[Federal Register Volume 59, Number 198 (Friday, October 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25446]


[[Page Unknown]]

[Federal Register: October 14, 1994]


-----------------------------------------------------------------------


FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 76

[MM Docket No. 92-215; FCC 94-226]

 

Cable Television Act of 1992

AGENCY: Federal Communications Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Commission has adopted a Memorandum Opinion and Order 
declining to adopt a productivity offset concerning regulated rates for 
cable television service. The Commission stated that the record failed 
to adequately support the proper design and adoption of a productivity 
offset. This action reconsiders the Commission's earlier proposal to 
adopt a productivity offset.

EFFECTIVE DATE: October 14, 1994.

FOR FURTHER INFORMATION CONTACT:
Lawrence A. Walke, (202) 416-0847.

SUPPLEMENTARY INFORMATION: The text of this document 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 Service, (202) 857-3800, 2100 M Street NW., 
Washington, DC 20037.

Memorandum Opinion and Order

    In the Matter of: Implementation of Sections of the Cable 
Television Consumer Protection and Competition Act of 1992--Rate 
Regulation.

    Adopted: September 2, 1994.
    Released: September 29, 1994.

    By the Commission:

I. Background

    1. In the initial Rate Order, released in May 1993, we adopted a 
price cap mechanism to govern rates for regulated cable service after 
initial rates have been established. In the Matter of Implementation of 
Sections of the Cable Television Consumer Protection and Competition 
Act of 1992: Rate Regulation Report and Order, MM Docket No. 92-266, 58 
FR 29736 (5/21/93), 8 FCC Rcd 5631, 5776 (1993) (``Rate Order''). Under 
the price cap, cable operators are permitted to adjust their capped 
rates to reflect costs attributable to inflation as measured by the 
Gross National Product--Price Index (GNP-PI), as well as for changes in 
external costs. We declined, however, to adopt a productivity offset to 
the GNP-PI because the record did not provide a basis for determining 
productivity gains in the cable industry.
    2. In the initial Cost-of-Service Notice, released in July 1993, we 
sought comment on whether the cable television industry has been or 
will be experiencing efficiency gains and on several alternatives for 
establishing a productivity offset. We specifically sought comment on 
four possible options: (1) No productivity offset; (2) a consumer 
productivity dividend of 0.5%; (3) a telecommunications industry 
adjustment of between 3.0% and 3.3%; and (4) a different productivity 
offset for cable operators. In the Matter of Implementation of Sections 
of the Cable Television Consumer Protection and Competition Act of 
1992: Rate Regulation, Report and Order and Further Notice of Proposed 
Rulemaking, MM Docket No. 93-215, 58 FR 40762 (7/30/93), 8 FCC Rcd 4545 
(``Cost of Service Notice''), at para. 85. In the Further Notice in 
this proceeding, released in March 1994, we tentatively concluded that 
cable operators should reasonably expect to achieve productivity gains 
that are comparable to those realized by other communications firms. We 
noted that cable television and telephone technologies are similar in 
many ways and have both benefited from technical advances. We stated, 
however, that while both industries are likely to continue improving 
their productivity, in the near term, the productivity gains that cable 
may reasonably expect to achieve may differ from those of telephone 
operations due to differences in their networks, operations, services 
and histories. Accordingly, we tentatively concluded that the record 
did not support the automatic adoption of the same productivity factor 
for cable systems as local telephone companies. In the Matter of 
Implementation of Sections of the Cable Television Consumer Protection 
and Competition Act of 1992: Rate Regulation, Report and Order and 
Further Notice of Proposed Rulemaking, MM Docket No. 93-215 59 FR 17975 
(4/15/94) (``Further Notice'') at para. 319. We proposed, and sought 
comment on, a two percent productivity offset. In the Further Notice, 
we also tentatively concluded that programming costs should not be 
subject to any productivity offset. We stated that we did not wish to 
indirectly restrict the ability of programmers to obtain fair value for 
their products.

II. Comments

    3. In response to the Further Notice, cable operators contend that 
a productivity offset would be inappropriate for the cable industry. 
They argue that the record in this proceeding does not adequately 
support a productivity offset of two percent, or of any particular 
level for that matter. Time Warner, for example, notes that only one 
party offered a specific offset figure which, Time Warner asserts, 
apparently is based on its use in state regulation of local exchange 
carriers (``LECs'') and not on any serious inquiry into the economics 
of the cable industry, and is not supported by any economic analysis. 
These commenters argue that differences between the telephone and cable 
industries dictate that a productivity offset for the cable industry 
should not be based on an offset incorporated in the interstate 
telephone price per scheme. These differences, according to commenters, 
are: (1) The relative easing of telephone rate regulation as compared 
to the re-regulation of cable systems currently underway; (2) differing 
fixed equipment costs; and (3) the differing units by which 
productivity growth is measured in the two industries. NCTA explains 
that the units of regulatory measurement for interstate telephone calls 
can be either the number of calls completed or the number of minutes of 
such calls. These units can expand within the system's capacity even if 
subscribership remains constant, and can grow rapidly in response to 
price decreases, it states. Thus, according to NCTA, it may be 
appropriate to have a productivity offset on the price of a call or a 
call minute as the incremental cost of each unit falls. NCTA states 
that, in contrast, the unit of regulatory measurement for regulated 
basic cable service is the number of basic cable subscribers; intensity 
of usage is irrelevant. NCTA argues that a price reduction for basic 
cable service will not induce households that already purchase service 
to purchase more service. NCTA contends that only in areas of low 
penetration will subscribership change in response to a price decrease, 
while in areas of high penetration, price decreases likely will not 
lead to substantial percentage increases in subscribership. NCTA thus 
asserts that these differences in the units of regulatory measurement 
further demonstrate the inappropriateness of deriving a productivity 
offset from the telephone regulatory regime into the cable service 
price cap scheme. NCTA also provides a study purporting to demonstrate 
that there has been no increase in productivity in the cable industry 
based on analyses of cable operators' costs. Productivity Growth in the 
Cable Television Industry, Christensen Associates. We note that Bell 
Atlantic has contended that NCTA's study would have shown productivity 
gains if the study also reflected the annual change in average number 
of active cable service channels.
    4. Cable operators also note that, in adopting a productivity 
offset for common carriers, the Commission reviewed numerous 
productivity studies demonstrating the historical productivity growth 
of telephone companies, including two independent studies as well as 
its own short-term study and a long-term study of the telephone 
industry covering more than 60 years. These parties contend that, given 
the absence of any studies or data concerning the cable industry, the 
Commission has no basis on which to determine or implement a 
productivity offset for the cable industry. Cable operators further 
argue generally that a productivity offset will dampen the industry's 
incentives to invest in innovative video services and development of 
the National Information Infrastructure. Comments from the cable 
industry also object to the productivity offset proposal based on (1) 
the relative immaturity of the cable industry and its supporting 
technology; (2) the fact that fiber optics and other necessary 
technological improvements may actually increase cable operators' costs 
in the near future; and (3) their belief that the price cap, as 
measured by the GNP-PI, already captures purported efficiency gains.
    5. Commenters from the telephone industry, on the other hand, 
assert that cable operators' rates should be subject to a productivity 
offset because the current and near-term introduction of fiber optics 
and other technologies will greatly increase the efficiency of the 
cable industry. These efficiencies, the telephone companies argue, 
should be shared with cable operators' subscribers. GTE and Bell 
Atlantic contend that the telephone and cable industries should have 
equivalent, or at least similar, productivity offsets given the 
industries' impending convergence in both technologies and services 
offered. These commenters note that an offset has been applied to the 
rates of telephone companies since they became subject to price cap 
regulation, and argue that industries rapidly converging to compete in 
the same video programming distribution marketplace should be subject 
to similar regulatory rate constraints.

III. Discussion

    6. A productivity offset should be based to the extent possible on 
observed efficiency gains experienced by the cable industry. An 
accurate productivity offset can assure that regulated cable service 
rates reflect a portion of the difference between demonstrated 
efficiency gains experienced by regulated cable operators, if any, and 
those gains produced in the economy as a whole, as measured by the 
Commission's chosen price cap index--the GNP-PI. As such, a correctly 
designed offset can significantly benefit consumers while permitting 
cable operators also to share in efficiency gains. In adopting a 
productivity offset in other contexts, the Commission has had the 
benefit of numerous Commission-sponsored and independent economic 
studies, each providing a record of the historical costs and 
productivity of the relevant industry.
    7. We believe that the current record does not provide an adequate 
factual basis for the incorporation of a productivity offset into the 
price cap governing cable service rates. The studies that have been 
submitted are insufficient to demonstrate observed productivity gains. 
Bell Atlantic's report is the only study submitted in response to the 
Further Notice purporting to provide an economic analysis in support of 
a productivity offset factor for cable service. However, the report's 
conclusion is not based on an analysis of costs or productivity in the 
cable industry; rather, the report essentially argues that cable 
operators should be subject to an offset, as required of telephone 
companies, given the rapid convergence of the two industries. No other 
studies or data have been submitted in support of a productivity 
offset. Thus, there is no factual basis in the record that would 
adequately support a two percent productivity offset. Accordingly, we 
decline to adopt our proposal to incorporate a productivity offset into 
the price cap governing cable operators' regulated rates for cable 
service.
    8. Accordingly, it is ordered, that the proposed productivity 
offset set forth in the Further Notice in this proceeding is not 
adopted.

Federal Communications Commission.
William F. Caton,
Acting Secretary.
[FR Doc. 94-25446 Filed 10-13-94; 8:45 am]
BILLING CODE 6712-01-M