15118 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations

recorded in Account 4310, Other longterm liabilities, that were derived from

above-the-line expenses from the

interstate rate base. We also deny MCI’s

petition for reconsideration of the

Vacate Order.

4. In the NPRM, we proposed that

prepaid OPEBs recorded in Account

1410, Other noncurrent assets, should

be included in the interstate rate base.

In this Order, we have decided not to

adopt our proposal automatically to

include prepaid OPEBs in the interstate

rate base. We find our current rules are

adequate to determine what, if any, of

the assets recorded in Account 1410

should be included in the rate base.

Therefore, if a carrier can show that any

of its assets recorded in Account 1410

(including prepaid OPEBs) meet the

used-and-useful standard, we will allow

that asset to be included in the interstate

rate base. This decision is consistent

with our treatment of similar costs, such

as prepaid pension costs. A certain

amount of prepaid pension costs are

allowed in the rate base because these

costs can earn a return that later reduces

expenses. Thus, any prepaid OPEB costs

that meet the used and useful standard

will be included in the interstate rate

base.

5. In the NPRM, we also proposed to

amend § 65.830 to remove from the

interstate rate base the interstate portion

of all accrued liabilities recorded in

Account 4310, Other long-term

liabilities. In this Order we have

decided to modify our proposal so that

only those zero-cost sources of funds

that result from above-the-line expenses

are removed from the rate base. Thus,

only those liabilities recorded in

Account 4310 that are derived from the

expenses specified in § 65.450(a) will be

removed from the rate base.

6. In the NPRM, we noted that the

Bureau in RAO 20 directed carriers to

remove accrued OPEB liabilities

recorded in Account 4310, Other longterm liabilities, from their rate bases on

the basis that OPEB benefits are similar

to pension benefits, which are deducted

from the rate base pursuant to part 65.

The Bureau concluded that accrued

OPEB costs should receive similar rate

base treatment. We believe the Bureau

was correct in that conclusion.

Moreover, in the NPRM, we noted that

all accrued liabilities recorded in

Account 4310 represent zero-cost

sources of funds including accrued

pension and OPEB liabilities. We

therefore proposed to accord to all items

recorded in Account 4310 the same

treatment currently accorded to

pensions. After reviewing the comments

in this proceeding, we conclude that,

because the amounts recorded in

Account 4310 are zero-cost sources of

funds, rates should not provide a return

on those amounts. Accordingly, we

adopt our proposal except as modified

in the preceding paragraph.

7. Finally, we state that the

conclusion in the Vacate Order that the

Bureau did not have the delegated

authority to amend the Part 65 rules in

RAO 20 was correct. MCI’s petition for

reconsideration does not refute this

conclusion. Accordingly, the Order

denies MCI’s petition for

reconsideration.

Ordering Clauses

Accordingly, it is ordered, pursuant to

Section 4(i) and 405 of the

Communications Act of 1934, 47 U.S.C.

§§ 154(i) and 405 that the Petition for

Reconsideration filed April 8, 1996, by

MCI Telecommunications Corporation

is denied.

It is further ordered, that pursuant to

Sections 1, 4(i), 4(j), 201 through 205,

220, and 403 of the Communications

Act of 1934, as amended, 47 U.S.C.

§§ 151, 154(i), 154(j), 201 through 205,

220 and 403, Part 65, Subpart G of the

Commission’s Rules, 47 CFR Part 65,

Subpart G, is amended as shown below,

effective April 30, 1997.

It is further ordered, that the Secretary

shall serve a copy of this Order on each

state commission.

It is further ordered, that the Secretary

shall send a copy of this Report and

Order including the Final Regulatory

Flexibility Analysis, to the Chief

Counsel for Advocacy of the Small

Business Administration in accordance

with paragraph 605(b) of the Regulatory

Flexibility Act, Public Law 96–354, 94

Stat. 1164, 5 U.S.C. §§ 601 et seq. (1981).

List of Subjects in 47 CFR Part 65

Communications common carriers,

Reporting and recordkeeping

requirements.

Federal Communications Commission.

William F. Caton,

Acting Secretary.

Rule Changes

Part 65 of Title 47 of the Code of

Federal Regulations is amended as

follows:

1. The authority citation for part 65

continues to read as follows:

Authority: 47 U.S.C. 151, 154, 201, 202,

203, 204, 205, 218, 219, 220, 403.

2. Section 65.830 is amended by

revising paragraphs (a)(3) and (c) to read

as follows:

§ 65.830 Deducted items.

(a) * * *

(3) The interstate portion of other

long-term liabilities (Account 4310) that

were derived from the expenses

specified in § 65.450(a).

* * * * *

(c) The interstate portion of other

long-term liabilities (Account 4310)

shall bear the same proportionate

relationship as the interstate/intrastate

expenses which gave rise to the liability.

[FR Doc. 97–8040 Filed 3–28–97; 8:45 am]

BILLING CODE 6712–01–P

47 CFR Part 76

[MM Docket No. 92–266; FCC 97–87]

Low-Price Cable Television System

Rate Regulation

AGENCY: Federal Communications

Commission.

ACTION: Final rule.

SUMMARY: The Commission has adopted

a Report and Order regarding low-price

system rate regulation. The Report and

Order makes permanent the transition

relief afforded to low-price cable

television systems, and establishes final

rules for low-price system rate

regulation. Based on data received in a

cost survey conducted in the Fall of

1995, the Report and Order finds that

low-price system operators have lower

cash flow ratios and receive lower profit

margins for their low-price systems than

operators of systems already regulated

under the Commission’s revised

benchmark approach receive for their

systems. The Report and Order,

therefore, states that low-price system

rates are reasonable and that low-price

systems will not be required to reduce

their rates by the full competitive

differential or any lesser amount. Lowprice systems will be able to continue

charging for cable services in

accordance with the current rules for

such systems.

EFFECTIVE DATE: April 30, 1997.

ADDRESSES: In addition to filing

comments with the Secretary, a copy of

any comments on the information

collections contained herein should be

submitted to Dorothy Conway, Federal

Communications Commission, Room

234, 1919 M Street, NW., Washington,

DC 20554, or via the Internet to

dconway@fcc.gov, and to Timothy Fain,

OMB Desk Officer, 10236 NEOB, 725—

17th Street, NW., Washington, DC 20503

or via the Internet to fainlt@al.eop.gov.

FOR FURTHER INFORMATION CONTACT:

Rodney McDonald, Cable Services

Bureau, (202) 418–7200. For additional

information concerning the information

collections contained in the Report and
Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations 15119

Order, contact Dorothy Conway at (202)

418–0217, or via the Internet at

dconway@fcc.gov.

SUPPLEMENTARY INFORMATION: The main

text of this decision is included below.

The full text of this decision is available

for inspection and copying during

normal business hours in the FCC

Reference Center (Room 239), 1919 M

Street, NW., Washington, DC 20554, and

may be purchased from the

Commission’s copy contractor,

International Transcription Services,

Inc. (202) 857–3800, 1919 M Street,

NW., Washington, DC 20554.

I. Introduction

1. In this Report and Order, we

terminate the transition status of lowprice systems and establish final rules

for low-price system rate regulation

pursuant to the provisions of the Cable

Television Competition and Consumer

Protection Act of 1992, Public Law 102–

385, 106 Stat. 1460 (1992), 47 U.S.C. 521

et seq. (‘‘1992 Cable Act’’). We rely on

the results of our cost survey in

particular, to determine whether lowprice systems should be required to

reduce their rates by the full

competitive differential or any lesser

amount.

II. Background

2. In the Report and Order and

Further Notice of Proposed Rulemaking

in MM Docket No. 92–266, FCC 93–177,

58 FR 29736 (May 21, 1993) (‘‘Rate

Order’’), the Commission found that

‘‘our initial effort to regulate rates for

cable service should provide for

reductions from current rates of

regulated cable systems with rates above

competitive levels.’’ In order to simulate

the rates that would be charged by

comparable cable systems subject to

effective competition, we adopted a

‘‘benchmark’’ approach to regulate the

basic service tier and the cable

programming services tier of systems

not subject to effective competition. The

initial benchmark formula was

primarily derived by examining cable

operator’s revenues. The formula

reflected an implicit assumption that all

cable operators faced similar cost

conditions, but it took into account

variations in rates due to certain other

economic and demographic factors. Our

initial analysis revealed that the ‘‘rates

of systems not subject to effective

competition (were), on average,

approximately 10 percent higher than

rates of comparable systems subject to

effective competition.’’ This 10%

competitive differential was

incorporated into the benchmark

system, and noncompetitive systems

whose rates exceeded the benchmark

were deemed to be charging

unreasonable rates. These systems were

thus required to reduce their rates, at

most by the full 10% competitive

differential, but not below the

benchmark.

3. In the Second Order on

Reconsideration, Fourth Report and

Order, and Fifth Notice of Proposed

Rulemaking in MM Docket No. 92–266,

FCC 94–38, 59 FR 17943 and 59 FR

18064 (April 15, 1994) (‘‘Second Order

on Reconsideration’’), the Commission

adopted a 17% competitive differential

based on a revised analysis of its early

competitive survey of the cable

industry; it concluded that the 17%

differential determined by the revised

model more accurately estimated the

difference between effectively

competitive and noncompetitive cable

rates than the ten percent differential

established in the Rate Order. The

Commission recognized, however, that

the rates developed under this revised

benchmark approach might not be

appropriate for all cable systems. The

competitive survey used to establish the

new benchmark approach included

several cost-related variables, but we

remained concerned that our analysis

may have failed to identify unusual cost

influences that might indicate whether

a system was charging unreasonable

rates. In particular, the Commission

identified two types of systems, small

systems and low-price systems, that

appeared to exhibit significantly

different prices and costs from most

other cable systems based on the initial

data gathered. The Commission granted

transition relief to small systems and

low-price systems finding that these

systems would not be required to use

the new benchmark approach until the

Commission gathered further data

regarding their particular price/cost

profiles. We defined low-price systems

as ‘‘(i) systems whose March 31, 1994

rates are at (or) below the revised

benchmark and (ii) systems whose

March 31, 1994 rates are above the

benchmark but whose permitted rates

are at or below the benchmark.’’

Pending this determination, low-price

systems were placed in a ‘‘transition’’

status and were subject to ‘‘transition

relief’’ as ‘‘transition systems.’’

4. The Commission established an

alternate approach to rate regulation for

transition systems pending completion

of our price/cost analysis. During the

transition period, low-price systems

having March 31, 1994 rates below the

new benchmark were not required to

reduce their rates at all. Low-price

systems having March 31, 1994 rates

above the new benchmark but having

permitted rates at or below the new

benchmark were only required to reduce

their rates to the new benchmark. We

imposed a modified price cap on these

transition rates that allowed systems

subject to such relief to increase their

rates ‘‘to reflect increases in external

costs and increases caused by channel

changes that accrue after March 31,

1994.’’ A transition system was not,

however, allowed to increase its

transition rate due to increases in

inflation until its transition rate was

equal to the rate that would have

resulted from a full 17% rate reduction

under our revised benchmark approach

(i.e., their full reduction rate increased

by permitted inflation, and increases

due to external costs and channel

changes). In this way, the transition

rates of transition systems would

eventually become equal to the full

reduction rates these systems would

have been required to charge under our

new benchmark approach. The

Commission reasoned that a system’s

full reduction rate might eventually

exceed its transition rate because the

full reduction rate would increase with

inflation as well as external costs and

channel changes. The Commission

stated that transition treatment would

terminate at the completion of our

price/cost analysis, and that systems

that had been provided transition relief

would be required to apply the 17%

competitive differential upon

termination of transition treatment

unless our analysis revealed that

application of the 17% competitive

differential to these systems would be

inappropriate.

5. Specifically, we said that we

needed to further study whether belowbenchmark rates are more likely to be

reasonable than above-benchmark rates,

because they are comparatively lower,

and that in light of this inquiry, it would

not be appropriate, at the time, to

require regulated systems to reduce

their rates below the benchmark level.

In addition, we stated that ‘‘requiring

any systems whose rates are currently

slightly above the benchmark to reduce

their rate levels to the full reduction

levels, but not requiring belowbenchmark systems to reduce their rates

at all, would result in inequitable

treatment of systems that may be fairly

similarly situated.’’ Therefore, we stated

that upon completion of our collection

and analysis of low price system prices

and costs ‘‘the regulated rates of such

systems [would] be set to reflect the full

17 percent differential if our analysis

[did] not show that the resulting rates

would be unreasonably low—that is, the

rates would be lower than they would

be if set by competitive pressures as
15120 Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations

determined by cost comparisons

between noncompetitive systems and

systems subject to effective

competition.’’

6. The Commission subsequently

made adjustments to the transition relief

initiated in the Second Order on

Reconsideration. In the Ninth Order on

Reconsideration in MM Docket No. 92–

266, FCC 95–43, 60 FR 10512 (February

27, 1995), the Commission allowed all

systems subject to transition relief to

further adjust their rates based on

inflation. In the Sixth Report and Order

and Eleventh Order on Reconsideration

in MM Docket Nos. 92–266 and 93–215,

FCC 95–196, 60 FR 35854 (July 12,

1995) (‘‘Small System Order’’) we

initiated ‘‘the gradual termination of

transition relief for all but low-price

systems,’’ by limiting transition relief

for small systems to two years from the

effective date of the new rule.

Consistent with our statements in the

Second Order on Reconsideration,

however, we have continued transition

relief for low-price systems until the

completion of our collection and

analysis of necessary cost data.

7. When the Second Order on

Reconsideration was adopted, the

Commission noted that we lacked

sufficient data regarding the costs faced

by low-price systems to establish

whether these systems were charging

reasonable rates despite the fact that

they were charging relatively low rates

as compared to the rates of other

noncompetitive cable systems.

Therefore, the Commission delegated

authority to the Chief, Cable Services

Bureau to conduct general cost studies

of the cable industry. Report and Order

and Further Notice of Proposed

Rulemaking, in MM Docket No. 93–215

and CS Docket No. 94–28, FCC 94–39,

59 FR 18066 (April 15, 1994). A cable

industry cost survey was commenced

pursuant to this authority in the Fall of

1995. See Order, in MM Docket No. 92–

266, 11 FCC Rcd 4003 (released

September 29, 1995). This Report and

Order analyzes data from our cost

survey, and compares the cost and

revenue data of noncompetitive lowprice systems with the cost and revenue

data received for non-low-price systems

that are already regulated by the

Commission under the revised

benchmark approach.

III. Discussion

A. Data

8. The cost survey we initiated in

September of 1995 was based upon a

random sample of cable systems.

Specifically, the survey was mailed to

cable operators owning 660 of the total

2,271 non-small cable systems in the

U.S. Small systems were not included in

our survey because their treatment was

previously determined in the Small

System Order. The Commission

received 359 usable questionnaires from

the cable operators surveyed. Of these

359 questionnaires, 40 were received for

low-price systems (‘‘low-price group’’)

and 38 were received for systems

regulated by the Commission under the

revised benchmark approach (‘‘non-lowprice group’’). Of the remaining 281

usable questionnaires, two were

received for systems facing effective

competition as defined in the 1992

Cable Act, and the remaining 279 were

received for several categories of cable

systems including those regulated only

at the local level, those for which a costof-service showing was filed, those

unregulated, and those subject to social

contracts.

9. Data provided in response to the

cost survey included information

regarding system plant and equipment

costs, intangible assets, operating

revenues and expenses, and capital

structure as of year end 1992 and year

end 1994. We also received information

regarding system characteristics.

B. Analysis

10. The data received from our cost

survey was analyzed to determine the

relative profitability of the low-price

group compared with the non-low-price

group. In our analysis, we used a

standard measure of ‘‘accounting’’

profitability as a means of determining

the relative profitability of these two

groups. Specifically, we used cash flow

ratios, which are commonly used in

financial analyses of the cable industry.

One of the more frequently used cash

flow measures is income before interest,

taxes, depreciation and amortization

(‘‘IBITDA’’). We applied this measure in

the form of the following ratio:

operating revenues minus operating

expenses before interest, taxes,

depreciation, and amortization divided

by operating revenues.

11. We compared the average cash

flow ratio of our low-price group with

the average cash flow ratio of our nonlow-price group. We found that the

average cash flow ratio of our low-price

group was 36.5% and the average cash

flow ratio of our non-low-price group

was 39.7%. These findings indicate that,

on average, the operators of systems in

our low-price group received lower

profit margins for their low-price

systems than the operators of systems in

our non-low-price group received for

their non-low-price systems. Based on

these findings, we believe that the

operators of low-price systems generally

receive lower profit margins for their

low-price systems than the operators of

systems already regulated under the

Commission’s revised benchmark

approach. Under these conditions we

believe that rates charged by low-price

systems are reasonable. We therefore

find it unnecessary for the operators of

these systems to reduce the rates on

these systems by the full competitive

differential or by any lesser amount.

12. We believe that the transition

relief afforded low-price systems was

appropriate, however, we see no need to

maintain the transition status of lowprice systems now that we have

completed an analysis of the necessary

cost data particular to these systems.

Therefore, we make that relief

permanent. We will allow low-price

systems to continue charging the rates

they established under transition relief

and making appropriate rate increases

in accordance with our current rules. 47

CFR 76.922.

IV. Final Regulatory Flexibility

Certification

13. As required by the Regulatory

Flexibility Act, 5 U.S.C. 603 (RFA), an

Initial Regulatory Flexibility Analysis

(IRFA) for the Fifth Notice of Proposed

Rulemaking was incorporated in the

Second Order on Reconsideration,

Fourth Report and Order, and Fifth

Notice of Proposed Rulemaking in MM

Docket 92–266, FCC 94–38. The

Commission therein provided notice of

its intent to establish further

requirements concerning the rates

permitted for systems subject to

transition treatment, and sought written

public comments on the IRFA.

Comments regarding the treatment of

‘‘small’’ transition systems were

received by the Commission and

addressed in a previous order. Sixth

Report and Order and Eleventh Order

on Reconsideration in MM Docket Nos.

92–266 and 93–215, FCC 95–196. No

comments, however, were received

regarding the matter of ‘‘low-price’’

transition cable systems.

14. Although we performed an IRFA

in the Fifth Notice of Proposed

Rulemaking, we received no comments

in response to the IRFA with respect to

‘‘low-price’’ transition systems and

upon further consideration we now

believe that we can certify that no

regulatory flexibility analysis is

necessary. This certification conforms to

the RFA, as amended by the Small

Business Regulatory Enforcement

Fairness Act of 1996 (SBREFA). See

Title II of the Contract with America

Advancement Act of 1996, Public Law

104–121, 110 Stat. 847, 857 (1996),

codified at 5 U.S.C. 601 et seq.
Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules and Regulations 15121

15. We do not believe that the

amendments to the rules adopted in this

Report and Order will have a significant

economic impact on a substantial

number of small entities as defined by

statute, by our rules, or by the Small

Business Administration (SBA). See 47

U.S.C. 543(m)(2); 47 CFR 76.901(e); 13

CFR 121.201 (SIC 4841); 5 U.S.C. 605(b).

16. Our rules for regulating the rates

of small systems owned by small cable

companies were established in a

previous order, so this Report and Order

only concerns the permitted rates for

low-price systems. Based on the rule

changes adopted here, low-price

systems will be permitted to maintain

the rates originally established pursuant

to their status as systems subject to

transition relief. Further, the rules

adopted in this Report and Order will

allow low-price systems to increase

their rates in the same manner as our

previous transition rules for low-price

systems. The rules adopted herein do

not alter the method by which low-price

cable system rates currently are

regulated, and for this reason these

amendments will not have a significant

economic impact on a substantial

number of small cable operators, and

will not change the treatment of lowprice systems.

17. The Commission will send a copy

of this certification, along with this

Report and Order, in a report to

Congress pursuant to the Small Business

Regulatory Enforcement Fairness Act of

1996, 5 U.S.C. 801(a)(1)(A), and to the

Chief Counsel for Advocacy of the Small

Business Association, 5 U.S.C. 605(b). A

copy of this certification will also be

published in the Federal Register. Id.

V. Ordering Clauses

18. Accordingly, it is ordered that,

pursuant to sections 4(i), 4(j), 303(r),

and 623 of the Communications Act of

1934, as amended, 47 U.S.C. 154(i),

154(j), 303(r), and 543, the rules,

requirements and policies discussed in

this Report and Order are adopted and

§ 76.922 of the Commission’s rules, 47

CFR 76.922, is amended as set forth

below.

19. It is further ordered that the

Secretary shall send a copy of this

Report and Order, including the Final

Regulatory Flexibility Analysis, to the

Chief Counsel for Advocacy of the Small

Business Administration in accordance

with paragraph 603(a) of the Regulatory

Flexibility Act, Public Law 96–354, 94

Stat. 1164, 5 U.S.C. 601 et seq. (1981).

20. It is further ordered that the

requirements and regulations

established in this decision shall

become effective April 30, 1997.

List of Subjects in 47 CFR Part 76

Cable television.

Federal Communications Commission

William F. Caton,

Acting Secretary.

Rule Changes

Part 76 of Title 47 of the Code of

Federal Regulations is amended as

follows:

PART 76—CABLE TELEVISION

SERVICE

1. The authority citation for Part 76

continues to read as follows:

Authority: 47 U.S.C. 151, 152, 153, 154,

301, 302, 303, 303a, 307, 308, 309, 312, 315,

317, 325, 503, 521, 522, 531, 532, 533, 534,

535, 536, 537, 543, 544, 544a, 545, 548, 552,

554, 556, 558, 560, 561, 571, 572, 573.

2. Section 76.922 is amended by

revising paragraph (b)(4)(ii) to read as

follows:

§ 76.922 Rates for the basic service tier

and cable programming services tiers.

* * * * *

(b) * * *

(4) * * *

(ii) Low-price systems. Low-price

systems shall be eligible to establish a

transition rate for a tier.

* * * * *

Note: This attachment will not be

published in the Code of Federal Regulations.

Attachment

CASH FLOW RATIOS

Category

Average operating revenues

(million)

Average operating expenses before interest, taxes,

depreciation

and amortization

(million)

Income before interest,

taxes, depreciation and

amortization

(IBITDA)

(million)

Cash flow

ratios 1

(percent)

(A) (B) (A¥B)

Low-price group (40 systems) ........................................................................................ $15.1 $9.6 $5.5 36.5

Non-low-price group (38 systems) ................................................................................. 12.5 7.5 5 39.7

Competitive group (2 systems) ...................................................................................... 76.4 46.2 30.2 39.5

All other 2 (279 systems) ................................................................................................ 8.3 5.3 3 36.7

1 Calculated on totals for each group prior to averaging (i.e., cash flow ratios equal total operating revenues minus total operating expenses

before interest, taxes, depreciation and amortization divided by total operating revenues). 2 Includes systems for which a cost-of-service showing was filed, systems regulated only at the local level, unregulated systems, and systems

subject to social contracts.

[FR Doc. 97–7976 Filed 3–28–97; 8:45 am]

BILLING CODE 6712–01–P

47 CFR Part 76

[CS Docket No. 95–174; FCC 97–86]

Uniform Cable Price-Setting

Methodology

AGENCY: Federal Communications

Commission.

ACTION: Final rule.

SUMMARY: The Report and Order

modifies rules and policies concerning

cable systems. The Report and Order

amends our regulations to permit the

establishment by a cable operator of

uniform rates for uniform services

offered across multiple franchise areas