Before the

Federal Communications Commission

Washington, D.C. 20554

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| In the Matter of                 | * | ## CSR 5383                  |
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| Northland Cable Television, Inc. | ) |                              |
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MEMORANDUM OPINION AND ORDER

**Adopted: January 31, 2000** **Released: February 3, 2000**

By the Chief, Cable Services Bureau:

## INTRODUCTION

1\. Here we address a petition for special relief ("Petition"), in which
Northland Cable Television, Inc. ("NCT") seeks a waiver of the
Commission's rules to the extent necessary to permit NCT to establish
regulated cable rates on behalf of its Aiken, South Carolina system, in
accordance with the small system cost-of-service methodology adopted in
the *Sixth Report and Order and Eleventh Order on Reconsideration* in MM
Docket Nos. 92-266 and 93-215 (*"Small System Order"*).[^1] We grant the
Petition upon a finding that a waiver of the Commission's rules is in
the public interest.

2\. Section 623(i) of the Communications Act of 1934, as amended
("Communications Act"), requires that the Commission design rate
regulations that reduce the administrative burdens and the cost of
regulatory compliance for cable systems with 1,000 or fewer
subscribers.[^2] Accordingly, in the course of establishing the standard
benchmark and cost-of-service ratemaking methodologies generally
available to cable operators, the Commission adopted various measures
aimed specifically at easing regulatory burdens for these smaller
systems.[^3] In the *Small System Order*, the Commission further
extended small system rate relief to certain systems that exceed the
1,000-subscriber criterion.[^4] These systems were deemed eligible for
small system rate relief because they were found to face higher costs
and other burdens disproportionate to their size.[^5]

3\. The *Small System Order* defines a small system as any system that
serves 15,000 or fewer subscribers.[^6] The Commission recognized that
systems with no more than 15,000 subscribers were qualitatively
different from larger systems with respect to a number of
characteristics, including: (1) average monthly regulated revenues per
channel per subscriber; (2) average number of subscribers per mile; and,
(3) average annual premium revenues per subscriber.[^7] The magnitude of
the differences between the two classes of systems as to these
characteristics indicated that the 15,000-subscriber threshold was the
appropriate point of demarcation for purposes of providing for
substantive and procedural regulatory relief.[^8]

4\. Rate relief provided under the *Small Systems Order* is available to
independent small systems as well as small systems affiliated with
another cable company, as long as that cable company serves a total of
400,000 or fewer subscribers over all of its systems.[^9] The Commission
adopted this threshold because it roughly corresponds to \$100 million
in annual regulated revenues, a standard the Commission has used in
other contexts to identify smaller entities deserving of relaxed
regulatory treatment.[^10] The Commission found that cable companies
exceeding this threshold would find it easier than smaller companies to
attract the financing and investment necessary to maintain and improve
service.[^11] In addition, the Commission determined that cable
companies that exceeded the small company definition "are better able to
absorb the costs and burdens of regulation due to their expanded
administrative and technical resources.[^12]

5\. In addition to adopting the new categories of small systems and
small cable companies, the *Small System Order* introduced a form of
rate regulation known as the small system cost-of-service
methodology.[^13] This approach, which is available only to small
systems owned by small cable companies, is more streamlined than the
standard cost-of-service methodology available to cable operators
generally. In addition, the small system rules include substantive
differences from the standard cost-of-service rules to take account of
the proportionately higher costs of providing service faced by small
systems. Eligible systems establish their rates under this methodology
by completing and filing FCC Form 1230. In order to qualify for the
small system cost-of-service methodology, systems and companies must
meet the new size standards as of either the effective date of the
*Small System Order*, or on the date thereafter when they file the
documents necessary to elect the relief they seek.[^14]

6\. Cable systems that fail to meet the numerical definition of a small
system, or whose operators do not qualify as small cable companies, may
submit petitions for special relief requesting that the Commission grant
a waiver of its rules to enable the petitioning systems to utilize the
various forms of rate relief available to small systems owned by small
cable companies.[^15] The Commission has stated that petitioners should
demonstrate that they "share relevant characteristics with qualifying
systems."[^16] Other potentially pertinent factors include the degree by
which the system fails to satisfy either or both definitions and
evidence of increased costs (e.g., lack of programming or equipment
discounts) faced by the operator.[^17] If the system fails to qualify
for relief based on its affiliation with a larger cable company, the
Commission will consider "the degree to which that affiliation exceeds
our affiliation standards, and whether other attributes of the system
warrant that it be treated as a small system notwithstanding the
percentage ownership of the affiliate."[^18] The Commission also stated
that "a qualifying system that seeks to obtain programming from a
neighboring system by way of a fiber optic link, but that is concerned
that interconnection of the two systems may jeopardize its status as a
stand-alone small system, may file a petition for special relief to ask
the Commission to find that it is eligible for small system
relief."[^19] The Commission specifically stated that this list of
relevant factors was not exclusive and invited petitioners to support
their petitions with any other information and arguments they deemed
relevant.[^20]

## THE PETITION

7\. With 267,844 subscribers, NCT easily qualifies as a "small cable
operator" under our rules. As of December 31, 1998, however, NCT's
Aiken, South Carolina system had 15,613 subscribers, slightly more than
the 15,000 cap for a "small system," according to the *Small System
Order.* According to the Petition, the Aiken system serves 14,848
"basic" subscribers, and an additional 765 "bulk" subscribers, including
subscribers in hotels, apartment buildings and other multiple dwelling
units.[^21]

8\. NCT provides the following information in support of its assertion
that its Aiken system shares pertinent characteristics with small cable
systems generally:

9\. The Aiken system has monthly regulated revenues per channel per
subscriber of \$0.64, which is between the average for small systems
(\$0.86) and the average for large systems (\$0.44).[^22]

10\. The Aiken system has an average of 24.3 subscribers per mile, which
is below the average for small systems (35.5) and the average for large
systems (68.7).[^23]

11\. The Aiken system has an average annual premium revenue of \$32.58,
which is below the average for small systems (\$41.00) and the average
for large systems (\$73.13).[^24]

12\. While NCT anticipates some growth in its Aiken system in the
future, it asserts that such growth will stem from line extension,
rather than from an increase in market penetration. Thus, NCT asserts
that it will not benefit from cost savings associated with the economies
of scale possessed by large cable systems.[^25]

## III. DISCUSSION {#iii.-discussion .unnumbered}

13. We agree with NCT that its Aiken system shares pertinent
    characteristics of small systems generally. First of all, the Aiken
    system serves a total of 15,613 subscribers, which is only slightly
    in excess of the 15,000 cap for small systems generally. The *Small
    System Order* recognizes that it would be arbitrary and unfair to
    exclude a cable system from the rate relief granted to small systems
    merely because the system varies marginally from the numerical
    criterion for a "small system," provided the system otherwise fits
    economically into the small system category.[^26] The Commission's
    mechanism for granting petitions for special relief is designed to
    address such instances where strict application of the numerical
    criteria would be unfair.

14\. We believe it would be arbitrary and unfair to withhold regulatory
relief from NCT merely on the basis that its Aiken system exceeds the
numerical criteria for a "small system" by 613 subscribers. It would be
unfair in this case because the Aiken system shares pertinent
characteristics with small systems generally, as discussed above.

15\. A cable system's average monthly regulated revenue per channel per
subscriber, its density of subscribers per mile, its average annual
revenue per subscriber, and its historical growth rate are all relevant
factors in distinguishing a small system from a large system because
these factors are accurate indicators of the system's costs per
subscriber in providing service in a particular geographical area.
Regulatory relief is granted to small systems insofar as such systems
generally face significantly higher costs per subscriber in providing
cable service.[^27] We note that with respect to these factors, NCT's
Aiken system resembles a small system according to most of the pertinent
criteria.

16\. Under Section 76.7(c)(1) of the Commission's rules, a petition for
special relief "shall state fully and precisely all pertinent facts and
considerations relied on to demonstrate the need for the relief
requested and to support a determination that a grant of such relief
would serve the public interest."[^28] NCT has adequately established
its "need for the relief requested" as required by Section 76.7(c)(1).
In making this finding, we note the Commission's decision in the *Small
System Order* to target relief at small systems owned by operators with
fewer than 400,000 subscribers, based on a recognition that the
then-existing rate rules did not sufficiently take into account the
higher costs of business faced by smaller companies.[^29] In addition,
the Commission found that qualifying systems and companies were in need
of relief from the procedural burdens imposed upon such entities by the
other forms of rate regulation.[^30] The Commission found that
alleviating the substantive and procedural burdens associated with the
standard benchmark and cost-of-service methodologies "should free up
resources that affected operators currently devote to complying with
existing regulations and should enhance those operators' ability to
attract capital, thus enabling them to achieve the goals of Congress,"
as set forth in the Cable Television Consumer Protection and Competition
Act of 1992.[^31]

17\. We also find the grant of the Petition would serve the public
interest. As indicated above, in the *Small System Order*, the
Commission found that extending rate relief to those operators in need
of it would further specific congressional goals set forth in the 1992
Cable Act.[^32] Having concluded that NCT is likewise in need of that
relief, we find that granting the Petition will serve the same
congressional goals that were furthered by the adoption of the *Small
System Order*, and thus is in the public interest.

18\. As a result of our grant of the Petition, NCT's Aiken system shall
be deemed a small system for purposes of rate regulation. Accordingly,
NCT may set rates prospectively for its Aiken system in accordance with
the small system cost-of-service methodology.

## SCOPE OF THE WAIVER

19\. We next must determine the duration of the waiver. In the *Small
System Order,* after establishing the new small system and small cable
company definitions, the Commission stated:

To qualify for any existing form of \[small system\] relief, systems and

companies must meet the new size standards as of either the effective

date of this order or on the date thereafter when they file whatever
docu-

mentation is necessary to elect the relief they seek, at their election
. . .

A system that is eligible for small system relief on either of the dates

described above shall remain eligible for so long as the system has
15,000

or fewer subscribers, regardless of a change in the status of the
company

that owns the system. Thus, a qualifying system will remain eligible for

relief even if the company owning the system subsequently exceeds the

400,000 subscriber cap. Likewise, a system that qualifies shall remain

eligible for relief even if it is subsequently acquired by a company
that

serves a total of more than 400,000 subscribers.[^33]

20\. The Commission adopted this grandfathering treatment for qualifying
systems to enhance their value "in the eyes of operators and, more
importantly, lenders and investors."[^34] As the Commission stated: "The
enhanced value of the system thus will strengthen its viability and
actually increase its ability to remain independent if it so
chooses."[^35]

21\. Upon exceeding the 15,000-subscriber cap, a system that has
established its rates in accordance with the small system
cost-of-service methodology " . . . may maintain its then existing
rates. However, any further adjustments shall not reflect increases in
external costs, inflation or channel additions until the system has
re-established initial permitted rates in accordance with our benchmark
or cost-of-service rules."[^36]

22\. Since the Aiken system has already exceeded 15,000 subscribers,
there is no obvious numerical limit to serve as a cutoff for its
continued eligibility for small system treatment. We believe it is
reasonable to presume that this system will continue to grow. Therefore,
we must place some duration on the waiver, because the alternative would
be to grant small system status indefinitely, regardless of the eventual
size of the system. This latter alternative is clearly inconsistent with
the Commission's decision to limit small system relief to systems that
are in need of it due to their relatively small size.

23\. Therefore, the NCT waiver will terminate two years from the date of
this order, unless extended further, subject to the conditions set forth
below. During the waiver period, NCT may file only one Form 1230 for
each franchise area it serves. This should give NCT adequate regulatory
certainty for the foreseeable future, while still ensuring that the
system is not permitted to charge rates indefinitely under a scheme
designed for smaller systems. Of course, NCT may seek continued
eligibility for small system treatment by filing a petition for special
relief at the end of the waiver period.

24\. Limiting the waiver period to two years means that any Form 1230 to
be filed by NCT must be submitted with the appropriate regulatory
authorities within two years of the date of this order. In any franchise
area where the system is currently subject to regulation, NCT may
reestablish its maximum permitted rates by filing Form 1230 at any time
in the next two years. Where the system is not currently subject to
regulation but, within the next two years, becomes subject to regulation
due to the certification of a local franchising authority or the filing
of a rate complaint, NCT then may file Form 1230 within the normal
response time. Where the system is not now subject to regulation, and
does not become subject to regulation until more than two years from
now, NCT will not be eligible for small system treatment under this
waiver.

25\. After filing its initial Form 1230 and giving the required notice,
NCT may set its actual rates in the franchise area at any level that
does not exceed the maximum rate, subject to the standard rate review
process. Subsequent increases, not to exceed the maximum rate
established by the Form 1230, shall be permitted, subject to the 30
days' notice requirement of the Commission's rules.[^37] As noted, the
maximum rate established by the initial Form 1230 shall be a cap on the
system's rates during the waiver period. If the system reaches that cap
and subsequently wishes to raise rates further, it will have to justify
the rate increase in accordance with our standard benchmark or
cost-of-service rules. Alternatively, the system can file another
petition for special relief and seek continued treatment as a small
system. Limiting NCT to a single Form 1230 filing for each franchise
area provides further assurance that the system will not have grown too
large to be establishing rates under the small system cost-of-service
methodology.

IV. **ORDERING CLAUSES**

26\. Accordingly, **IT IS ORDERED** that the Petition for Special Relief
filed by Northland Cable Television, Inc. requesting a waiver of the
Commission rules defining systems subject to small system rate relief
**IS GRANTED**, with respect to NCT's Aiken system.

27\. These actions are taken pursuant to delegated authority under
Section 0.321 of the Commission's rules.[^38]

FEDERAL COMMUNICATIONS COMMISSION

> Deborah A. Lathen
>
> Chief, Cable Services Bureau

[^1]: 10 FCC Rcd 7393 (1995).

[^2]: 47 U.S.C. § 543(i).

[^3]: *See* *Report and Order and Further Notice of Proposed Rulemaking*
    in MM Docket No. 92-266, 8 FCC Rcd 5631 (1993); *Second Order on
    Reconsideration, Fourth Report and Order, and Fifth Notice of
    Proposed Rulemaking* in MM Docket No. 92-266, 9 FCC Rcd 4119 (1994);
    *Fifth Order on Reconsideration and Further Notice of Proposed
    Rulemaking* in MM Docket Nos. 93-215, 93-266, 9 FCC Rcd 5327 (1994);
    *Eighth Order on Reconsideration* in MM Docket Nos. 92-266, 93-215,
    10 FCC Rcd 5179 (1995).

[^4]: *Small System Order,* 10 FCC Rcd at 7406.

[^5]: *Id.* at 7407. More recently, Congress amended Section 623 of the
    Communications Act to allow greater deregulation for "small cable
    operators," defined as operators that "directly or through an
    affiliate, \[serve\] in the aggregate fewer than 1 percent of all
    subscribers in the United States and \[are\] not affiliated with any
    entity or entities whose gross annual revenues in the aggregate
    exceed \$250,000,000." Telecommunications Act of 1996 ("1996 Act"),
    Pub. L. No. 104-104, §301(c), 110 Stat. 5 (1996); Communications Act
    § 623(m), 47 U.S.C. § 543(m). Pursuant to this amendment, the rate
    regulation requirements of Sections 623(a), (b) and (c) do not apply
    to a small cable operator with respect to "(A) cable programming
    services, or (B) a basic service tier that was the only service tier
    subject to regulation as of December 31, 1994," in areas where the
    operator serves 50,000 of fewer subscribers." *Id.*

[^6]: *Small System Order*, 10 FCC Rcd at 7406.

[^7]: *Id.* at 7408.

[^8]: *Id.*

[^9]: *Id.* A small system is deemed affiliated with a larger cable
    company if the company "holds more than a 20 percent equity interest
    (active or passive) in the system and exercises *de jure* control
    (such as through a general partnership or majority voting
    shareholder interest.)" *Id.* at 7412-13, n. 88.

[^10]: *Id.* at 7409-11.

[^11]: *Id*. at 7411.

[^12]: *Id.* at 7409.

[^13]: *Id.* at 7418-28.

[^14]: *Id.* at 7413. The effective date of the *Small Systems Order*
    was August 21, 1995.

[^15]: *Id.* at 7412-13. *See Memorandum and Order In the Matter of
    Booth American Company Petition for Special Relief*, CSR 4637-D
    (released July 30, 1997); *Memorandum Opinion and Order and Order on
    Reconsideration In the Matter of Casco Cable Television, Inc. and
    Casco Cable Television of Bath, Maine, Inc. Petition for Special
    Relief and Petition for Reconsideration*, CSR 5140-D (released July
    30, 1998).

[^16]: *Id.*

[^17]: *Id.*

[^18]: *Id.*

[^19]: *Id.* at 7413.

[^20]: *Id.*

[^21]: Petition at 1.

[^22]: *Id.* at 2.

[^23]: *Id.* at 3.

[^24]: *Id.*

[^25]: *Id.*

[^26]: *See Small System Order*, 10 FCC Rcd at 7412.

[^27]: "As we have observed previously, our relief for smaller cable
    entities is aimed at those that do not have access to the financial
    resources, purchasing discounts, and other efficiencies of larger
    companies." *Small System Order*, 10 FCC Rcd at 7408, *citing Second
    Order on Reconsideration, Fourth Report and Order and Fifth Notice
    of Proposed Rulemaking*, 9 FCC Rcd 4119, 4173 n. 157 (1994).

[^28]: 47 CFR § 76.7(c)(1).

[^29]: *Id.*

[^30]: *Id.*

[^31]: *Id.* at 7407, citing the Cable Television Consumer Protection
    and Competition Act of 1992, Pub. L. No. 102-385, 106 Stat. 1460
    (1992) ("1992 Cable Act").

[^32]: *See supra* at paragraph 16.

[^33]: *Small System Order*, 10 FCC Rcd at 7413. The quoted text is
    discussing a system's initial and continuing eligibility for "any
    existing form of relief," which did not include the small system
    cost-of-service methodology. However, later in the order, the
    Commission applied the same eligibility standards to that
    methodology as well. *Id.* at 7427-28.

[^34]: *Id.* at 7413.

[^35]: *Id.*

[^36]: *Id.* at 7427-28.

[^37]: *Small System Order*, 10 FCC Rcd at 7426. Under the small system
    rules, rate increases taken after the initial Form 1230 has been
    approved are not subject to further regulatory review, as long as
    the rate is no higher than that permitted by the previously filed
    form. *Id.*

[^38]: 47 C.F.R. § 0.321.