922(g)(8) provides that \"\[p\]aragraph (g) of this
    section shall cease to be effective on January 1, 1998 unless
    renewed by the Commission.\"[^29] The intent of this sunset language
    has been the subject of some debate. Cable operators have questioned
    whether the Commission meant to preclude use of the mark-up table in
    paragraph (g)(2) when adding new channels to the system or preclude
    adjusting a tier\'s residual when deleting channels or moving
    channels between tiers pursuant to paragraphs (g)(4) and (g)(5),
    respectively. If paragraph (g)(8) is read to encompass all of
    paragraph (g), rather than only those provisions in paragraph (g)
    relating to incentives for adding channels, rates would be adjusted
    when channels are added to or deleted from the BST only for changes
    in external costs, including the 7.5% mark-up for programming costs
    associated with the affected channels, as provided by section
    76.922(f).[^30] However, FCC Forms 1210 and 1240,[^31] the forms for
    calculating rate adjustments using the quarterly or annual rate
    adjustments methodologies, respectively, were not changed and
    continued in use. Section 76.922(h) provides that "\[p\]ermitted
    charges for a tier shall be determined in accordance with forms and
    associated instructions established by the Commission."[^32]

16. In reviewing complaints about rates for CPST services provided
    through March 31, 1999, the end of CPST rate regulation, the
    Commission has accepted operators\' rate calculations on Commission
    rate forms that included residual adjustments for channel deletions
    and channel movements between tiers of service subject to
    regulation, because subscribers benefited from the reduction in
    rates when the residual associated with a deleted channel was
    removed from the rates, and moving the residual with a shifted
    channel was revenue neutral to the operator and had little, if any,
    impact on the combined rate for all regulated tiers. The Commission
    has also issued stays of local rate orders that disallowed
    comparable BST rate adjustments for channels shifted to the BST
    before March 31, 1999.[^33] Commission staff have been advised
    informally that operator and franchising authority practices with
    respect to channel deletions and channel movements have varied
    considerably both before and after March 31, 1999. Some operators
    have deleted or moved channels from the BST using the rate form to
    calculate adjustments to the tier residual as well as to external
    costs; others have adjusted rates only for the external costs
    associated with the deleted or moved channel. Some franchising
    authorities have accepted residual adjustments for channel deletions
    or channel movements from BST to CPST but may not have allowed
    residual adjustments for channels moved from the CPST to the BST or
    added to the BST. In some franchise areas, inconsistent approaches
    may have been used from year to year.

17. The policy objective in terms of channel additions or deletions was
    to provide the system operator with an appropriate return of its
    investment in the underlying facilities and programming services and
    to make sure that system subscribers were only paying for the
    services they received. The rules also sought to reflect the fact
    that the unit cost of a channel declines as the total channel
    capacity of a system increases. In an environment in which both BST
    and CPST rates were subject to regulation, the policy objective
    underlying the rules relating to channel shifts between tiers was
    simply to make the immediate consequences of any move of channels
    between tiers revenue neutral to the system operator. That is, the
    rules were designed to avoid a situation where the process created
    an incentive to move channels between tiers.

18. To address the applicability of our policy objectives in light of
    the sunset of CPST rate regulation, we seek comment on the following
    possibilities as to how the rules should be revised or interpreted.
    One possibility would be to continue to adjust BST rates for changes
    in the number of BST channels by adding or subtracting the specific
    "external" costs associated with the channel additions and deletions
    and the associated 7.5% mark-up adjustment provided in section
    76.922(f). Our concern is that applying this methodology to channels
    deleted or moved from the BST, without further adjustments, will
    have only a minimal impact on the BST rate. When a large number of
    BST channels are removed from the tier, subscribers could receive a
    substantial reduction in BST service without an equally substantial
    reduction in the BST rate.

19. Another possible approach on which we seek comment would be to
    adjust rates further for changes in the number of channels by adding
    or subtracting the "per-channel adjustment factor" from the table in
    section 76.922(g)(2) of the rules,[^34] but identifying the specific
    amount of adjustment not by reference to the number of "regulated
    channels" but by reference to the current number of channels that
    would be subject to regulation if CPST rate regulation had not
    ended. Continuing to use the per-channel adjustment factors from the
    chart would not be appropriate without this change because the chart
    was derived from a study based on data from both BST and CPST
    channels combined and the chart reflects the declining price of
    channels as total channel capacity increases. The chart also does
    not take into consideration any diversion of spectrum from analog
    programming tiers to digital services. The chart is based on the
    economies of scale reflected in the benchmark rates that formed the
    basis for the Commission's first rule for adjusting capped rates for
    the addition, deletion, or movement of channels. We are concerned
    that this approach, like the external cost approach, will have only
    a minimal impact on BST rates when channels are deleted.

20. Alternatively, we seek comment on whether rate adjustments for
    changes in the number of channels on the BST should include some
    other adjustment to the tier residual and whether the type of
    adjustment should depend on whether channels are added to or deleted
    from the BST. Paragraph (g) provided that cable systems could add
    channels to the BST by adjusting for external cost changes,
    including the 7.5% markup, and using the chart in paragraph (g)(2)
    to reflect the incremental change to the total tier residual from
    the added channel or channels, but were to adjust rates for dropped
    channels based on the pro rata share of the tier residual for the
    dropped channel or channels in addition to external cost and markup
    adjustments. Cable systems dropping channels that had been added
    using the "caps" incentives would adjust rates based on the actual
    per channel adjustment taken when the channel was added to the
    tier.[^35] Should this approach be reinstated or should something
    similar be adopted? Alternatively, if some adjustment to the
    residual is appropriate when channels are added to the BST, should
    an adjustment be made other than a per-channel adjustment like that
    in the paragraph (g)(2) chart? If some other residual adjustment is
    appropriate, how should that adjustment be determined?

21. We also seek comment as to whether the movement of channels to the
    BST from previously regulated programming tiers is relevant in
    determining the BST rate adjustments associated with those channels.
    Paragraph (g) provided that systems moving channels between
    regulated tiers would move the external costs and residual value
    with the channel on a revenue neutral basis. Systems moving
    previously unregulated channels, such as premium channels, would not
    move any residual value to the BST. Channels added to the CPST
    pursuant to the caps incentives could not be moved to the BST. In
    light of the end of CPST rate regulation, can a residual for CPST
    channels be computed when a channel is moved to the BST without
    inflating the BST rate or relying on old records? We are concerned
    that computing the residual for a now unregulated CPST channel as a
    pro rata share of the CPST tier rate would permit a system operator
    to retain an unregulated revenue stream for any CPST channel moved
    to the BST, which is contrary to the underlying statutory premise
    that controls over basic tier rates remain desirable. It would also
    be inconsistent with the treatment of other unregulated channels
    that are moved to the BST.

22. Should we, instead, establish new BST per-channel values through new
    benchmarks based on an updated comparison of BST rates charged by
    competitive and non-competitive systems? If we do so, should we look
    only at cable system rates, or should we also consider the rates of
    alternative providers, such as DBS? Could a simple formula be
    developed? Should the operator's base rate be recalibrated using new
    benchmarks or should new per-channel values be applied only to
    channels added to and deleted from the BST after this rulemaking? Or
    should we consider adjusting tier rates for changes in the number of
    channels based on rates at competitive systems with comparable
    market and channel characteristics? How would comparability be
    evaluated? We also seek comment on whether we should allow channels
    added to the CPST pursuant to the caps methodology to be moved to
    the BST.

###  "Single Tier" Systems

23. The Commission's rules currently provide that cable operators using
    the annual rate adjustment methodology may make an additional rate
    adjustment to reflect channel additions if the operator offers only
    a BST and does not offer a CPS tier.[^36] Should this option be
    retained for "single tier" systems? In determining whether a cable
    operator offers a single tier or multiple tiers of service, should
    digital service tiers be considered?

## Headend upgrades

24. We plan to modify section 76.922(g)(7) to reflect the sunset of the
    opportunity for single tier small systems to make headend upgrade
    adjustments. Paragraph (g)(7) was added to our rules as an incentive
    for adding channels to the CPST and to single tier systems
    through 1997. Small systems could recover the additional headend
    costs incurred for adding up to seven new channels and could
    continue to depreciate these costs for the useful life of the
    equipment. By its own terms, the incentive in paragraph (g)(7)
    expired, and we see no need to reinstate it. Operators who
    previously adjusted rates pursuant to paragraph (g)(7), however, may
    continue to recover undepreciated costs for the useful life of the
    equipment as provided by that rule and calculated on FCC Form 1210
    Module B or FCC Form 1240 Worksheet 6.

## Digital broadcast television rate adjustment issues

25. The Commission in its *DTV Must Carry First Report and Order*
    discussed issues associated with the carriage of a broadcaster's
    digital television signal on cable systems.[^37] This *Report and
    Order* also amended section 76.922 of the Commission's rules to
    allow recovery of headend equipment costs necessary for the carriage
    of DTV signals as an external cost in paragraph 76.922(f)(1)(vii)
    and also allowed cable operators to recover costs of improvements
    necessary for carriage of digital signals through the network
    upgrade surcharge pursuant to paragraph (j)(1).[^38] So that
    operators cannot recover more than once for the same cost, we
    propose to clarify that operators may use either method for
    adjusting rates, but not both, and we seek comment on this proposal.

26. In the *Further Notice of Proposed Rulemaking* accompanying the *DTV
    Must Carry First Report and Order*, the Commission proposed to
    permit BST rate adjustments separate from the upgrade surcharge
    adjustment addressed above to reflect the addition of channels of
    digital broadcast programming to the BST.[^39] Specifically, the
    Commission proposed to allow cable operators adding digital
    broadcast signals to their channel line-ups to increase rates for
    each 6 MHz of capacity devoted to such carriage and solicited
    comment on the proper adjustment methodology. The Commission was
    concerned that cable operators have sufficient incentives to add
    digital television signals, particularly during the transition from
    analog to digital service, that subscribers should bear a fair share
    of the costs of providing service on the tier carrying digital
    signals relative to the system's overall capacity, and that
    subscriber rates be reasonable. In light of the broader questions
    being posed in this proceeding, we ask commenters to update the
    record with comments in this proceeding regarding rate adjustments
    for carrying digital broadcast services on a rate regulated BST.

## Initial regulated rates

27. We also seek comment on how initial rate levels should be determined
    for systems first becoming subject to regulation. Under the current
    rules, the initial regulated rate, if the system was in operation in
    1992, would be calculated using rate and subscribership data from
    1992 and 1994 and external cost data from 1994 and adjusted to a
    current permissible rate level using the price caps methodology. As
    time passes, however, it becomes increasingly likely that the data
    necessary for this calculation will be unavailable and that the
    competitive differential computed from 1992 rate data is not
    reflective of the competitive differential today. Should we consider
    alternatives to this process? One option would be to eliminate
    franchising authority review of the operator's entire rate structure
    and, instead, limit review to the operator's most recent rate
    increase or its next rate increase after the franchising authority
    becomes certified to regulate rates. With respect to CPST rates, the
    Commission determined after rate regulation had been in effect for
    about two years that an operator's entire rate structure should not
    be subject to regulatory review when a complaint was filed.[^40] It
    found that its previous policy of reviewing the entire CPST rate
    structure at that point created an uncertain business environment
    for affected cable operators and could discourage the investment
    necessary for upgrading networks and adding new services. We seek
    comment as to whether similar concerns are applicable to BST rate
    regulation and whether this approach is consistent with the
    statutory directive in section 623(b)(1) that regulations be
    designed to protect subscribers from BST rates that exceed rates
    that would be charged if the system were subject to effective
    competition. Another option for finding a current permissible rate
    would be to impute a rate from another regulated system with as
    nearly comparable characteristics as possible. We seek comment on
    this option, including how comparability should be evaluated and how
    disputes should be resolved under this option. If the system had
    been found to have been subject to effective competition in the
    past, another option would be to use the last "competitive" rate as
    the starting point for regulation with the price caps methodology
    followed thereafter. We also seek comment as to whether there are
    other ways to determine initial regulated rates when unregulated
    systems are brought under rate regulation. If the approach in the
    current rules is no longer required, is there any reason to retain
    the methods for determining the permitted rate for a tier on May 15,
    1994, as set forth paragraph 76.922(b) of the Commission's rules and
    referred to in the last five sentences of paragraph
    76.922(d)(2)?[^41] Can other rules or paragraphs also be eliminated
    if the current approach is no longer required?

28. If the Commission were to retain the current approach to
    establishing initial regulated rates, can the Commission continue to
    use the current Form 1200? Form 1200 applies the competitive
    differential to the operator's total revenues from sources that were
    subject to regulation when the form was developed, including the
    CPST. We seek comment as to whether the end of CPST rate regulation
    requires any revision to Form 1200 when that form is used as the
    first step in determining the current maximum permitted BST rate.

## Rate structures and uniform regional rates 

29. We have explored in the past in Dockets 95-174 and 96-157 techniques
    of permitting greater rate structure flexibility. In the first of
    these proceedings some rule changes were adopted to facilitate
    operators having rates that could be uniform on a regional
    basis.[^42] In the second of these proceedings, comment was sought
    on techniques allowing operators, on a revenue neutral basis, to
    adjust basic and CPST prices on a more flexible basis when both
    tiers were subject to rate regulation.[^43] This second proceeding
    appears to have been by-passed by the sunset of CPST tier rate
    regulation. We seek comment on whether this is correct and updated
    comments on whether there are other changes in the rules that might
    be useful in order to create greater flexibility in rate structures
    or more uniform regional rates while continuing to maintain rules
    designed to keep BST rates reasonable.

## Rates for commercial subscribers

30. In its *Fifth Notice of Proposed Rulemaking* in MM Docket No.
    92-266, the Commission sought comment on issues relating to the
    establishment of commercial rates.[^44] Although comments were
    received in response to this *Notice,* the issues raised remain
    unresolved. The earlier *Notice* and the comments received in
    response to it generally explored three basic questions. First, to
    what extent was section 623 of the Communications Act intended to
    apply to commercial rates? Section 623(a)(2)(A) provides that rates
    charged by an operator for basic service "shall be subject to
    regulation."[^45] Second, how should commercial rates be defined in
    the cable context? And third, because commercial subscribers may
    have greater access to competitive sources of supply, are market
    forces sufficient to ensure that rates are reasonable in the absence
    of direct regulation? We invite interested parties to update the
    record on these or related issues regarding commercial rates.

## Small system issues

31. The Commission has previously addressed rate regulation issues that
    are specific to operators of small systems.[^46] As the competitive
    landscape changes, we continue to believe that it is important to
    recognize the unique challenges facing small operators of small
    systems and to make sure that the regulation process does not impede
    the ability of these systems to raise capital and position
    themselves to respond to the challenges resulting from competition.
    Smaller multiple system operators have been described as holding
    "small-town, rural properties that lack the heft to be upgraded
    efficiently and, hence, have been ravaged by DirecTV and
    EchoStar."[^47]

32. Recognizing the continuing difficulties faced by operators of
    smaller systems, we seek comment on any changes in the rate rules
    that might address the problems associated with the simultaneous
    growth in competition and need for additional investment to upgrade
    facilities. We seek comment as to whether changes proposed in this
    notice of proposed rulemaking, such as elimination of consideration
    of the CPST from our rules and rate forms, will have an untoward
    effect on small systems. We also seek comment on whether the
    presumptively reasonable per channel rate in section 76.934(h)(5) of
    our rules should be reexamined if CPST channels, expenses, and rate
    base are no longer included on FCC Form 1230.[^48]

33. The Commission has asked for comment about the process for setting
    initial regulated rates *supra* in section II.E. Section
    76.922(b)(5) of the Commission's rules allows small systems owned by
    small cable companies to use streamlined rate reductions for setting
    initial regulated rates.[^49] We seek comment on whether small
    systems have need for streamlined rate reductions in light of the
    availability of small system rate relief in section 76.934 of the
    Commission's rules, including the small system cost-of-service
    methodology in section 76.934(h) and FCC Form 1230.

## Cost-of-service rate process

34. Another rate issue concerns the alternative "cost-of-service" rate
    setting process. This is a very information and labor intensive
    mechanism for establishing rates. It was adopted as a safety valve
    mechanism to take care of particularly high cost systems that might
    not receive a constitutionally adequate rate of return under the
    benchmark system. The Commission adopted interim cost rules to
    permit operators to recover operating expenses and a fair return on
    investment for regulated services, while protecting subscribers from
    unreasonable rates,[^50] and finalized the rules with adjustments in
    the *Final Cost Order*.[^51] The Commission addressed issues
    concerning the rate base, including used and useful plant,
    intangible assets, start-up losses, and tangible assets. It also
    addressed issues concerning a presumptive rate of return,
    depreciation, taxes, cost allocation, accounting requirements,
    affiliate transactions, and hardship relief. At the same time, it
    issued a further notice of proposed rulemaking to explore an
    optional alternative to the presumptive unitary rate of return for
    cost of service filings. This further notice as well as petitions
    for reconsideration of the *Final Cost Order* remain pending.[^52]

35. With the demise of CPST regulation, it seems possible that the
    cost-of-service process is no longer needed as an alternative for
    BST regulation. We seek comment on this question as well as what
    further actions should be taken in the pending "COS" docket in light
    of the end of CPST rate regulation. We also seek comment on any
    impact these questions regarding cost-of-service rules for BST rates
    will have on determinations of equipment and installation rates
    pursuant to section 76.923 of the Commission's rules and FCC Form
    1205,[^53] and on determinations of rate increases for network
    upgrade surcharges pursuant to section 76.922(j) of our rules and
    FCC Form 1235.[^54] Both incorporate cost-of-service components and
    section 76.924 cost allocation categories.[^55]

## Abbreviated cost-of-service showing on FCC Form 1235 

36. We seek comment about the abbreviated cost-of-service showing
    permitted for significant network upgrades. This streamlined
    approach allows cable operators to recover network upgrade costs
    through a surcharge on regulated rates without having to develop and
    examine all the costs associated with their systems. Before the end
    of CPST rate regulation, operators allocated the upgrade costs to
    the BST, the CPST, and other services, usually based on the system
    channel capacity devoted to each service,[^56] but could elect to
    recover all the costs associated with regulated services through a
    surcharge only on the CPST.[^57] We seek comment as to whether the
    abbreviated cost-of-service option continues to meet a need. When
    the option was adopted, a substantial portion of the services
    offered over a cable system were subject to rate regulation. The
    Commission was concerned that benchmark/price cap rates might not
    provide sufficient revenue to attract capital for upgrades in some
    cases and that the cost-of-service alternative was unduly
    burdensome. In light of the breadth of unregulated services that can
    now be delivered over cable systems, including CPST, we seek comment
    on whether we should continue to allow operators to file abbreviated
    cost-of-service showings. Even if the option is eliminated for most
    cable systems, should the option continue to be available for
    systems that meet the definition of "small system" under the
    Commission's rules?

37. If we retain the abbreviated cost-of-service option for the BST, we
    propose to modify the form used for determining the maximum
    permitted network upgrade surcharge, FCC Form 1235, to remove the
    requirement that cost assignments to the CPST and a CPST revenue
    requirement be shown. With the end of CPST rate regulation, there is
    no need for separately showing CPST information. We also propose to
    modify FCC Form 1235 so that rate base recoveries will be limited to
    an operator\'s average upgrade investment over the life of the
    upgrade rather than its total investment over the life of the
    upgrade. Although the rate form currently permits operators to earn
    a rate of return on their total upgrade investment throughout the
    life of the upgrade, operators are also allowed to recover
    depreciation expenses annually. As a result, operators have been
    able to continue recovering a rate of return on investment that has
    already been recovered through depreciation. We seek comment on
    these proposals and also on whether other adjustments to the
    abbreviated cost-of-service showing are needed.

## Rates of interest 

38. Operators using the annual rate adjustment methodology calculated on
    FCC Form 1240 must correct for over- and underestimations of
    projected costs, with interest at 11.25%. We seek comment as to
    whether we should revise the rate of interest in section
    76.922(e)(3)(i) and the instructions for Form 1240, Module H, Lines
    H4 and H8, and what an appropriate rate of interest should be.[^58]
    Should it be fixed in the rules and rate form calculation or tied to
    some kind of indicator? If the latter, what should the indicator be?
    If the rate of interest in section 76.922(e)(3)(i) is revised,
    should that revised rate of interest be used for the interest on
    franchise fee refunds owed by the franchising authority to the cable
    operator pursuant to section 76.942(f)?[^59] The interest rate
    currently specified in section 76.942(f) is 11.25%.

39. Section 76.942(e) currently provides that refunds for subscriber
    rate overcharges shall be "computed at applicable rates published by
    the Internal Revenue Service for tax refunds and additional tax
    payments."[^60] Should the rule specify which rate should be used or
    whether the higher (or lower) of the two rates is to be used?

## Unbundling 

40. Operators setting initial regulated rates were required to unbundle
    equipment costs from programming rates. In the *Third
    Reconsideration*, the Commission expressed concern about evasions of
    rate regulation, such as charging for services previously provided
    without extra charge unless the value of that service, as reflected
    in new charges, "was removed from the base rate number when
    calculating the reduction in rates necessary to establish reasonable
    \[programming service\] rates."[^61] Questions have been raised
    about the continued applicability or the appropriate response to
    this Commission concern. We request comment on this matter.

## Refunds

41. Section 76.942 of the Commission's rules addresses refunds of
    previously paid rates in excess of maximum permitted rates.[^62] We
    seek comment on whether and, if so, how this rule should be updated.

## Re-evaluation of the BST rate regulation process

### Recalibration of the "competitive differential"

42. The foregoing discussion has addressed adjustments to our rate rules
    based on the assumption that the benchmark/price cap process we have
    adopted should continue. We seek comment as to whether a more
    fundamental change to our rate regulations should be enacted, for
    example, by recalibrating the "competitive differential" between
    monopoly systems (those subject to regulation) and competitive
    systems (those not subject to regulation because of the presence of
    effective competition) focusing specifically on basic tier service.
    The initial process of attempting to calculate the competitive
    differential was based on 1992 data for a relatively small sample of
    competitive systems and did not focus on basic tier service separate
    from CPST service. Would there now be significant value in
    attempting to recalibrate the whole process through a new rate
    comparison? Would it be possible to find appropriate samples, and
    how should the resulting differential be used in the resulting rate
    setting process? Should we consider data from all four types of
    systems reflected in the statutory effective competition test or
    focus on particular types of systems?[^63] Should we take upgrades
    into account as a separate factor? This task could conceivably be
    accomplished (although with some considerable effort) by expanding
    the annual price survey process.[^64]

### Other approaches to BST rate regulation

43. We also seek comment as to whether there is another method for
    regulating BST rates that will ensure reasonable rates for basic
    service through a simplified regulatory process.[^65] For any
    alternatives proposed, commenters should discuss how the alternative
    would be implemented. Commenters should also address the regulatory
    costs to cable operators and franchising authorities from
    implementing a proposed alternative, and how the Commission would
    review the reasonableness of a franchising authority's rate action.
    If an alternative is adopted, should it replace the traditional
    approach to rate regulation or be available as an alternative to
    traditional rate regulation?

## Equipment and inside wiring rate regulation

44. Associated with basic service tier rate regulation is the regulation
    of certain charges for equipment that is used with the provision of
    basic service. There are three matters here on which we seek
    comment. The first relates to the definition of the type of
    equipment that is subject to regulation; the second, to whether it
    is possible, or may become possible in the future, to rely on market
    forces to ensure that the rates involved are kept at a reasonable
    level; the third, to the showing on the rate form.

45. With respect to the first point, there is some tension in the
    Communications Act as to what equipment is subject to regulation by
    local authorities along with basic tier service. The Act, including
    in particular sections 623(b)(3) and 623(l)(2), seems to suggest
    that some equipment might be specifically associated with the basic
    tier[^66] and some with the CPST or with other unregulated service
    offerings.[^67] The Act, however, did not make clear specifically
    how to connect a particular type of equipment with a particular
    service tier. As a practical matter, because there is a statutory
    requirement that all subscribers receive basic tier service,
    virtually all equipment used for the receipt of video service has
    been regarded as associated with the basic tier of service.[^68] The
    definitional tension involved was acknowledged when the Commission
    adopted its initial rules.[^69] At that time, however, the
    Commission felt obliged to give an "expansive reading"[^70] to the
    basic tier definition even though it resulted in virtually no
    equipment coming within the CPST tier equipment definition. The
    Commission suggested at the time that this was a matter requiring
    further review.[^71]

46. Since that time there have been two changes that warrant a new a
    look at this issue. First, there has been the introduction of tiers
    of digital video service that involve the use of a digital set-top
    box, the functions and cost of which are largely associated with
    non-basic service offerings. And second, section 629 of the
    Communications Act was adopted as part of the Telecommunications Act
    of 1996.[^72] This provision, entitled "Competitive Availability of
    Navigation Devices," is intended to create a competitive market for
    equipment used to access cable and other MVPD services.

47. In light of these changes, we seek comment on whether the
    categorization of equipment should be reconsidered. In particular,
    would it be appropriate to associate digital equipment or other
    equipment that involves investments very largely used to receive
    CPST or other unregulated services with the non-regulated tiers for
    rate regulation purposes? If it is appropriate, should this
    association be discretionary or mandatory for the cable operator?

48. Alternatively, we seek comment on whether a process should be
    established so that when a competitive market for equipment or
    wiring can be demonstrated to exist, governmental rate setting
    should cease and the presence of competitive alternatives allowed to
    ensure that the rates in question meet the statutory "actual cost"
    standard.[^73] We seek comment on whether this would be consistent
    with existing precedent.[^74] We also seek comment on whether other
    changes in the equipment rate regulation rules might be used to
    assist in the creation of a more competitive market for equipment in
    a manner consistent with section 629. Operators might, it has been
    suggested, avoid regulation of a type of equipment by certifying
    that a particular type of equipment is available for sale or lease
    from third party sources and that subscribers have been advised of
    that fact.[^75] In this regard we note that the equipment rate
    regulation process may interfere with the development of such a
    market.[^76] Would or should substitution of marketplace regulation
    for direct regulation of equipment rates affect the regulation of
    rates for installing or maintaining the affected equipment and
    charges for customer-initiated changes in equipment?[^77]

49. We also seek comment on whether FCC Form 1205 can be simplified in
    any way to ease the burden of regulation on both cable operators and
    franchising authorities. The Communications Act provides that cable
    operators can aggregate costs into broad categories and at the level
    of the operator's choice,[^78] subject to the requirement that
    Commission regulations include standards to establish equipment and
    installation rates on the basis of actual cost.[^79] FCC Form 1205,
    designed to implement these requirements, calculates rates on a
    cost-of-service basis and must be filed annually.[^80] Once an
    operator has established equipment rates based on its costs, is
    there a less burdensome way to adjust equipment or installation
    rates that would be consistent with the statutory standard? Can any
    information used in setting rates be standardized based on
    industry-wide information? If so, how would that process work?

## Recovery of lost revenues for equipment and installation due to subsequently reversed rate orders 

50. A cable operator\'s permitted rates for equipment and installation
    are computed on FCC Form 1205 and submitted for franchising
    authority review in advance of the intended implementation date. If
    a franchising authority disallows any or all of the proposed rate
    increase and the local rate order is reversed on appeal to the
    Commission, the cable operator may be unable to recoup revenues lost
    or refunds paid pursuant to the erroneous rate order. This creates
    an incentive for the operator to disregard the rate order or seek a
    stay of the rate order from the Commission. To address this problem,
    should we allow cable operators to recover the amount of revenues
    lost or excess refunds paid due to local rate orders subsequently
    reversed by the Commission through an entry on Form 1205, perhaps as
    an "other" expense on Form 1205, Schedule B? Our concern is that,
    when franchising authorities unreasonably limit rates, they deny
    operators the cost recovery determined to be permissible under the
    Commission\'s rules and rate forms and contemplated by section
    623(b)(3). We do not propose to allow operators voluntarily setting
    rates below the permitted rate to recover the shortfall. We seek
    comment on this proposal.

## Charges for changes in service tiers

51. Charges for changes in service tiers initiated by the subscriber
    have been limited to actual costs by section 76.980 of the
    Commission's rules.[^81] We seek comment on the effect of the end of
    CPST rate regulation on regulation of rates for service tier
    changes.

## Effective competition showings

52. Another area where it has been informally suggested that our rate
    regulation process might be improved relates to the procedures used
    to demonstrate the presence of effective competition. Pursuant to
    section 623, rate regulation in a community ends when effective
    competition is present.[^82] In the absence of a demonstration to
    the contrary, cable systems are presumed not to be subject to
    effective competition.[^83] The cable operator bears the burden of
    rebutting the presumption that such effective competition does not
    exist and so must provide evidence sufficient to demonstrate that
    effective competition is present in the franchise area.[^84]

53. The Commission's *Eighth Competition Report* states that DBS
    penetration now exceeds 20% of television households in 30 states
    and 30% in five states.[^85] The growth and development in DBS
    services has suggested to some that the effective competition
    determination process should be expedited, for example, by altering
    the burden of proof in areas of high DBS penetration so that
    community-by-community decisions might not always be needed. Thus,
    we seek comment on whether there are techniques consistent with the
    Communications Act to improve and expedite effective competition
    showings and review as competition, particularly from satellite
    service, becomes more prevalent.

## Procedures for Commission review of local rate decisions

54. Finally, we seek comment on whether there are procedural aspects of
    the Commission's review of local rate decisions that might be
    improved. In particular, should the deference already given to these
    local rate decisions be increased so that the Commission would
    intervene only when there were significant deviations from the
    established rules?

# ORDER: INTERIM RATE ADJUSTMENTS FOR bst CHANNEL CHANGES

55. In light of the confusion created by section 76.922(g)(8) of the
    Commission's rules and the intent expressed in the *Going Forward
    Order* that there be some mechanism for dealing with channel changes
    if the incentives in paragraph (g) were not renewed,[^86] we clarify
    how channel changes should be handled pending action on this notice
    of proposed rulemaking. We base this clarification on the provisions
    in paragraph (g) and Forms 1210 and 1240 for the BST, which are
    understood by cable operators and franchising authorities. We also
    take into consideration the sunset of CPST rate regulation.
    Franchising authorities reviewing rates should accept rate
    adjustments for channels added to the BST using the per channel
    adjustment factor in section 76.922(g)(2), based on the number of
    channels that would have been subject to regulation if CPST rate
    regulation had not ended. Franchising authorities should also accept
    and may require rate adjustments for channel deletions and
    substitutions consistent with section 76.922(g)(4) and (g)(6),
    respectively.[^87] The calculations should be done using FCC Forms
    1210 and 1240. We will review appeals of local rate orders
    consistent with this approach. In reviewing appeals of local rate
    orders concerning rate adjustments for the movement of channels
    between tiers of regulated service, we will find reasonable orders
    that are consistent with section 76.922(g)(5) and the Commission\'s
    rate forms for BST channels and also for CPST channels moved on or
    before March 31, 1999, the sunset of CPST rate regulation, provided
    that the rate adjustments are computed from CPST rates that were
    subject to rate regulation.[^88] The provisions in section
    76.922(f), (g) of the Commission\'s rules concerning external costs,
    including the permitted 7.5% mark-up on programming cost increases,
    continue to apply. This clarification is consistent with Commission
    rate forms, which have remained in effect since their adoption, and
    with the Commission's handling of rate complaints and stays of local
    rate appeals. Without this clarification, subscribers may experience
    a decrease or change in BST service without a corresponding
    adjustment to their rates. The clarification with respect to the
    movement of channels between tiers maintains the balance between
    regulated revenue sources, which has been a consistent part of our
    rate regulations, for the period that the CPST was subject to rate
    regulation. Because of our concern about determining the CPST
    residual from unregulated rates, we will not find franchising
    authority orders unreasonable for disallowing the movement of
    residual for channels moved from the CPST to the BST after the
    sunset of CPST rate regulation. However, franchising authorities
    that have accepted a residual movement from the CPST to the BST
    either in orders or by inaction within the period for reviewing a
    Form 1240 should not change that determination in the true-up
    process. Our intent with these interim guidelines is to create some
    stability in the rate-making process pending resolution of this
    proceeding, not to overturn rate adjustments previously accepted
    based on a good faith interpretation of our rules and rate forms.

# ADMINISTRATIVE MATTERS

## Initial Regulatory Flexibility Analysis 

56. As required by the Regulatory Flexibility Act of 1980, as amended
    ("RFA"),[^89] the Commission has prepared this present Initial
    Regulatory Flexibility Analysis ("IRFA") of the possible significant
    economic impact on a substantial number of small entities by the
    policies and rules proposed in this Notice of Proposed Rulemaking
    ("NPRM"). Written public comments are requested on this IRFA.
    Comments must be identified as responses to the IRFA and must be
    filed by the deadlines for comments provided in paragraph 77 of the
    item. The Commission will send a copy of the NPRM, including this
    IRFA, to the Chief Counsel for Advocacy of the Small Business
    Administration ("SBA").[^90] In addition, the NPRM and IRFA (or
    summaries thereof) will be published in the Federal Register.[^91]

### Need for, and Objectives of, the Proposed Rules

57. The Commission developed rules and forms for the regulation of cable
    television rates when both the basic service tier ("BST") and the
    cable programming service tiers ("CPST") were subject to rate
    regulation. The Commission proposes to update these regulations and
    rate forms. Updating is needed so that the rules and rate forms will
    reflect the end of CPST rate regulation pursuant to the
    Telecommunications Act of 1996.[^92] Updating is also needed because
    the Commission's rule for adjusting rates for changes in the number
    of channels on the BST has sunset, and cable operators and
    franchising authorities need guidance about how to adjust rates when
    the number of BST channels changes.[^93] Updating would be needed
    for rules and rate forms available specifically to small cable
    systems owned by small cable operators as well as for rules and rate
    forms used by large systems.

58. The Commission also proposes changes in the regulation of both BST
    and equipment rates with the objective of improving the existing
    regulatory structure for all cable systems. For small cable systems
    owned by small cable operators, the Commission proposes to consider
    rule changes with the additional objectives of: (1) ensuring that
    the regulatory process does not impede the ability of small systems
    to raise capital and respond to competitive challenges, and (2)
    avoiding an untoward effect on small systems from other changes
    being considered for the rate rules generally. As discussed in
    paragraph 67, the Commission also proposes to discontinue the
    streamlined rate reduction ratemaking method that may no longer be
    useful for small systems in order to eliminate unneeded
    requirements.

59. For cable systems in general, including small cable systems, the
    Commission proposes changes to its rules and rate forms with the
    objectives of: resolving whether the rates charged to commercial
    subscribers are regulated rates;[^94] eliminating some of the
    regulatory burdens associated with equipment and inside wiring
    rates;[^95] and reducing the regulatory burden associated with
    showings that a cable system is no longer subject to rate
    regulation.[^96] The Commission also proposes changes that would
    streamline the setting of initial regulated rates for previously
    unregulated systems. [^97] This streamlining would be available to
    small systems not choosing to use one of the special small system
    ratemaking options.[^98]

60. In addition, the Commission proposes broader changes to the
    regulatory process with the objective of ensuring reasonable BST
    rates through a simplified regulatory process. Change could be
    accomplished by recalibrating the competitive differential that
    forms the basis for determining regulated rates or by another
    alternative proposed by commenters.[^99]

### Legal Basis 

61. The authority for the action proposed in this rulemaking is
    contained in sections 1, 2(a), 3, 4(i), 4(j), 303(r), 601(3), 602,
    and 623 of the Communications Act of 1934, as amended, 47 U.S.C. §§
    151, 152(a), 153, 154(i), 154(j), 303(r), 521, 522, and 543.

### Description and Estimate of the Number of Small Entities to Which the Proposed Rules Will Apply

62. The RFA directs agencies to provide a description of, and where
    feasible, an estimate of the number of small entities that may be
    affected by the proposed rules, if adopted.[^100] The RFA generally
    defines the term "small entity" as having the same meaning as the
    terms "small business," "small organization," and "small
    governmental jurisdiction."[^101] In addition, the term "small
    business" has the same meaning as the term "small business concern"
    under the Small Business Act.[^102] A "small business concern" is
    one which: (1) is independently owned and operated; (2) is not
    dominant in its field of operation; and (3) satisfies any additional
    criteria established by the SBA.[^103]

63. The SBA has developed a small business size standard for cable and
    other program distribution, which includes all such companies
    generating \$11 million or less in revenue annually.[^104] This
    category includes, among others, cable operators, closed circuit
    television services, direct broadcast satellite services, multipoint
    distribution services, open video systems, satellite master antenna
    television systems, and subscription television services. According
    to the Census Bureau data from 1992, there were 1,788 total cable
    and other pay television services and 1,423 had less than \$11
    million in revenue.[^105] We address cable operators below to
    provide a more precise estimate of the affected small entities. We
    do not believe that the other pay television services would be
    affected by the proposals in this notice of proposed rulemaking.

64. *Cable Systems*. The Commission has developed its own small business
    size standard for a small cable operator for the purposes of rate
    regulation. Under the Commission\'s rules, a \"small cable company\"
    is one serving fewer than 400,000 subscribers nationwide.[^106]
    Based on our most recent information, we estimate that there were
    1,439 cable operators that qualified as small cable companies at the
    end of 1995.[^107] Since then, some of those companies may have
    grown to serve over 400,000 subscribers, and others may have been
    involved in transactions that caused them to be combined with other
    cable operators. Consequently, we estimate that there are fewer than
    1,439 small cable companies that may be affected by the proposed
    rules. A "small system" under the Commission's rules, is one serving
    "15,000 or fewer subscribers. The service area of a small system
    shall be determined by the number of subscribers that are served by
    the system's principal headend, including any other headends or
    microwave receive sites that are technically integrated to the
    principal headend."[^108]

65. The Communications Act of 1934, as amended, also contains a size
    standard for a "small cable operator," which is \"a cable operator
    that, directly or through an affiliate, serves in the aggregate
    fewer than one percent of all subscribers in the United States and
    is not affiliated with any entity or entities whose gross annual
    revenues in the aggregate exceed \$250,000,000.\"[^109] The
    Commission has determined that there are 67,700,000 subscribers in
    the United States.[^110] Therefore, an operator serving fewer than
    677,000 subscribers shall be deemed a small operator, if its annual
    revenues, when combined with the total annual revenues of all of its
    affiliates, do not exceed \$250 million in the aggregate.[^111]
    Based on available data, we estimate that the number of cable
    operators serving 677,000 subscribers or less totals approximately
    1,450.[^112] We do not request or collect information on whether
    cable operators are affiliated with entities whose gross annual
    revenues exceed \$250,000,000,[^113] and therefore are unable to
    estimate accurately the number of cable system operators that would
    qualify as small cable operators under the definition in the
    Communications Act.

### Description of Projected Reporting, Recordkeeping and Other Compliance Requirements for Small Entities

66. Cable operators whose basic service tier rates are regulated must
    justify their basic service tier and associated equipment and
    installation rates using Commission rate forms.[^114] When changes
    to the rate rules are determined, rate forms will be modified
    accordingly. Elimination of information regarding the CPST is
    anticipated, because CPST is no longer subject to rate regulation.
    One of the affected forms would be FCC Form 1230 used for small
    system cost-of-service showings.[^115] Entities using FCC Form 1230
    have previously aggregated data for CPST and BST. If CPST data is no
    longer included, they would bear the burden of excluding CPST data
    from the data included on the rate form. In addition, the
    presumptively reasonable rate in section 76.934(h) of the
    Commission's rules may change to reflect the elimination of CPST
    data from the relevant data on FCC Form 1230.[^116] No other
    increase in the regulatory burden on small systems is expected to
    result from this proceeding.

67. The Commission's rules currently offer regulatory options to small
    systems owned by small cable operators that are less burdensome than
    the regulations applicable to larger cable systems and operators.
    One is the small system cost-of-service option discussed above in
    paragraph 66. Another option, the streamlined rate reduction for
    systems first becoming subject to rate regulation,[^117] could be
    eliminated pursuant to proposals in the NPRM.[^118] Easing the
    regulatory burden of establishing initial regulated rates as
    proposed in the NPRM would provide a reason for finding this option
    unnecessary,[^119] and FCC Form 1230 described in paragraph 66 will
    continue to be available. Two more small system options, certifying
    with the franchising authority's consent that rates comply with the
    Commission's rate rules and entering into an alternative rate
    regulation agreement with the franchising authority,[^120] would not
    be affected by this proceeding.

### Steps Taken to Minimize Significant Impact on Small Entities and Significant Alternatives Considered

68. The RFA requires an agency to describe any significant, specifically
    small business, alternatives that it has considered in reaching its
    proposed approach, which may include the following four alternatives
    (among others): "(1) the establishment of differing compliance or
    reporting requirements or timetables that take into account the
    resources available to small entities; (2) the clarification,
    consolidation, or simplification of compliance and reporting
    requirements under the rule for such small entities; (3) the use of
    performance rather than design standards; and (4) an exemption from
    coverage of the rule, or any part thereof, for such small
    entities."[^121]

69. As noted in paragraphs 57, 58, and 59, the Commission will consider
    potential revisions to cable television rate regulations in order to
    conform the rules to the sunset of CPST rate regulation and to
    improve the existing regulatory structure. Alternatively, the
    Commission will consider broader changes, as noted in paragraph
    60.[^122]

70. The Commission's rules currently give small systems owned by small
    cable companies options for establishing their regulated BST rates
    that are less burdensome than the ratemaking methods used by large
    entities.[^123] The Commission will consider amending the rule
    addressing one of the options, small system cost of service
    showings, to reflect the end of CPST rate regulation, and making
    conforming changes to its FCC Form 1230, which is used for
    establishing permitted rates on small systems.[^124] Except at noted
    in paragraph 66, these changes should not increase the regulatory
    burden small systems face as a result of rate regulation, but
    eliminating CPST-associated costs and expenses from the rate base
    could have an impact on the resulting BST per channel rate. We do
    not have a basis for determining what that impact will be. An
    alternative is to consider changes in the rate rules that might
    address continuing difficulties faced by operators of small systems,
    such as the problems associated with the simultaneous growth in
    competition and the need for additional investment to upgrade
    facilities.[^125]

71. Small systems owned by small cable companies can choose to adjust
    their regulated rates using the price cap methodology included in
    the Commission's rules.[^126] The rule governing changes in the
    number of channels has sunset and is under review in the NPRM.[^127]
    The approach ultimately adopted in this proceeding could require
    revisions to the Commission's rate forms.[^128] While we do not
    anticipate that rule changes will result in an increase in the
    burden of computing rate adjustments on rate forms, the approach
    adopted in the rulemaking proceeding could affect the maximum
    permitted rate computed on the rate forms, particularly for systems
    moving a large number of channels from or to the BST. The Commission
    does not have a basis for determining what that impact will be. A
    corollary issue is the appropriate adjustment to rates for adding or
    removing digital television broadcast signals from the BST.[^129]

72. The Commission also has under consideration a less burdensome way to
    set initial regulated rates than currently provided in the rules
    when a previously unregulated system first becomes subject to rate
    regulation.[^130] Options include limiting the period addressed in
    the rate review and looking to the rates of comparable systems.
    These changes would apply to large systems, but any changes made by
    the Commission would be available to small systems. Small systems
    owned by small cable companies currently have ratemaking options
    available that are less burdensome than the ratemaking process for
    other systems. These are the FCC Form 1230 option, the certification
    option available with the consent of the franchising authority, and
    the negotiated rate option, which are described in paragraph
    67.[^131] These options would continue to be available to small
    systems. The Commission will consider whether there is a continued
    need for the streamlined rate reduction method that is available
    only to small systems setting initial regulated rates.[^132]

73. With respect to equipment rates, the Commission has three matters
    under consideration: the definition of equipment that is subject to
    regulation; whether reliance can be placed on competitive forces to
    ensure reasonable rates; and the rate form used primarily by large
    cable companies.[^133] Because small cable systems owned by small
    cable companies have the option of using the small cable cost of
    service ratemaking methodology on FCC Form 1230, the regulatory
    burden of equipment rate regulation is currently less than that
    experienced by large cable systems. The regulatory approaches
    addressed in the NPRM with respect to equipment look toward easing
    the regulatory burden on cable operators generally and, if adopted,
    should not result in increased burdens on small cable systems.

74. Finally, the Commission is considering the showing needed to
    establish effective competition.[^134] Only cable systems that are
    not subject to effective competition are subject to rate regulation
    by franchising authorities. Small systems would benefit from any
    efficiencies in demonstrating effective competition.

### Federal Rules Which Duplicate, Overlap, or Conflict with the Commission's Proposed Rules

75. None.

## Initial Paperwork Reduction Act of 1995 Analysis 

76. This NPRM contains a modified information collection. The
    Commission, as part of its continuing effort to reduce paperwork
    burdens, invites the general public and the Office of Management and
    Budget ("OMB") to take this opportunity to comment on the
    information collections contained in this NPRM, as required by the
    Paperwork Reduction Act of 1995, Public Law 104-13. Public and
    agency comments are due at the same time as other comments on this
    NPRM; OMB notification of action is due 60 days from date of
    publication of this NPRM in the Federal Register. Comments should
    address: (a) whether the proposed collection of information is
    necessary for the proper performance of the functions of the
    Commission, including whether the information shall have practical
    utility; (b) the accuracy of the Commission\'s burden estimates; (c)
    ways to enhance the quality, utility, and clarity of the information
    collected; and (d) ways to minimize the burden of the collection of
    information on the respondents, including the use of automated
    collection techniques or other forms of information technology.

## Procedural Provisions

77. *Comments and Reply Comments.* Pursuant to Sections 1.415 and 1.419
    of the Commission\'s rules, 47 C.F.R. §§ 1.415, 1.419, interested
    parties may file comments on or before 60 days after publication in
    the *Federal Register*, and reply comments on or before 90 days
    after publication in the *Federal Register*. Comments may be filed
    using the Commission\'s Electronic Comment Filing System (ECFS) or
    by filing paper copies. *See Electronic Filing of Documents in
    Rulemaking Proceedings*, 63 Fed. Reg. 24121 (1998).

78. Comments filed through the ECFS can be sent as an electronic file
    via the Internet to \<http://www.fcc.gov/e-file/ecfs.html\>.
    Generally, only one copy of an electronic submission must be filed.
    Although multiple docket numbers appear in the caption of this
    proceeding, commenters should transmit one electronic copy of the
    comments only to MB Docket No. 02-144, Revisions to Cable Television
    Rate Regulations. In completing the transmittal screen, commenters
    should include their full name, U.S. Postal Service mailing address,
    and the applicable docket or rulemaking number. Parties may also
    submit an electronic comment by Internet e-mail. To get filing
    instructions for e-mail comments, commenters should send an e-mail
    to ecfs@fcc.gov, and should include the following words in the body
    of the message, \"get form \<your e-mail address\>.\" A sample form
    and directions will be sent in reply. Parties who choose to file by
    paper must file an original and four copies of each filing. Although
    more than one docket number appears in the caption of this
    proceeding, commenters should submit copies only to MB Docket No.
    02-144, Revisions to Cable Television Rate Regulations. Filings can
    be sent by hand or messenger delivery, by commercial overnight
    courier, or by first-class or overnight U.S. Postal Service mail
    (although we continue to experience delays in receiving U.S. Postal
    Service mail). The Commission\'s contractor, Vistronix, Inc., will
    receive hand-delivered or messenger-delivered paper filings for the
    Commission\'s Secretary at 236 Massachusetts Avenue, N.E., Suite
    110, Washington, D.C. 20002. The filing hours at this location are
    8:00 a.m. to 7:00 p.m. All hand deliveries must be held together
    with rubber bands or fasteners. Any envelopes must be disposed of
    before entering the building. Commercial overnight mail (other than
    U.S. Postal Service Express Mail and Priority Mail) must be sent to
    9300 East Hampton Drive, Capitol Heights, MD 20743. U.S. Postal
    Service first-class mail, Express Mail, and Priority Mail should be
    addressed to 445 12th Street, SW, Washington, D.C. 20554. All
    filings must be addressed to the Commission\'s Secretary, Marlene H.
    Dortch, Office of the Secretary, Federal Communications Commission.
    One copy of each filing also must be filed with Qualex
    International, Portals II, 445 12^th^ Street, SW, Room CY-B402,
    Washington, DC, 20554. In addition, parties must also send four (4)
    copies of each paper filing to Wanda Hardy, Media Bureau, 445 12^th^
    Street, SW, Room3-A862, Washington, DC 20554. Parties filing
    electronically must send one electronic copy via e-mail to
    whardy@fcc.gov.

79. The full text of this document is available for public inspection
    and copying during regular business hours at the FCC Reference
    Information Center, Portals II, 445 12^th^ Street, SW, Room CY-A257,
    Washington, DC 20554. This document may also be purchased from the
    Commission's duplicating contractor, Qualex International, Portals
    II, 445 12^th^ Street, SW, Room CY-B402, Washington, DC 20554,
    telephone 202-863-2893, facsimile 202-863-2898, or via e-mail
    qualexint@aol.com.

80. Comments and reply comments will be available for public inspection
    and copying during regular business hours in the FCC Reference
    Information Center, 445 12th Street, SW, CY-A257, Washington,
    DC 20554. Persons with disabilities who need assistance in the FCC
    Reference Center may contact Bill Cline at (202) 418-0270, (202)
    418-7365 TTY, or bcline@fcc.gov. Comments and reply comments also
    will be available electronically at the Commission's Disabilities
    Issues Task Force web site: www.fcc.gov/dtf, and also from the
    Commission's Electronic Comment Filing System. Comments and reply
    comments are available electronically in ASCII text, Word 97, and
    Adobe Acrobat. Copies of filings in this proceeding may also be
    purchased from Qualex International, Portals II, 445 12^th^ Street,
    SW, Room, CY-B402, Washington, DC, 20554, telephone (202) 863-2893,
    facsimile (202) 863-2898, or via email qualexint@aol.com.

81. This document is available in alternative formats (computer
    diskette, large print, audio cassette, and Braille). Persons who
    need documents in such formats may contact Brian Millin at (202)
    418-7426, TTY (202) 418-7365, or send an email to access@fcc.gov.

82. The media contact for this proceeding is Margo Domon Davenport
    at (202) 418- 2949. The Media Bureau contacts for this proceeding
    are John Norton at (202) 418-7037 or jnorton@fcc.gov, or Wanda Hardy
    at (202) 418-2129 or whardy@fcc.gov, or TTY at (202) 418-7365
    or (888) 835-5322.

83. *Ex Parte Rules.* This proceeding will be treated as a
    "permit-but-disclose" proceeding, subject to the
    "permit-but-disclose" requirements under section 1.1206(b) of the
    Commission's rules.[^135] Ex parte presentations are permissible if
    disclosed in accordance with Commission rules, except during the
    Sunshine Agenda period when presentations, ex parte or otherwise,
    are generally prohibited. Persons making oral ex parte presentations
    are reminded that a memorandum summarizing a presentation must
    contain a summary of the substance and not merely a listing of the
    subjects discussed. More than a one or two sentence description of
    the views and arguments presented is generally required.[^136]
    Additional rules pertaining to oral and written presentations are
    set forth in section 1.1206(b) of the Commission's rules. Finally,
    one copy of each disclosure filing also must be filed with other
    offices, as follows: (1) Qualex International, Portals II, 445
    12^th^ Street, SW, Room CY-B402, Washington, DC, 20554; (2) John
    Norton, Media Bureau, 445 12^th^ Street, SW, Room 4-C764,
    Washington, DC, 20554; (3)Wanda Hardy, Media Bureau, 445 12^th^
    Street, SW, Room 3-A862, Washington, DC, 20554.

# ORDERING CLAUSES

84. Accordingly, IT IS ORDERED that, pursuant to the authority contained
    in sections 1, 2(a), 3, 4(i), 4(j), 303(r), 601(3), 602, and 623 of
    the Communications Act of 1934, as amended, 47 U.S.C. §§ 151,
    152(a), 153, 154(i), 154(j), 303(r), 521, 522, 543, the Notice of
    Proposed Rulemaking IS ADOPTED.

85. IT IS FURTHER ORDERED that the clarification about how channel
    changes should be handled pending action on this Notice of Proposed
    Rulemaking, as described *supra* in section III, paragraph 55, IS
    ADOPTED.

86. IT IS FURTHER ORDERED that the Commission's Consumer and
    Governmental Affairs Bureau, Reference Information Center, shall
    send a copy of this Notice, including the Initial Regulatory
    Flexibility Analysis, to the Chief Counsel for Advocacy of the Small
    Business Administration.

> FEDERAL COMMUNICATIONS COMMISSION
>
> Marlene H. Dortch
>
> Secretary

[^1]: 47 U.S.C. § 543.

[^2]: Pub. L. No. 102-385, 106 Stat. 1460 (1992).

[^3]: The basic service tier includes, at a minimum, the broadcast
    signals distributed by the cable operator (except superstations),
    along with any public, educational, or government access channels
    required by the local franchising authority. 47 U.S.C. § 543(b)(7);
    47 C.F.R. § 76.901(a).

[^4]: Local franchising authorities have jurisdiction to regulate the
    cable operator's rates for the installation and lease of equipment
    used by subscribers to receive the basic service tier. 47 U.S.C. §
    543(a)(2)(A), (b)(1), (b)(3)(A). The Commission has interpreted the
    scope of this authority to include all equipment in a subscriber's
    home, provided and maintained by the cable operator, that is used to
    receive the basic service tier, regardless of whether such equipment
    is additionally used for other services. 47 C.F.R. § 76.923(a)(1).
    The covered equipment includes converter boxes, remote control
    units, and inside wiring.

[^5]: The CPST is any video programming provided over a cable system,
    including installation or rental of equipment used for the receipt
    of such video programming, other than video programming carried on
    the basic tier or offered on a per channel or per program basis. 47
    U.S.C. § 543(l)(2); 47 C.F.R. § 76.901(b).

[^6]: Effective competition is established in the franchise area if: (1)
    fewer than 30 percent of the households subscribe to the operator's
    service ("low penetration test"); (2) the cable operator and a
    competing provider each offer comparable video programming to at
    least 50% of the households and at least 15 percent of the
    households take service from multichannel video programming
    distributors ("MVPD") other than the largest one ("competing
    provider test"); (3) the franchising authority offers video
    programming as an MVPD to at least 50 percent of the households
    ("municipal provider test"); or (4) a local exchange carrier ("LEC")
    or an MVPD using LEC facilities offers comparable video programming
    directly to subscribers ("LEC test"). 47 U.S.C. § 543(l)(1); 47
    C.F.R. § 76.905(b).

[^7]: 47 U.S.C. § 543(b)(1).

[^8]: *See Implementation of Sections of the Cable Television Consumer
    Protection and Competition Act of 1992: Rate Regulation*, MM Docket
    No. 92-266, Report and Order and Further Notice of Proposed
    Rulemaking ("*Rate Order*"), 8 FCC Rcd 5631 (1993) (adopted
    regulatory structure); First Order on Reconsideration, Second Report
    and Order, and Third Notice of Proposed Rulemaking ("*First
    Reconsideration*"), 9 FCC Rcd. 1164 (1993) (affirmed benchmark/price
    cap approach to regulation, actual cost standard for leased
    equipment used for BST, procedural and jurisdictional issues
    including BST definition; determined that low penetration and
    municipal systems belonged in benchmark analysis); Third Report and
    Order, 8 FCC Rcd 8444 (1993) (required same ratemaking method for
    initial rates for all regulated tiers); Second Order on
    Reconsideration, Fourth Report and Order, and Fifth Notice of
    Proposed Rulemaking "(*Second Reconsideration*"), 9 FCC Rcd 4119
    (1994) (recalculated the competitive differential, adjusted the
    price cap computation, provided administrative relief for small
    systems; adopted new "going forward" methodology based on a
    per-channel adjustment factor for capped rates); *Implementation of
    Sections of the Cable Television Consumer Protection and Competition
    Act of 1992: Rate Regulation,* MM Docket No. 92-266, *Buy-Through
    Prohibition*, MM Docket No. 92-262, Third Order on Reconsideration
    ("*Third Reconsideration*"), 9 FCC Rcd 4316 (1994) (addressed
    competition issues, tier buy-through prohibition, procedural and
    jurisdictional issues, generally applicable provisions, and
    equipment and installation issues); MM Docket No. 92-266, Fourth
    Order on Reconsideration, 9 FCC Rcd 5795 (1994) (permitted franchise
    fee and FCC regulatory fee pass-through without prior approval); MM
    Docket Nos. 93-215, 93-266 \[*sic*\], Fifth Order on Reconsideration
    and Further Notice of Proposed Rulemaking ("*Fifth
    Reconsideration*"), 9 FCC Rcd 5327 (1994) (administrative relief for
    small cable systems); MM Docket Nos. 92-266, 93-215, Sixth Order on
    Reconsideration, Fifth Report and Order, and Seventh Notice of
    Proposed Rulemaking (\"*Going Forward Order*\"), 10 FCC Rcd 1226
    (1994) (revised rate adjustments for adding, deleting, or
    substituting channels); MM Docket No. 92-266, Seventh Order on
    Reconsideration ("*Seventh Reconsideration*"), 10 FCC Rcd 3225
    (1995) (expanded use of small system headend upgrade incentive); MM
    Docket Nos. 92-266, 93-215, Eighth Order on Reconsideration
    ("*Eighth Reconsideration*"), 10 FCC Rcd 5179 (1995) (alternative
    rate adjustment agreements for small systems); MM Docket No. 92-266,
    Ninth Order on Reconsideration ("*Ninth Reconsideration*"), 10 FCC
    Rcd 5198 (1995) (inflation adjustments for systems receiving
    transition rate relief); MM Docket No. 92-266, Tenth Order on
    Reconsideration ("*Tenth Reconsideration*"), 10 FCC Rcd 6870 (1995)
    (reduced rate form reporting burden for transition systems); MM
    Docket Nos. 92-266, 93-215, Sixth Report and Order and Eleventh
    Order on Reconsideration ("*Small System Order*"), 10 FCC Rcd 7393
    (1995) (defined small system and small cable companies; adopted
    simplified small system cost of service formula); MM Docket Nos.
    92-266, 93-215, Twelfth Order on Reconsideration, 11 FCC Rcd 785
    (1995) (eliminated home shopping offset); MM Docket No. 92-266,
    Thirteenth Order on Reconsideration ("*Thirteenth
    Reconsideration*"), 11 FCC Rcd 388 (1996) (adopted annual rate
    adjustment methodology); *Implementation of Sections of the Cable
    Television Consumer Protection and Competition Act of 1992: Rate
    Regulation*, MM Docket 92-266, *Cable Pricing Flexibility*, CS
    Docket 96-157, Memorandum Opinion and Order and Notice of Proposed
    Rulemaking, 11 FCC Rcd 9517 (1996) (required consistent ratemaking
    methodology for all regulated tiers; proposing cable pricing
    flexibility); MM Docket No. 92-266, 11 FCC Rcd 20206 (1996) (adopted
    rule changes per *Time Warner Entertainment Co. v. FCC*, 56 F.3d 151
    (D.C. Cir. 1995)); MM Docket No. 92-266, Report and Order, 12 FCC
    Rcd 3445 (1997) (adopted low-price systems final rules); MM Docket
    Nos. 92-266, 93-215, Fourteenth Order on Reconsideration
    ("*Fourteenth Reconsideration*"), 12 FCC Rcd 15554 (1997) (denied
    reconsideration of *Small System Order*).

    *See also* *Implementation of Sections of the Cable Television
    Consumer Protection and Competition Act of 1992: Rate Regulation and
    Adoption of a Uniform Accounting System for Provision of Regulated
    Cable Service*, MM Docket No. 93-215, CS Docket No. 94-28, Report
    and Order and Further Notice of Proposed Rulemaking ("*Cost
    Order*"), 9 FCC Rcd 4527 (1994) (interim cost rules); Second Report
    and Order, First Order on Reconsideration, and Further Notice of
    Proposed Rulemaking ("*Final Cost Order*"), 11 FCC Rcd 2220 (1996)
    (final cost rules); *Implementation of Sections of the Cable
    Television Consumer Protection and Competition Act of 1992 \-- Rate
    Regulation*, CS Docket No. 95-174, Report and Order, 12 FCC Rcd 3425
    (1997) (uniform rate methodology across multiple franchise areas).

[^9]: Telecommunications Act of 1996, Pub. L. No. 104-104 § 301(b)(1),
    110 Stat. 115 (1996) (codified as 47 U.S.C. § 543(c)(4)) (subsection
    (c) "shall no longer apply to cable programming services offered
    after March 31, 1999").

[^10]: 47 C.F.R. § 76.950(b).

[^11]: *Second Reconsideration*, 9 FCC Rcd at 4166-68 ¶¶ 105 -110
    *reconsidering Rate Order*, 8 FCC Rcd at 5770-74 ¶¶ 213-222. The
    competitive differential was initially found to be 10% but, on
    reconsideration, was found to be 17% with various other adjustments
    in the rules. *Rate Order* at 5644 ¶ 14, 6146 (Appendix E); *Second
    Reconsideration* at 4166 ¶ 105. Initially comparisons were based on
    per channel rates. *See* FCC Form 393, Determination of Maximum
    Initial Permitted Rates for Regulated Cable Programming Services and
    Equipment (Aug. 1993). On reconsideration, comparisons were based on
    per subscriber per tier revenues from regulated sources. *See* FCC
    Form 1200, Setting Maximum Initial Permitted Rates for Regulated
    Cable Services Pursuant to Rules Adopted February 22, 1994,
    "First-Time Filers Form" (May 1994).

[^12]: FCC 393 was replaced by FCC Form 1200.

[^13]: The Commission reasoned that its ratemaking approach was
    reasonable because a cable operator without market power would need
    to charge rates that would cover, for example, "the direct costs . .
    . of obtaining, transmitting, and otherwise providing signals," and
    "'the capital and operating costs of the cable system,'" which were
    among the factors specified in Communications Act § 623(b)(2)(C),
    (c)(2), 47 U.S.C. § 543(b)(2)(C), (c)(2). *Second Reconsideration*,
    9 FCC Rcd at 4197 ¶ 163.

[^14]: *Second Reconsideration,* 9 FCC Rcd at 4196 ¶ 162.

[^15]: *Rate Order*, 8 FCC Rcd at 5746, 5759-60, 5881-82, ¶¶ 171, 197,
    396; *reconsideration denied on this issue*, *First
    Reconsideration*, 9 FCC Rcd at 1182-85 ¶¶ 31-36.

[^16]: The Commission permitted operators to add new services to the
    CPST or to systems with only a single programming tier at a special
    capped rate not otherwise available for channels added to the BST.
    *See* 47 C.F.R. § 76.922(g)((3); *Going Forward Order*, 10 FCC Rcd
    at 1248-55 ¶¶ 64-82. Channels added under this capped rate could not
    be moved from the CPST to the BST. 47 C.F.R. § 76.922(g)(5). Other
    channels could be moved between tiers on a revenue neutral basis.
    Small systems owned by small cable companies could additionally
    increase rates to recover the actual cost up to a specified amount
    of headend equipment needed to add up to seven channels to CPSTs and
    single tier systems. *Going Forward Order* at 1258-59 ¶¶ 91-94; 47
    C.F.R. § 76.922(g)(7).

[^17]: The Commission's rules also refer to FCC Form 1211. This form is
    not in use and references will be deleted from the Commission's
    rules. *See* 47 C.F.R. §§ 76.922, 76.934.

[^18]: FCC Form 1215, Instructions for FCC Form 1215: A La Carte Channel
    Offerings (May 1994); FCC Form 1225, Cost of Service Filing for
    Regulated Cable Services for Small Systems (Apr. 1994).

[^19]: *See* 47 C.F.R. §§ 76.922(b)(6), 76.934(g).

[^20]: Section 623(b)(7)(B) contains the following specific reference to
    rate increases associated with the addition of channels to the basic
    tier: "A cable operator may add additional video programming signals
    or services to the basic service tier. Any such additional signals
    or services provided on the basic service tier shall be provided to
    subscribers at rates determined under the regulations prescribed by
    the Commission under this subsection." 47 U.S.C. § 543(b)(7)(B).

[^21]: *Second Reconsideration*, 9 FCC Rcd at 4243-44 ¶¶ 247-48; *see*
    47 C.F.R. § 76.922(e) (1994).

[^22]: *Id*. at 4239-45 ¶¶ 242-49.

[^23]: *Id.* at 4242-43 ¶ 246. The amount was set below what the
    Commission determined to be a reasonable rate of return on
    investment in plant for regulated services, but above a minimal
    level. The Commission stated its intention to monitor the amount and
    revise it later if appropriate. *Id.* n.345.

[^24]: 47 C.F.R. § 76.922(g)(2); *see Going Forward Order*, 10 FCC Rcd
    at 1248-49 ¶ 65.

[^25]: 47 C.F.R. § 76.922(g)(3); *see* *Going Forward Order* at 1248-55
    ¶¶ 64-83.

[^26]: *See Going Forward Order* at 1256-57 ¶¶ 84-86.

[^27]: For channels other than those added by the "caps" method,
    operators would divide the tier residual by the number of channels
    on the tier. Neither "caps" channels nor any "caps" adjustments
    would be included in the channel count or tier residual when
    computing the per-channel residual. 47 C.F.R. § 76.922(g)(4). The
    residual for a "caps" channel was the "caps" adjustment associated
    with that channel. Rates would be adjusted for a deleted "caps"
    channel based on that channel's "caps" residual.

[^28]: 47 C.F.R. § 76.922(g)(4)-(6).

[^29]: 47 C.F.R. § 76.922(g)(8).

[^30]: 47 C.F.R. § 76.922(f).

[^31]: FCC Form 1210, Updating Maximum Permitted Rates for Regulated
    Cable Services (May 1995); FCC Form 1240, Updating Maximum Permitted
    Rates for Regulated Cable Services (July 1996).

[^32]: 47 C.F.R. § 76.922(h).

[^33]: *See TCI TKR of Georgia, Inc.*, 15 FCC Rcd 4451 (CSB 2000)
    (Moultrie, GA); *TCI Cablevision of Dallas, Inc.*, 14 FCC Rcd 9252
    (CSB 1999) (Farmers Branch, TX).

[^34]: This is consistent with the approach taken in the Fourth Report
    and Order. *Second Reconsideration*, 9 FCC Rcd at 4243-45.

[^35]: Although the caps incentive was primarily for CTST, single tier
    systems were able to take advantage of the caps incentive when
    adding new channels. *See* 47 C.F.R. § 76.922(g)(3).

[^36]: 47 C.F.R. § 76. 922(e)(2)(iii)(C).

[^37]: *Carriage of Digital Television Broadcast Signals,* CS Docket No.
    98-120, First Report and Order and Further Notice of Proposed
    Rulemaking ("*DTV Must Carry First Report and Order*"), 16 FCC Rcd
    2598 (2001).

[^38]: *Id*. at 2646-47 ¶¶ 109-110; 47 C.F.R. § 76.922(f)(1)(vii),
    (j)(1).

[^39]: *DTV Must Carry Report and Order* at 2656-57 ¶¶ 133-134.

[^40]: *Thirteenth Reconsideration*, 11 FCC Rcd at 450-52 ¶¶ 161-64.

[^41]: 47 C.F.R. § 76.922(b), (d)(2). The methods include the full
    reduction rate, the March 31, 1994, benchmark rate, transition
    rates, low-price systems, and streamlined rate reductions.

[^42]: *Implementation of Sections of the Cable Television Consumer
    Protection and Competition Act of 1992 \-- Rate Regulation, Uniform
    Rate Setting Methodology*, CS Docket No. 95-174*,* Notice of
    Proposed Rulemaking, 11 FCC Rcd 3791 (1995); Report and Order, 12
    FCC Rcd 3425 (1997); 47 C.F.R. § 76.922(n).

[^43]: *Implementation of Sections of the Cable Television Consumer
    Protection and Competition Act of 1992, Rate Regulation,* MM Docket
    No. 92-266, *Cable Pricing Flexibility*, CS Docket No. 96-157,
    Memorandum Opinion and Order and Notice of Proposed Rulemaking, 11
    FCC 2d 9517 (1996) (docket remains open).

[^44]: *Second Reconsideration*, 9 FCC Rcd at 4248-49 ¶ 257.

[^45]: 47 U.S.C. § 543(a)(2)(A).

[^46]: *See* *Rate Order*, 8 FCC Rcd at 5921-24 ¶¶ 462-65 (franchising
    authorities could accept rate certifications; rate formula reflected
    substantive relief); *Second Reconsideration*, 9 FCC Rcd at 4220-29
    ¶¶ 206-21 (streamlined rate reduction for initial regulated rates;
    equipment averaging); *Fifth Reconsideration*, 9 FCC Rcd 5327
    (administrative relief); *Going Forward Order*, 10 FCC Rcd at
    1258-59 ¶¶ 87-94 (small system headend upgrade incentive); *Seventh
    Reconsideration*, 10 FCC Rcd 3225 (small system headend upgrade
    incentive allowed in addition to other rate-setting methodologies);
    *Eighth Reconsideration,* 10 FCC Rcd 5179 (alternative rate
    regulation agreements between small systems and franchising
    authorities); *Ninth Reconsideration*, 10 FCC Rcd 5198 (inflation
    adjustments for small systems receiving transition rate relief);
    *Tenth Reconsideration*, 10 FCC Rcd 6870 (reduced reporting burden
    for small systems with transition rates); *Small System Order*, 10
    FCC Rcd 7393 (defined small system and small cable companies;
    adopted simplified small system cost of service formula);
    *Fourteenth Reconsideration*, 12 FCC Rcd 15554 (clarified
    presumption of reasonableness).

[^47]: "Meager Mergers, Unless AT&T's In," *Broadcasting and Cable,*
    February 19, 2001.

[^48]: 47 C.F.R. § 76.934(h)(5).

[^49]: 47 C.F.R. § 76.922(b)(5).

[^50]: *Cost Order,* 9 FCC Rcd 4527.

[^51]: 11 FCC Rcd 2220; *see* 47 C.F.R. §§ 76.922(i), 76.924. Petitions
    for reconsideration are pending, and an appeal of the adopted rules
    has been filed in *Comcast Cable Communications, Inc. v. FCC* (D.C.
    Cir. Case No. 96-1148*)*. This case has been held in abeyance.

[^52]: *See* Jones Intercable, Inc. and Benchmark Communications, Inc.,
    Petition for Reconsideration (filed Apr. 8, 1996) (addressing the
    straight channel allocator for allocating the cost of commonly used
    plant, the treatment of unactivated channels, and distributions by
    non-subchapter C corporations; seeking clarification that
    adjustments for depreciation expense also be made to accumulated
    depreciation; and advocating application of a First Amendment
    intermediate scrutiny test to the rate-setting process); Petition by
    the Southern New England Telephone Company for Partial
    Reconsideration of the Second Report and Order (filed Feb. 26, 1996)
    (addressing affiliate transactions).

[^53]: 47 C.F.R. § 76.923; FCC Form 1205, Determining Regulated
    Equipment and Installation Costs, "Equipment Form" (June 1996).

[^54]: 47 C.F.R. § 76.922(j); FCC Form 1235, Abbreviated Cost of Service
    Filing For Cable Network Upgrades (Feb. 1996).

[^55]: *See* 47 C.F.R. § 76.924.

[^56]: *See* FCC Form 1235, Worksheets A, B (cost assignments and
    allocations; allocation key); FCC Form 1235, Instructions for
    Completion of Abbreviated Cost of Service Filing for Cable Network
    Upgrades ("FCC Form 1235 Instructions"), at 8-12 (Instructions for
    Worksheets A, B); *Final Cost Order*, 11 FCC Rcd at 2270 ¶ 123 ("in
    most cases, a straight channel ratio would be a reasonable approach
    to the allocation of plant costs").

[^57]: *See* FCC Form 1235, Part III (Allocation of Upgrade Revenue
    Requirement to Basic and Cable Programming Service Tiers); FCC Form
    1235 Instructions at 7-8 (Instructions for Part III).

[^58]: *See* 47 C.F.R. § 76.922(e)(3)(i); Instructions for FCC Form
    1240, Annual Updating of Maximum Permitted Rates for Regulated Cable
    Services, "Annual Update Form" (July 1996), at 20, 21, Lines H4, H8.

[^59]: 47 C.F.R. § 76.942(f).

[^60]: 47 C.F.R. § 76.942(e).

[^61]: *Third Reconsideration,* 9 FCC Rcd at 4365 ¶ 135.

[^62]: 47 C.F.R. § 76.942.

[^63]: *See supra* note Error: Reference source not found.

[^64]: *See* 47 U.S.C. § 543(g) (Commission is to require the annual
    filing of "such financial information as may be needed for purposes
    of administering and enforcing this section"); *id*. § 543(k)
    (Commission is to report annually on average rates for BST, other
    cable programming, and equipment of systems found to be subject to
    effective competition and systems not found to be subject to
    effective competition); 47 C.F.R. § 76.1800 Note 2.

[^65]: *See* H.R. [Conf. Rep. No]{.smallcaps}. 862, 102d Cong., 2d Sess.
    62 (1992), expressing Congress' intent "to give the Commission the
    authority to choose the best method of ensuring reasonable rates for
    the basic service tier and to encourage the Commission to simplify
    the regulatory process."

[^66]: 47 U.S.C. § 543(b)(3), which relates to the establishment of
    basic tier rate regulation states:

    The regulations prescribed by the Commission under this subsection
    shall include standards to establish, on the basis of actual cost,
    the price or rate for\--

    > \(A\) installation and lease of the equipment used by subscribers
    > to receive the basic service tier, including a converter box and a
    > remote control unit and, if requested by the subscriber, such
    > addressable converter box or other equipment as is required to
    > access programming described in paragraph (8)\[tier buy-through
    > provision\]; and

    \(B\) installation and monthly use of connections for additional
    television receivers.

[^67]: Section 623(l)(2) states:

    The term \"cable programming service\" means any video programming
    provided over a cable system, regardless of service tier, [including
    installation or rental of equipment used for the receipt of such
    video programming,]{.underline} other than (A) video programming
    carried on the basic service tier, and (B) video programming offered
    on a per channel or per program basis. (Emphasis added).

[^68]: *See* 47 U.S.C. § 543(b)(7)(A); 47 C.F.R. § 76.923(a).

[^69]: *Rate Order*, 8 FCC Rcd at 5802 ¶ 276.

[^70]: *Id.* at 5806-07 ¶ 283. *See also id*. at 5800 ¶ 273 ("We further
    conclude that Congress intended these actual cost regulations to
    cover all installations and equipment used by subscribers to receive
    the basic service tier in systems not subject to effective
    competition, even if the installation or equipment is also used for
    other cable services.").

[^71]: *Id*. at 5805-06 ¶ 282.

[^72]: 47 U.S.C. § 549.

[^73]: Remote control units, for example, have previously been argued to
    be widely and competitively available. *See Rate Order*, 8 FCC Rcd
    at 5802-03 ¶ 277.

[^74]: The Commission found it unnecessary to regulate the rates for
    "new product" CPS tiers directly based on a conclusion that rates
    for such tiers would otherwise be protected against unreasonable
    increase. *Going Forward Order*, 10 FCC Rcd at 1234-39 ¶¶ 22-37,
    *review denied sub nom. Adelphia Communications Corp. v. FCC*, 88
    F.3d 1250 (D.C. Cir. 1996). The Cable Services Bureau found the
    offering of an inside wire maintenance service plan covering both
    cable television and telephone wiring not to be subject to
    regulation based, at least in part, on the availability of
    competitive providers of this service. *Request for Clarification of
    Rate Regulatory Rules: Inside Wire Maintenance,* 16 FCC Rcd 2198
    (2001).

[^75]: *Rate Order*, 8 FCC Rcd at 5802-03 ¶ 277.

[^76]: *See, e.g*., CS Docket No. 97-80, Letter from Radio Shack
    Corporation and Circuit City Stores, Inc. to Chairman Michael K.
    Powell, FCC (Apr. 16, 2001); CS Docket No. 97-80, Letter from Neal
    M. Goldberg, NCTA, to Commissioner Susan Ness, FCC (May 16, 2001).
    Section 629 contains a direction that equipment charges not be
    subsidized by charges for any programming services. Concerns have
    been raised relating to both the limits on the rate of return that
    regulated equipment providers are entitled to receive and the
    distortions in that market created by section 623(a)(7) and the
    associated rules, which specifically permit the aggregation of low
    cost and high cost devices for rate setting purposes. *See* 47
    U.S.C. § 543(a)(7); 47 C.F.R. § 76.923(c)(1).

[^77]: *See* 47 C.F.R. §§ 76.923, 76.980(c).

[^78]: 47 U.S.C. § 543(a)(7).

[^79]: 47 U.S.C. § 543(b)(3).

[^80]: *See* 47 § 76.923(n).

[^81]: 47 C.F.R. § 76.980.

[^82]: *See supra* note Error: Reference source not found.

[^83]: See 47 C.F.R. § 76.906.

[^84]: 47 C.F.R. § 76.907(b).

[^85]: *See* *Annual Assessment of the Status of Competition in the
    Market for the Delivery of Video Programming*, CS Docket No. 01-129,
    Eighth Annual Report, 17 FCC Rcd 1244, 1273 ¶ 58 (2002) (citing
    Satellite Broadcasting and Communications Ass'n Comments at 3-4 and
    App. A).

[^86]: *See* 47 C.F.R. § 76.922(g); *Going Forward Order*, 10 FCC Rcd at
    1260 ¶ 98.

[^87]: Briefly, when an operator deletes a channel pursuant to 47 C.F.R.
    § 76.922(g)(4), the operator reduces the rate to reflect the net
    reduction in external costs and the residual associated with the
    dropped channel. For channels added pursuant to the caps method, the
    residual is the actual per channel adjustment taken for that channel
    when it was added to the tier. When an operator substitutes a
    channel pursuant to 47 C.F.R. § 76.922(g)(6), its rate must reflect
    the net difference in programming costs associated with the
    substitution.

[^88]: 47 C.F.R. § 76.922(g)(5) provides for the revenue-neutral
    movement of residual associated with a channel when the channel is
    moved between rate regulated tiers of service.

[^89]: *See* 5 U.S.C. § 603. The RFA, *see* 5 U.S.C. § 601 -- 612, has
    been amended by the Small Business Regulatory Enforcement Fairness
    Act of 1996 (SBREFA), Pub. L. No. 104-121, Title II, 110 Stat. 857
    (1996).

[^90]: *See* 5 U.S.C. § 603(a).

[^91]: *Id*.

[^92]: This is codified as Communications Act §623(c)4), 47 U.S.C. §
    543(c)(4).

[^93]: 47 C.F.R. § 76.922(g)(8).

[^94]: *See supra* section G.

[^95]: *See supra* section O.

[^96]: *See supra* section R.

[^97]: *See supra* section E.

[^98]: The Commission also proposes rule changes or clarifications that
    are most likely to be applicable only to cable systems that do not
    use one of the small cable ratemaking options described *infra* in
    paragraph 67. These proposed changes and objectives include:
    providing more flexibility in setting regional rates (*supra*
    section F); clarifying the handling of services provided without an
    extra charge when initial regulated rates were set, often referred
    to as "unbundling" (*supra* section L); and assessing the continued
    need for optional cost-of-service and abbreviated cost-of-service
    ratemaking methodologies (*supra* sections I and J). Because these
    proposals are not likely to affect small cable systems, there is no
    need to consider alternatives to these proposals.

[^99]: *See supra* section N.

[^100]: 5 U.S.C. § 603(b)(3).

[^101]: *Id.* § 601(6).

[^102]: *Id.* § 601(3) (incorporating by reference the definition of
    "small business concern" in the Small Business Act, 15 U.S.C. §
    632). Pursuant to 5 U.S.C. § 601(3), the statutory definition of a
    small business applies "unless an agency, after consultation with
    the Office of Advocacy of the Small Business Administration and
    after opportunity for public comment, establishes one or more
    definitions of such term which are appropriate to the activities of
    the agency and publishes such definition(s) in the Federal
    Register."

[^103]: 15 U.S.C. § 632.

[^104]: 13 C.F.R. § 121.201, North American Industry Classification
    System ("NAICS") codes 513210 and 513220.

[^105]: *See U.S. Department of Commerce, Bureau of the Census, 1992
    Economic Census Industry and Enterprise Receipts Size Report,* Table
    2D (U.S. Bureau of the Census data under contract to the Office of
    Advocacy of the U.S. Small Business Administration). These data have
    been updated for 1997, but without the small business breakout.
    *See* Summary, 1997 Economic Census, Subject Series: Information, at
    24 (issued April 2001). By 1997, the census total for firms in this
    category had increased to 4,185. *Id.*

[^106]: 47 C.F.R. § 76.901(e). The Commission developed this definition
    based on its determinations that a small cable company is one with
    annual revenues of \$100 million or less. *See Small System Order*,
    10 FCC Rcd at 7408-7409 ¶¶ 28-30.

[^107]: Paul Kagan Assocs., Inc., Cable TV Investor, Feb. 29, 1996
    (based on figures for Dec. 30, 1995).

[^108]: 47 C.F.R. § 76.901(c).

[^109]: 47 U.S.C. § 543(m)(2).

[^110]: *See FCC Announces New Subscriber Count for the Definition of
    Small Cable Operator,* 16 FCC Rcd 2225 (2001).

[^111]: 47 C.F.R. § 76.1403(b).

[^112]: *See* 16 FCC Rcd 2225.

[^113]: We do receive such information on a case-by-case basis only if a
    cable operator appeals a local franchise authority's finding that
    the operator does not qualify as a small cable operator pursuant to
    section 76.901(f) of the Commission's rules. See 47 C.F.R. §
    76.990(b).

[^114]: *See* FCC Forms 1200, 1205, 1210, 1220, 1230, 1235, and 1240.
    The Commission's rules also reference FCC Forms 1211, 1215, and
    1225. As noted *supra* note Error: Reference source not found, Form
    1211 is not in use and references will be deleted from the
    Commission's rules. As noted *supra* para. 11, the Commission
    advised the Office of Management and Budget that it would no longer
    support use of FCC Forms 1215 and 1225, and dropped these forms from
    its information collection budget effective April 30, 1997. The
    Commission proposes to drop references to these forms from its
    rules.

[^115]: *See* 47 C.F.R. § 76.934(h); FCC Form 1230, Establishing Maximum
    Permitted Rates for Regulated Cable Services on Small Cable Systems
    (Aug. 1995).

[^116]: *See supra* paragraph 32.

[^117]: *See* 47 C.F.R. § 76.922(b)(5).

[^118]: *See supra* para. 33. *See* also *supra* n.Error: Reference
    source not found regarding dropping FCC Form 1225 from the
    Commission's rules. Form 1225 is a more burdensome way to establish
    regulated rates using cost-of-service methodology than FCC Form
    1230.

[^119]: *See supra* section E.

[^120]: *See* 47 C.F.R. § 76.934(b), (g).

[^121]: 5 U.S.C. § 603(c)(1) -- (c)(4).

[^122]: *See supra* section N.

[^123]: *See* 47 C.F.R. §§ 76.901(c), (e), (f), 76.922(b)(5), 76.934.
    *See also* FCC Form 1230.

[^124]: *See supra* para*s*. 9, 11, proposing to amend section 76.934 of
    the Commission's Rules and FCC Form 1230.

[^125]: *See supra* section H. Comment is sought on this topic.

[^126]: *See* 47 C.F.R. §§ 76.922(d), (e), 76.934(h)(8).

[^127]: *See supra* section B.

[^128]: *See* FCC Form 1210, Updating Maximum Permitted Rates for
    Regulated Cable Services (May 1995); FCC Form 1240, Updating Maximum
    Permitted Rates for Regulated Cable Services (July 1996).

[^129]: *See supra* section D.

[^130]: *See supra* section E.

[^131]: *See* 47 C.F.R. § 76.934.

[^132]: *See supra para. 67.*

[^133]: *See supra* section O.

[^134]: *See supra* section R.

[^135]: 47 C.F.R. § 1.1206(b).

[^136]: *See id.* § 1.1206(b)(2).