[Federal Register Volume 59, Number 233 (Tuesday, December 6, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29442]
[[Page Unknown]]
[Federal Register: December 6, 1994]
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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 76
[MM Docket Nos. 92-266 and 93-215, FCC 94-286]
Cable Television Act of 1992
AGENCY: Federal Communications Commission.
ACTION: Final rule.
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SUMMARY: The Commission has adopted a Sixth Order on Reconsideration
and Fifth Report and Order to provide cable operators with additional
incentives to expand their facilities and services in a way that both
ensures that cable rates are reasonable and expands the opportunities
for cable programmers to reach viewers. These incentives will: allow
cable operators to offer new product tiers (``NPTs'') to be priced as
operators elect, provided certain limited conditions are met; permit
cable operators to add new channels to existing cable programming
services tiers (``CPSTs'') subject to certain price caps; and create an
additional option pursuant to which small cable operators may recover
headend costs expended plus programming costs when they add channels to
CPSTs. In addition, the Commission determined that a la carte packages
are CPSTs and therefore subject to rate regulation. The Commission also
confirmed that cable operators do not have to obtain the affirmative
consent of subscribers before making rate adjustments so long as the
changes are permitted under our rules and the fundamental nature of the
affected tier is unaltered. Finally, the Commission decided not to
adopt its proposal modifying restrictions on transactions between cable
operators and their affiliates; instead it will retain its existing
cable affiliate transaction rule.
The Commission also has adopted a Seventh Notice of Proposed
Rulemaking, which is being printed separately in the Federal Register.
EFFECTIVE DATE: January 1, 1995, with the exception of Sec. 76.922(e)
(1), (2), and (7) and Sec. 76.987(g) which contain new reporting
requirements which will be effective on that date or as soon thereafter
as they may be approved by the Office of Management and Budget. At a
later date, the Commission will publish a document specifying the
effective date.
FOR FURTHER INFORMATION CONTACT:
Paul D'Ari or Joel Kaufman, (202) 416-0800.
SUPPLEMENTARY INFORMATION: This is a synopsis of the Sixth Order on
Reconsideration and Fifth Report and Order in MM Docket No. 92-266 and
MM Docket No. 93-215, FCC 94-286, adopted November 10, 1994 and
released November 18, 1994.
The complete text of this Sixth Order on Reconsideration and Fifth
Report and Order is available for inspection and copying during normal
business hours in the FCC Reference Center (room 239), 1919 M Street,
NW., Washington, DC, and also may be purchased from the Commission's
copy contractor, International Transcription Services, Inc. (``ITS,
Inc.'') at (202) 857-3800, 2100 M Street, NW., Suite 140, Washington,
DC 20037.
Synopsis of the Sixth Order on Reconsideration and Fifth Report and
Order
A. Introduction
In this order, the Commission modifies its rules in light of
comments, filed, in response to petitions for reconsideration, and on
its own motion.
In this Report and Order, unless indicated otherwise, the
Commission uses ``CPSTs'' to mean cable programming service tiers that
are rate regulated under Sec. 76.922 of its rules. Although new product
tiers are CPSTs within the meaning of the Communications Act of 1934,
as amended, 47 U.S.C. 543(l)(2), in this Report and Order, they are
separately referred to as new product tiers or NPTs.
B. New Product Tiers
1. Background
The Cable Television Consumer Protection Act of 1992 (``1992 Cable
Act''), 47 U.S.C. 543(c), requires the Commission to ensure that CPST
rates are not unreasonable upon the receipt of a specific complaint.
The Act requires the Commission to establish criteria for determining
whether a rate is unreasonable after considering a number of factors,
such as the rates of similar systems, the rates charged by cable
operators that face competition, and the operator's costs and revenues.
The 1992 Cable Act also permits the Commission to consider other
relevant factors for determining what constitutes unreasonable rates
for CPSTs. In the Report and Order and Further Notice of Proposed
Rulemaking in MM Docket No. 92-266 (``Rate Order''), 58 FR 29736 (May
21, 1993), the Commission adopted benchmark and cost-of-service rules
which reflect a reasonable balancing of the statutory factors. The
Commission has also adopted rules which allow cable operators to
increase rates for their Basic Service Tiers (``BSTs'') and CPSTs to
reflect inflation, increases in external costs, and the addition of new
channels. The current formula for channel additions permits operators
to collect a sliding per channel adjustment for adding new programming
channels to CPSTs and to recover all programming expenses associated
with adding channels, plus a 7.5% mark-up on new programming expenses.
47 CFR 76.922 (d), (e).
A number of programmers have expressed the view that the cable
industry's ability to create new programming networks that can benefit
consumers depends on operators' being able to offer new services in
packages of programming. These programmers urge the Commission to
provide increased incentives to cable operators to offer such packages
of new programming services. Other commenters suggest that a
marketplace system is preferable to regulation in certain programming
and tiering decisions. In addition, as reflected in the record, many ex
parte comments support the adoption of rules allowing operators to
establish tiers of new services priced at market rates.
2. Discussion
The Commission is concerned, based on the comments filed by
operators and programmers, that the current rules may not provide
sufficient incentives for operators to expand capacity and provide new
services to consumers. Accordingly, the Commission is establishing a
new category of CPST--an NPT--that will provide additional incentives
for operators to provide new services to consumers because operators
will be permitted to price these tiers as they choose. The new rules
also will help programmers by encouraging operators to add new
attractive programming to NPTs in order to induce customers to
subscribe to the NPTs. NPTs are, by definition. ``cable programming
services'' under the 1992 Cable Act, because NPTs are composed of video
programming provided over cable systems that are not carried on the BST
and are offered in a package rather than exclusively on a per channel
or per program basis.\1\ 47 U.S.C. 543(1)(2). The Commission therefore
has a duty under the 1992 Cable Act to ensure that NPTs are not
unreasonably priced.
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\1\For purposes of the FCC Forms 1200 and 1210, however,
channels that are on an operator's NPT will not be considered
regulated channels.
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The Commission finds that, so long as the conditions set forth
below are met, the rates for NPTs will not be unreasonable. The
conditions set forth below will ensure that subscribers may choose to
subscribe to BSTs, NPTs, or CPSTs or combinations of those tiers and,
that as a result, NPTs will face competition from BSTs and CPSTs.
First, operators offering NPTs are prohibited from making
fundamental changes to what they offer on their BSTs and CPSTs on
September 30, 1994. This requirement is necessary to ensure that cable
subscribers continue to receive basically the same cable service they
now receive at prices the Commission has set pursuant to its rate
regulations. This requirement, however, is not intended to freeze BSTs
and CPSTs. Operators remain free to move channels from the existing
tier to a single channel offering or drop channels entirely, so long as
the aggregation of such changes does not constitute a fundamental
change of their BSTs or CPSTs.
Second, operators may not drop channels from BSTs and CPSTs and
move them to NPTs (including time-shifted, slightly altered or renamed
versions of channels offered on other tiers), if the channels were
offered on their BSTs or CPSTs on September 30, 1994. This will protect
consumers by ensuring that operators electing to provide NPTs do not
dilute the BSTs and CPSTs that are currently available to consumers.
This will also help ensure that BSTs and CPSTs provide a competitive
option to NPTs. A channel that occupied a BST or a CPST part-time may
be offered full-time on an NPT, as long as it continues to be offered
on the BST or CPST under substantially the same conditions as it was
offered on September 30, 1994. If a channel occupies a BST or CPST
full-time, however, and is subsequently reduced to part-time on the BST
and CPST, that channel may not be offered on an NPT full-time.
Third, BSTs and CPSTs must continue to be cognizable services. That
is, the operator must continue to market its BSTs and CPSTs so that
customers are reasonably aware of: (1) The availability of those tiers
to the public; (2) the names of the channels available on those tiers;
and (3) the price of the tiers. Within 30 days of the offering of an
NPT, operators shall file with the Commission a copy of the new rate
card that contains the following information on their BSTs, CPSTs, and
NPTs: (1) The names of the programming services contained on each tier,
and (2) the price of each tier. Operators also must file with the
Commission copies of notifications that were sent to subscribers
regarding the initial offering of NPTs. After this initial filing,
cable operators must file updated rate cards and copies of customer
notifications with the Commission within 30 days of rate or service
changes affecting the NPT. This information will help the Commission
ensure that operators are complying with our conditions for NPTs. No
prior regulatory approval, however, is required to offer an NPT.
Furthermore, in accordance with the 1992 Cable Act's prohibition on
negative option billing, an operator may not charge any subscriber for
an NPT unless the subscriber has requested the NPT by name. Moreover,
fundamental changes to an NPT must be approved by subscribers in
accordance with the negative option billing rules. Channel changes
involving relatively few channels generally will not change the
fundamental nature of a tier and thus will not implicate the negative
option billing rule.
Operators may not require the subscription to any tier, other than
a BST, as a condition for subscribing to an NPT. Further, operators may
not require subscription to an NPT as a condition to subscribing to a
CPST. We believe that restricting the ability of operators to link the
purchase of NPTs and other CPSTs will maximize subscriber choice and
foster competition between NPTs and CPSTs. These buy-through
restrictions will not apply, however, to cable operators that, prior to
October 5, 2002, lack the capacity to offer BSTs and NPTs without also
providing other intermediate tiers of service. See 47 CFR 76.921.
Apart from the foregoing limited, specific requirements, operators
will have complete flexibility to offer programming services on an NPT.
Thus, the Commission's NPT rules provide that operators may offer the
same programming services on NPTs as are on one or more BSTs and CPSTs
so long as they do not state or imply that any such channel is
available only on an NPT.
Operators may add any channel to an NPT that was previously on a
BST or CPST if the channel was dropped from the BST or CPST before
September 30, 1994. If a channel was offered on a system on a BST or
CPST on September 30, 1994, however, the channel may not be moved to an
NPT unless the operator waits at least two years from the date the
channel is dropped from the BST or CPST. However, operators may offer
new channels (i.e., channels first offered on a system after September
30, 1994) on CPSTs before moving them to NPTs, subject to the
conditions outlined in this Report and Order. The flexibility to move
new channels to NPTs will keep the prices for CPSTs from becoming
unreasonable and will create additional capacity for new services on
CPSTs. This capacity should help create opportunities for programmers
to establish an audience for their new channels.
If after initially electing to offer an NPT, a cable operator
decides that offering an NPT is no longer desirable, the cable operator
is free to drop the tier upon proper notice to subscribers. An operator
that drops an NPT may reestablish that tier at a later time by
complying with the conditions outlined above.
The Commission's conclusion that the rates at which cable operators
choose to offer NPTs will not be unreasonable reflects its
consideration of the statutory factors that it must consider in
establishing criteria for determining whether a rate for a CPST is
unreasonable. As explained above, the Commission believes that the
rates charged for NPTs will be constrained by the rates charged for
BSTs and CPSTs. The rate standards for BSTs and CPSTs were set directly
by analysis of the factors the 1992 Cable Act instructs the Commission
to consider. The Commission believes that the rates charged for NPTs
must be competitive with the rates charged for CPSTs or consumers will
decline to subscribe to NPTs. Therefore, the rates charged for NPTs
will reflect the Commission's analysis of the statutory factors because
cable operators will have to offer NPTs at prices that are attractive
in comparison to services subject to benchmark or cost-of-service
regulation.
B. A La Carte Package Offerings
1. Background
Under the 1992 Cable Act, video programming offered on a per
channel or per program (a la carte) basis is not subject to rate
regulation. 47 U.S.C. 543(l)(2). In the April 1993 Rate Order, 58 FR
29736 (May 21, 1993), the Commission held that it would not regulate
packages of otherwise exempt per channel or per program services so
long as: (1) The price for the combined package does not exceed the sum
of the individual charges for each component of service, and (2) the
cable operator continues to provide the component parts of the package
to subscribers separately. The Commission stated that the second
condition would be met only when the per channel offering provides
subscribers with a realistic service choice. Id at 29746.
In the Second Reconsideration Order, 59 FR 17943 (April 15, 1994),
in order to address concerns that some packages established by
operators in response to rate regulation were not consistent with the
1992 Cable Act and Commission regulations, and the fact that other
offerings raising similar concerns could be initiated in the future,
the Commission provided 15 interpretive guidelines for determining
whether an operator's collective offering of a la carte channels should
be accorded regulated or unregulated treatment. The Commission also
determined that packages of a la carte channels offered prior to April
1, 1993, (the date it adopted the Rate Order) would be accorded
unregulated treatment. This limited ``grandfathering'' of packages
available on April 1, 1993, was intended to avoid elimination of
discounts that were available to consumers and clearly were not offered
to evade rate regulation. Id. at 17951-17952.
Also, on November 17, 1993, the Commission issued 16 letters of
inquiry to various cable operators, and on December 13, 1993, it issued
another 35 letters of inquiry, most of which addressed the issue of
removal and repackaging of channels. On February 22, 1994, the
Commission issued 11 letters of inquiry to cable operators that, among
other things, asked operators to justify a la carte offerings that may
be inconsistent with the Commission's rate regulations.
The Commission has received numerous comments with respect to a la
carte issues. Most of the commenters requested greater clarification of
the Commission's a la carte rules and guidelines. Commenters also made
suggestions concerning the treatment of a la carte offerings that are
found not to meet Commission guidelines. Some suggest that cable
operators should not be penalized for failing to satisfy the
Commission's test for a la carte packages because it is unclear.
2. Discussion
The evidence obtained in response to the letters of inquiry issued
to cable operators offering a la carte packages and the comments we
received from cable operators convinced the Commission that it should
reconsider its approach. It seems clear that some cable operators have
evaded rate regulation by purporting to offer channels a la carte, when
in fact the individual offerings were not a realistic service
alternative. On the other hand, there is merit to the industry's claim
that neither the Commission's original two-part test nor its
interpretative guidelines provides a clear answer with respect to the
permissibility of some a la carte packages that have been offered.
Indeed, it is perhaps inevitable that the test would not be capable of
precise application in many instances because it is not clear how
various factors should be weighed and applied.
The Commission's analysis leads it to conclude, contrary to its
prior decisions, that a la carte packages are CPSTs within the meaning
of the 1992 Cable Act. The conclusion that all packages are ``cable
programming services'' is supported by the language of the statute, the
legislative history, and practical considerations as well.
Section 3(l)(2) of the 1992 Cable Act defines CPSTs as ``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, other than (A) video programming carried on the
basic service tier, and (B) video programming offered on a per channel
or per program basis.'' 47 U.S.C. 543(l)(2). A package of channels,
whether or not the channels also are offered a la carte, plainly is
``video programming provided over a cable system,'' and hence is a
``cable programming service.'' The package is not ``video programming
offered on a per channel or per program basis;'' the individual
channels are. Accordingly, it is apparent from the statutory language
that a la carte packages are cable programming services. The conclusion
that a package of a la carte channels is a CPST is further supported by
the legislative history, which focused on the fact that bundled
offerings of cable programming would be subject to rate regulation.
A conclusion that rate regulation does not apply at all to video
programming packages if the channels are offered individually would
fatally undermine the rate regulations rules Congress enacted. If a
package of a la carte channels is not a CPST, any cable operator may
avoid rate regulation simply by announcing the offering of channels on
an a la carte basis even if very few subscribers would choose the a la
carte offerings rather than the package.
However, as the Commission recognized in the Rate Order, there are
sound policy reasons to treat as reasonable any price offered for a
package of channels that traditionally have been offered on a per-
channel basis. Indeed, the Commission can not envision circumstances in
which any price of a collective offering such as the commonly offered
``HBO/Showtime'' package would be found to be unreasonable. For the
future, the new rules authorizing ``new product tiers'' should provide
cable operators with sufficient flexibility to offer such packages at
whatever price they choose. Although cable operators may not remove
channels from regulated tiers and offer them on NPTs, they are free to
create packages of a la carte channels under the new rules governing
NPTs. Moreover, as stated above, the Commission previously
``grandfathered'' packages available on April 1, 1993. The difficult
question concerns the treatment of a la carte packages created between
April 1, 1993, and September 30, 1994. In some cases, the Commission
thinks it is clear that the package at issue was not a permissible
package under a fair reading of its test. In other cases, however, it
is not clear how the test should be applied to the package at issue. In
those cases, the Commission thinks it is fair, in light of the
uncertainty created by its test, to allow cable operators to treat
existing packages as NPTs even though it would not qualify under the
new rules, provided that such packages involve only a small number of
migrated channels.\2\ The Commission sees little reason to require an
operator to ``reverse migrate'' a package that was not clearly
ineligible for unregulated treatment under our a la carte policy. The
Commission intends to address whether specific operator packages should
be treated as NPTs in rulings on individual cases in the near future.
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\2\As noted above, competition between an NPT and a BST and/or
CPST is the primary reason that we conclude rates for NPTs will not
be unreasonable.
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C. Adjustments to Capped Rates for Addition, Deletion and Substitution
of Channels on CPSTs
1. Background
Pursuant to Section 623 of Communications Act, 47 U.S.C. 543, the
Commission adopted a comprehensive framework governing the rates for
BSTs and CPSTs. Under this framework, once initial rates are set
pursuant either to the benchmark or cost-of-service approaches set
forth in the rules, rates are governed by a price cap designed to
assure that rates for regulated cable services remain reasonable. Under
the cap, operators may adjust rates annually for inflation as measured
by the gross national product price index (``GNP-PI'') and for certain
categories of external costs. 47 CFR 76.922(b),(c),(d).
The Commission's price cap rules were amended in March, 1994 to
specify a ``going forward'' mechanism under which capped rates are
adjusted for changes in the number of channels offered on BSTs and
CPSTs. Fourth Report and Order 59 FR 17943, 17955-17956 (April 15,
1994). Under these provisions, operators first remove all external
costs from the tier charge and then adjust the residual component of
the tier charge by a specified per channel adjustment amount when the
total number of regulated channels changes. The methodology for
adjusting capped rates when channels are added or deleted from a
regulated tier is set forth in detail in Sec. 76.922(e) of the
Commission's rules and in FCC Form 1210.
The March, 1994 rule amendments also permitted operators to include
a mark-up of 7.5% on new programming expense related to programming
added on or after May 15, 1994. Form 1210 allows the 7.5% mark-up on
all programming cost increases occurring after March 31, 1994, no
matter when the channel was first offered.
Parties filing petitions for reconsideration and many commenters
filing in response to the Fifth Notice of Proposed Rulemaking ask the
Commission to revise the existing going forward rules substantially.
Many criticize the existing per channel adjustment on the grounds that
it fails to provide sufficient incentives to add channels. Some cable
operators, programmers, and networks state that the percentage-based
approach to the programming mark-up results in disincentives for
operators to add low or no-cost services to BSTs and CPSTs (noting that
7.5% of zero is zero).
Most of the alternatives on going forward issues proposed by the
industry involve a flat per channel charge. Two Commenters submitted
economic studies to support a flat per channel adjustment of at least
25 to 30 cents. Some propose a flat-fee mark-up subject to an annual
cap.
2. Discussion
As noted, the Commission previously adopted a machanism by which
cable operators may adjust rates when adding channels to BSTs and
CPSTs. The Commission is supplementing its existing going forward rules
by creating an alternative channel adjustment methodology. Cable
operators adding channels to CPSTs under the new, supplemental rules
may receive (1) a flat per channel mark-up, subject to a cap through
December 31, 1997, and (2) recovery of programming costs, subject to a
cap through December 31, 1996, and pursuant to the Commission's
existing rules on permitted programming costs through December 31,
1997, modified to remove the 7.5% mark-up. In so doing, the Commission
seeks to permit operators to provide new services on CPSTs, while
assuring that rates for CPSTs are not unreasonable.
Operators may adjust rates for CPSTs pursuant to the new going
forward rules beginning January 1, 1995, the effective date of the new
rules, for channel changes, if any, made to these tiers on or after May
15, 1994, the effective date of the existing going forward rules.
Operators adding channels to CPSTs on and after May 15, 1994, may use
either the new rules or the existing rules for adjusting rates. Thus,
the permitted charge for a CPST will consist of two elements. The first
element is the permitted rate for channels offered on CPSTs on May 14,
1994, determined under current rules. The second element is the
permitted rates for channels added to, or dropped from, CPSTs on or
after May 15, 1994, determined under the new rules, or, if the operator
so elects with respect to channel additions, the current rules as
modified to remove the 7.5% mark-up on increases in programming costs
under certain circumstances described below.
Operators must elect to apply either the new rules or the current
rules the first time they adjust rates after December 31, 1994, to
reflect a channel addition to a CPST that occurred on or after May 15,
1994, and must use the elected methodology for all rate adjustments
through December 31, 1997. The Commission is allowing operators to
choose to continue using the current rules because the current rules
provide greater channel addition incentives than the new rules in
certain limited circumstances and some operators may have relied on the
current rules in deciding to add channels. While the Commission is
requiring that operators use either the existing or the new going
forward rules consistently for channel additions to CPSTs after
December 31, 1994, an operator that chooses to use the new rules after
that date may, but is not required to, adjust rates to reflect the new
rules for channel additions made between May 15, 1994 and December 31,
1994. Rates for the BST will continue to be governed exclusively by the
current rules, except that where a system offered only one tier on May
14, 1994, the cable operator will be allowed to use the revised rules
for channel additions to the BST, as if the tier was a CPST.
a. ``Going Forward'' price cap structure. Operators electing to use
the new rules may adjust their rates between January 1, 1995 and
December 31, 1997, by up to 20 cents, exclusive of license fees, for
each new channel added to CPSTs on or after May 15, 1994, subject to
the Operator's Cap and the reserve for license fees, described below.
Operators are not required to raise rates, but rather are permitted to
do so. Operators may add channels under the new rules at any time from
May 15, 1994, to December 31, 1997. They may not, however, raise their
prices as a result of channel additions by more than $1.20 per
subscriber per month between January 1, 1995, and December 31, 1996,
and by more than $1.40 between January 1, 1995, and December 31, 1997
(``Operator's Cap'').
Operators may use may portion of the Operator's Cap to pay for
license fees between January 1, 1995, and December 31, 1996, for
channels added between May 15, 1994, and December 31, 1996. Moreover,
operators may recover an additional amount of not more than 30 cents
per subscriber per month for license fees (the ``License Fee Reserve'')
between January 1, 1995, and December 31, 1996, for channels added
between May 15, 1994, and December 31, 1996. After December 31, 1996,
license fees may be passed through to subscribers pursuant to the
existing rules, except that, as described below, operators will not be
allowed the current 7.5% mark-up on programming costs for channels on
or after May 15, 1994. The Operator's Cap and License Fee Reserve only
apply to costs associated with new channels on CPSTs and do not affect
the ability of operators to obtain rate adjustments for inflation or
changes in external costs other than increases in programming costs of
channel added under the new going forward rules. See 47 CFR
76.922(d)(2), (3). The new going-forward rules for channel additions
should benefit consumers by increasing their viewing options on
existing CPSTs, while avoiding unreasonable price increases for those
tiers.
b. Per channel adjustment factor. As indicated, the Commission
establishes a ``per channel adjustment factor'' of up to 20 cents per
channel for channels added to CPSTs. Operators may increase rates by up
to 20 cents, exclusive of programming costs, for each channel added to
a CPST on and after May 15, 1994, subject to the Operator's Cap of
$1.20 on rate increases attributable to channel additions through
December 31, 1996, and $1.40 through December 31, 1996, and $1.40
through December 31, 1997. An operator may choose a lower per channel
adjustment, if that would further its business plan by, for example,
allowing it to devote a portion of the Operator's Cap to license fees.
An operator that added a channel on or after May 15, 1994, and raised
pursuant to the existing rules, may revise its rates after December 31,
1994, using the new channel addition rules. As noted, an operator must
use either the existing or the revised rules consistently for all
channel additions on and after January 1, 1995.
The per channel adjustment factor will compensate the operator for
its costs of adding the channel plus a reasonable profit. Twenty cents
falls within the historical range of 15-22 cents by which operators in
a competitive environment would adjust rates for the addition of a new
programming channel, exclusive of programming costs. The methodology
the Commission used in deriving the 15-22 cent range is set forth in
the Technical Appendix to the full text of this Report and Order.
The Commission's rules provide that any revenues received from a
programmer, or shared by a programmer and an operator, must be netted
against costs for purposes of calculating whether there has been an
increase or decrease in external costs. 47 CFR 76.922(d)(3)(x). We
extend this requirement for offsetting revenues against costs to the
per channel adjustment factor for channels added to CPSTs pursuant to
our revised channel adjustment rules. The revenues must be deducted
from programming costs and then, to the extent revenues are remaining,
from the per channel adjustment. Offsetting will apply on a channel-by-
channel basis. Commissions received by an operator from programmers
will be treated as revenues received from programmers.
The per channel adjustment factor permitted by this Report and
Order will apply only to net increases in channels from the highest
number of channels offered on all CPSTs (excluding NPTs) on May 15,
1994, or any date thereafter.\3\ If an operator substitutes a new
channel for an existing channel, no per channel adjustment may be made
under the revised channel adjustment rules. Rather, the operator should
continue to charge the residual associated with the channel that was
dropped. To permit an operator to receive a per channel adjustment in
these situations would encourage operators to evade the purpose of the
revised going forward incentives by substituting new for existing
channels simply to get an additional per channel adjustment.
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\3\An operator may receive a per channel adjustment for channel
X if it substitutes channel Y for channel X and then adds channel X
back to the system, so long as the addition of channel X represents
the required net increase in the number of CPST channels. In
contrast, an operator that had 20 channels on its CPSTs on May 15,
1994, 22 channels on its CPSTs on May 15, 1995, and 21 channels on
its CPSTs on January 1, 1996, may not obtain a per channel
adjustment for adding the 22nd channel back to its system on May 15,
1996. Rather, the 22nd channel is treated as a channel substitution.
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c. Operator's cap. For the addition of new channels to CPSTs on or
after May 15, 1994, the Commission establishes a per subscriber cap on
the amount by which monthly cable rates may increase between January 1,
1995, and December 31, 1997. Operators may not make rate adjustments to
monthly rates totalling more than $1.20 per subscriber over the first
two years of the three-year period or more than $1.40 over the full
three-year period. Rate changes prior to January 1, 1997, resulting
from programming costs of new channels must fall within the Operator's
Cap unless they are covered by the License Fee Reserve. Price increases
will be counted against the Operator's Cap when rates are increased as
a result of channel additions, not when the addition occurs. Any rate
increases pursuant to the revised rules shall be subject to the notice
and prior approval requirements of the Commission's regulations. See 47
CFR 76.932, 76.933, 76.958, 76.964. In addition, operators will be
required to send the Commission copies of the notices sent to
subscribers. The Operator's Cap will apply only to operators using the
20 cent per channel adjustment in our new rules. It will not apply to
operators that elect to use the existing rules to adjust rates for
channel additions occurring on and after May 15, 1994.
The Operator's Cap on the rate increase attributable to the
addition of new channels to CPSTs is based on historical increases in
numbers of channels offered. It is necessary because without such a
cap, the per channel mark-up could create an incentive for operators to
add large numbers of channels to CPSTs so as to increase the aggregate
mark-up received. This result would undermine the 17% competitive rate
reduction previously ordered by the Commission and could raise overall
rates toward monopoly levels that would have occurred in the absence of
the 1992 Cable Act. An unreasonable CPST rate also would cause the CPST
to be an unattractive choice for subscribers, thereby removing it as a
viable competitor to an NPT.
In addition, the Commission adopts the Operator's Cap because there
is no evidence that consumers want to pay for an unlimited number of
channels in CPSTs. The cap will also provide operators with incentives
to choose which new services offered on CPSTs would be most demanded by
subscribers. Finally, because the per channel adjustment of up to 20
cents reflects an average based on historical data, adjusted for the
lack of effective competition, it may provide some operators with a
greater incentive to add channels than would exist in a competitive
market.
d. License fee reserve. The Commission also establishes a License
Fee Reserve of 30 cents which operators may use, between January 1,
1995, and December 31, 1996, to recover programming costs for new
channels. The License Fee Reserve may be applied against the initial
license fee or any increase in the license fee for channels added
during the first two years that the Operator's Cap is in effect. During
this period, operators also may use all or any portion of the amount
permitted as a per channel adjustment under the Operator's Cap to pay
for license fees in excess of the License Fee Reserve. License fees
incurred in the third year the Operator's Cap is in effect may be
passed through to subscribers as external costs without counting
against either the License Fee Reserve or the Operator's Cap.
The 30 cents License Fee Reserve would allow 6 channels to be added
at an average license fee of 5 cents per channel. The 5-cents average,
per channel license fee falls within the range which the Commission
observed.
The Commission has adopted a License Fee Reserve in response to
programmers' concerns that a cap on total rate increases attributable
to new channels, without a reserve for license fees, might give rate-
regulated cable operators incentives to increase profits by adding only
no cost or low cost channels.
e. Programming cost increase mark-up. The Commission has decided
not to allow operators using the per channel adjustment under the new
rules to take the 7.5% mark-up on programming cost increases, including
retransmission consent fees and copyright fees incurred for coverage of
broadcast signals, for channels for which the per channel mark-up of up
to 20 cents was taken. The Commission's analysis indicates that the per
channel adjustment of up to 20 cents for additional channels, in
addition to the License Fee Reserve, will provide full and fair
compensation to operators adding channels to CPSTs. Operators who have
added channels prior to the effective date of the new rules will not be
harmed by this change since the operators may elect to add channels to
CPSTs under the old or the new rules.
f. Deletion and substitution of channels. The new regulations also
specify how operators shall adjust rates for BSTs and CPSTs when
channels are dropped from, or moved between, BSTs and CPSTs. In
general, when dropping a channel from a BST or CPST, operators will be
required to make their rates reflect the net reduction in external
costs as is required under the existing rules. See 47 CFR 76.922(d)(3)
(i) and (ii). Operators also will be required to reduce the price of
that tier by the ``residual'' associated with that channel. For
channels that were on a BST or CPST on or before May 14, 1994 or
channels added after that date pursuant to the current rules, the per
channel residual is the charge for the tier, minus the external costs
for the tier, and any per channel adjustments made after that date,
divided by the number of channels on the tier. For channels added to a
CPST on or after May 15, 1994, pursuant to the new channel addition
rules, the residuals shall be the actual per channel adjustment taken
for that channel when it was added to the tier plus any inflation
adjustment since that time. The residual and programming cost shall be
calculated as of the date the channel is dropped.
As noted above, when an operator substitutes a new channel for an
existing channel on a CPST, no per channel adjustment may be taken. The
residual for the new channel is that of the channel it replaced.
Operators substituting channels will be required to adjust their rates
for changes in license fees as provided by the current rules. To
preserve the overall effectiveness of the Operator's Cap and the
License Fee Reserve, if the license fee for the new service is greater
than the license fee for the replaced service, and the operator chooses
to pass that increase through to subscribers, the excess shall count
against the aggregate of the Operator's Cap and the License Fee
Reserve. If the license fee for the new channel is less than the
license fee for the replaced channel, no credit shall be given against
the cap or the reserve, so as not to create an artificial incentive to
replace higher license fee channels with lower license fee channels.
With respect to channels to which the 7.5% markup on new programming
costs applies, the operator shall treat the mark-up as part of its
programming costs and subtract the mark-up from its external costs when
a channel is dropped. When such a channel is substituted, the operator
may retain in its rates the 7.5% mark-up on the license fee of the
dropped channel, so long as that amount is not more than 7.5% of the
license fee of the new channel.
When a channel is shifted between a BST and a CPST or between
CPSTs, it shall be treated as if it was dropped from one tier and the
residual and programming cost associated with the shifted channel shall
be shifted to the other tier. The residuals associated with the shifted
channel shall be adjusted by reference to the number of subscribers on
each tier to ensure aggregate revenues remain the same.\4\ Revenue
neutrality protects consumers by ensuring that the Commission's
requirements do not create incentives for operators to move channels to
tiers with more subscribers solely to increase revenues. And because
the per channel adjustment of up to 20 cents applies only to the CPSTs,
an operator may not move a channel for which it received a per channel
adjustment under the new rules from a CPST to the BST.
---------------------------------------------------------------------------
\4\An operator may use the equivalent billing (``EBU'')
methodology in calculating the number of subscribers on a tier,
provided it does so for both the tier from which the channel is
shifted and the tier to which the channel is shifted and provided
that the operator otherwise meets the conditions for using EBU
methodology. See Public Notice: Question and Answer on Cable
Television Rate Regulation (July 27, 1994) Question and Answer 1.
---------------------------------------------------------------------------
g. Headend upgrades for small systems. The Commission decided to
adopt a special streamlined cost-of-service procedure for independent
small systems and small systems owned by small MSOs that upgrade their
headend equipment to add new channels to CPSTs. Small systems may find
it difficult to recover the fixed costs of the headend equipment
required for adding channels, since the cost must be recovered over a
small subscriber base. The Commission limits this relief to independent
small systems and small systems owned by small MSOs because (1) systems
with more than 1,000 subscribers can spread the fixed costs of headend
equipment over a larger customer base and (2) small systems owned by
larger operators should have adequate financial resources to add
channels under our generally applicable rules. Qualified small systems
that add channels to their CPSTs, therefore, have the option of either
using this special procedure or using the existing or revised going
forward rules applicable to all operators.
Under this streamlined cost-of-service procedure for upgrading
headend equipment, independent small systems and small systems owned by
small MSOs may increase rates to recover the costs associated with new
headend equipment that is used to add channels to CPSTs. In order to
recover costs for headend equipment, qualified small systems will be
required to certify to the Commission the level of costs they have
actually incurred for adding headend equipment.
The Commission also decided to limit the amount small systems may
recover under this special allowance to prevent unreasonably sharp rate
increases to small system subscribers. The amount a small system may
recover for each channel added shall be limited to programming costs
incurred plus the lesser of the actual cost of the headend equipment or
$5,000, which is consistent with comments that the addition of a
satellite channel can cost between $2,500 and $5,000.
Headend costs that are to be recovered through increased rates must
be depreciated over the useful life of the equipment. While the
Commission has not prescribed depreciation rates, cable operators are
required to follow reasonable depreciation practices. Depreciation and
useful life of the equipment are to be submitted to the Commission with
the cost certification. In addition, the rate of return the small
system may earn on this investment may not exceed 11.25%.
Small systems may apply this streamlined cost-of-service procedure
for channels added after May 14, 1994, but may not use this methodology
to increase rates to reflect channel additions until January 1, 1995.
Moreover, small systems that increase rates as a result of any channel
additions pursuant to either this methodology may add a maximum of
seven channels to CPSTs over the next three years. This is equal to the
number of channels that a system taking the maximum 20 cent per channel
adjustment may add under the Operator's Cap.
h. Systems with more than 100 channels. In the Fifth Notice of
Proposed Rulemaking, the Commission noted that the Fourth Report and
Order 59 FR 17943, 17955-17956 (April 15, 1994), established per
channel adjustments for systems with total channels on regulated tiers
of 100 channels or fewer. It did not establish per channel rates for
systems that provide more than 100 channels. The Commission solicited
comment on whether it should establish a method for adjusting capped
rates in situations where there are more than 100 regulated channels
and, if so, what that method should be. The Commission additionally
asked whether the going forward methodology should be modified to
provide greater or lesser compensation to operators for adjustments to
capped rates when channels are added or deleted from BSTs and CPSTs,
and whether this would better meet the goals of encouraging
infrastructure development and growth of programming.
The existing going forward regulations use a declining per channel
adjustment as the number of channels on a system increase. In contrast,
in this Report and Order the Commission has decided to allow (1) a flat
per channel adjustment for the addition of new channels to CPSTs,
subject to an Operator's Cap, and the License Fee Reserve, and (2) NPTs
for which cable operators set the price. Because the revised
regulations allow operators to set the price for an unlimited number of
channels on NPTs, the Commission does not believe it is necessary to
adopt any other rules that are based on a specific number of channels.
Cable operators continuing to add channels under the current rules may
receive a per channel incentive only for the first 100 channels on BSTs
and CPSTs.
i. Term of the revised channel addition rules. A. The new rule for
adjusting rates when channels are added, deleted or substituted on
CPSTs will be in place through December 31, 1997, and will be reviewed
prior to the end of that period to determine if there is any reason to
continue to provide incentives to increase the number of channels on
any CPST. The new rule will expire on that date and will be replaced by
the existing rule unless the new rule is reinstated by the Commission.
The special streamlined cost-of-service procedure for headend equipment
costs for small systems also will expire on December 31, 1997, unless
it is reinstated by the Commission.
D. Negative Option Billing
1. Background
Section 3(f) of the 1992 Cable Act, 47 U.S.C. 543(f), prohibits
negative option billing, which occurs when a cable operator charges a
subscriber for any service or equipment that the subscriber has not
affirmatively requested by name. A subscriber's failure to refuse a
cable operator's proposal to provide such service or equipment may not
be deemed to be an affirmative request for such service or equipment.
The Rate Order, 58 FR 29736, 29748 (May 21, 1993), provided that
changes in the mix of programming in a tier, including additions or
deletions of channels, will not be subject to the negative option
billing provision unless they change the fundamental nature of the
tier. The Commission believed that, on balance, the benefits to
subscribers from giving operators the ability to diversify, improve or
otherwise modify their offerings in a tier outweigh the slight
reduction in subscriber choice that results from exempting such changes
from the negative option billing prohibition.
In the Third Reconsideration Order, 59 FR 17961, 17969-17970 (May
21, 1993), the Commission concluded that the Commission concluded that
the Commission and state and local governments have concurrent
jurisdiction to regulate negative option billing. The rationale for
this conclusion was that regulation of negative option billing, while
discussed in the section of the 1992 Cable Act governing rate
regulation, is more in the nature of a consumer protection measure than
rate regulation per se. Section (8)(c)(1) of the 1992 Cable Act,
codified in Section 632(c)(1) of the Communications Act, 47 U.S.C.
552(c)(1), provides that nothing in the ``Consumer Protection Laws''
title of the Communications Act may ``be construed to prohibit any
State or any franchise authority from enacting or enforcing any
consumer protection law, to the extent not specifically preempted by
this title.''
Commenters request that the Commission clarify what channel
additions to a tier will not require affirmative marketing under
Section 3(f) of the 1992 Cable Act. They also ask the Commission to
declare that local authorities may not require affirmative marketing
for channel additions under state or local laws. More specifically,
NCTA asks the Commission to clarify that three specific ``scenarios''
do not trigger the federal negative option billing rule and that state
or local authorities are preempted from enacting or enforcing their own
negative option billing laws.
2. Discussion
In determining whether any of the scenarios involve negative option
billing, the Commission is guided by the language of the negative
option billing provision, its legislative history, and our prior
interpretations. In light of that guidance, the Commission reaffirms
that a change in the mix of channels in a tier, including additions or
deletions of channels, will not be subject to the negative option
billing provision, unless they change the fundamental nature of the
tier. With respect to NCTA's first scenario, which involved passing
through external costs or inflation adjustments, the Commission holds
that these types of rate changes do not in and of themselves invoke the
federal negative option billing rule. As an initial matter, they do not
constitute ``service or equipment'' within the meaning of Section 3(f).
Moreover, under our rate regulations, operators are specifically
permitted to pass through to subscribers increases in external costs
and inflation adjustments. 47 CFR 76.922(d). These types of rate
changes do not constitute a change in the fundamental nature of a tier,
and, therefore, do not implicate the federal negative option billing
prohibition for that reason as well.
With regard to the second and third scenarios identified in NCTA's
letter, the Commission stated in the Rate Order, 58 FR 29748 (May 21,
1993), that ``a change in the mix of channels in a tier, including
additions or deletions of channels, will not be subject to the negative
option billing provision, unless they change the fundamental nature of
the tier.'' Determinations as to what constitutes a change in the
fundamental nature of a tier will generally depend on the individual
circumstances of each case. Channel changes involving relatively few
channels generally will not change the fundamental nature of that tier,
and thus will not implicate the federal negative option billing rule.
Consistent with this approach, additions of channels and rate
adjustments within the Operator's Cap and License Fee Reserve of the
revised going forward rules generally will not change the fundamental
nature of a tier. Affirmative marketing also is not required when an
operator moves channels pursuant to our conditions for establishment of
NPTs, so long as the movements do not change the fundamental nature of
the tier. Because the Commission's rules require operators to give
subscribers 30-days' advance notice of any changes in rates,
programming or channel positions, the Commission does not believe
subscribers need the additional protection of the negative option
billing provision for relatively modest changes. See 47 CFR
76.309(c)(3)(i)(B); 76.964(b).
Section 632(c)(1) of the Communications Act makes clear that state
and local authorities generally may apply statutes proscribing fraud or
misleading advertising practices to cable operators. However, Section
3(a)(1) of the 1992 Cable Act makes clear that regulation of ``the
rates for the provision of cable service'' is governed exclusively by
the federal statute and Commission regulations. The scenarios NCTA
presents require the Commission to consider again the relationship
between Section 632(c)(1) of the Communications Act and Section 3(a)(1)
of the 1992 Cable Act.
The Commission concludes that a two-step approach is warranted.
First, is the state or local negative option rule consistent with the
federal rule? If it is, then the state or local rule may be enforced.
If the state or local rule is inconsistent with the federal rule, then
it is necessary to consider whether its enforcement ``approaches,
actual regulation of `rates for the provision of cable service.'' In
elaborating on that inquiry, the Commission now concludes that state or
local consumer protection laws may not be enforced in a manner that
conflicts with or undermines our rate regulation rules established
pursuant to Section 3 of the 1992 Cable Act. If there is an actual
conflict between federal and state law or where state law stands as an
obstacle to the accomplishment and execution of the full objectives of
Congress, the state law is preempted. See, e.g., Free v. Bland, 369
U.S. 663 (1962); Hines v. Davidowitz, 312 U.S. 52 (1941).
The scenarios NCTA presents involve situations where enforcement of
state and local negative option billing rules would be inconsistent
with the federal rule and enforcement might undermine implementation of
the cable rate rules promulgated pursuant to Congress's instruction.
With respect to the first scenario, the federal negative option billing
rule plainly would not require cable operators to obtain affirmative
consent from subscribers before passing through external costs and
inflation adjustments as permitted by the Commission's rules, as
explained above. In addition, enforcement of a state or local negative
option billing rule requiring affirmative consent prior to the pass-
through of external costs and cost-of-service increases, as permitted
by the Commission's rate rules, would undermine the federal regime
governing cable rates. The Commission has issued detailed rate rules
implementing Section 3 of the 1992 Cable Act. Under the Commission's
rules, most cable operators must reduce their rates from pre-1992
levels, many by as much as 17%, to ensure that cable rates are
reasonable. However, as the first scenario presented by NCTA
recognizes, the rules also allow cable operators to increase their
rates to reflect increases in the cost-of-living or other external
costs, most of which are beyond cable operators' control. The 17% rate
reduction and the rules authorizing the pass-through of external costs
and inflation adjustments are of a piece; the rate cut would not be
fair to cable operators if they were prohibited from raising rates to
reflect increased costs that are beyond their control.
The other two scenarios presented by NCTA involve the addition,
deletion and replacement of channels. The negative option billing
regulation makes clear that the requirement that cable operators obtain
affirmative consent before charging for a new service ``shall not
preclude the addition or deletion of a specific program from a service
offering, the addition or deletion of specific channels from an
existing tier of service, or the restructuring or division of existing
tiers of service that do not result in a fundamental change in the
nature of an existing service, or tier of service.'' 47 CFR 76.981.
Accordingly, the replacement of a single channel, NCTA's third
scenario, would not be prohibited by the federal negative option
billing provision, because that would not result in a ``fundamental
change'' unless the tier was very small. With respect to NCTA's second
scenario, involving the addition or deletion of channels, the answer
would depend on how many channels were added or deleted and other
factors relevant to determining whether a ``fundamental change'' had
occurred. As stated above, however, changes that are permitted under
the ``Operator's Cap'' generally would not constitute ``fundamental
changes.''
If the addition, deletion, or replacement of channels did not
constitute a fundamental change in a tier, so that the federal negative
option billing rule was not triggered, preemption of enforcement of a
stricter state or local negative option billing rule would depend on
whether enforcement would conflict with or undermine the rate
regulation rules established pursuant to Section 3 of the 1992 Cable
Act. It is not possible to provide a blanket response to NCTA's second
and third scenarios in the absence of a specific set of facts to
evaluate. However, it bears emphasis that the rate rules governing the
addition, deletion, and replacement of channels are designed to ensure
reasonable rates without impeding the provision of new services.
Indeed, the rate rules are designed to encourage the provision of new
services that subscribers desire at the reasonable rates mandated by
Congress. Therefore, an interpretation of state or local law that
required a cable operator to obtain the affirmative consent of every
subscriber before making a change that did not fundamentally alter the
affected tier would, in most cases, interfere with the accomplishment
of Congress's objectives. In relatively few cases, in the Commission's
view, would state or local officials be likely to seek to enforce
negative option billing rules that conflict with or undermine federal
rate regulation provisions. But in any event, on further consideration
the Commission is convinced that, however numerous such cases are
likely to be, state and local officials may not enforce negative option
billing rules that obstruct the accomplishment of the objectives of
Congress's cable rate provisions.
E. Affiliate Transactions
1. Background
In the Cost Order in MM Docket No. 93-215, 59 FR 17975 (April 15,
1994), the Commission promulgated a rule for valuing transactions
between cable operators and affiliated companies. The Commission found
that it would be inconsistent with Congressional intent to allow rates
for regulated cable service to reflect the prices affiliates charge
each other for transactions that occur at other than arm's length. The
Commission found that allowing cable companies to pass increases in
their costs through to rate payers could motivate those companies to
pay excessive amounts for assets and services obtained from unregulated
affiliates. The Commission therefore adopted a rule for affiliate
transactions that applies to cable operators who elect cost-of-service
regulation or seek to adjust benchmark/price cap rates for affiliated
programming costs.
In the Cost Further Notice, 59 FR 18066, 18067-18068 (April 15,
1994), the Commission tentatively concluded that the general changes it
proposed for affiliate transactions involving telephone companies
should be applied to cable operators. The Commission tentatively
concluded that the use of prevailing company pricing as a valuation
method for transactions between cable operators and their affiliates
should only be permitted where the predominant purpose of the
transaction is to serve non-affiliates. To that end, the Commission
proposed that any affiliate that sells less than 75 percent of its
output to non-affiliates has too large a volume of affiliate
transactions to be deemed to have a predominant purpose of serving non-
affiliates. The Commission therefore proposed to continue to allow
prevailing company pricing as a valuation method for affiliate
transactions only where at least 75 percent of the cable operators
output is sold to non-affiliates.
The cable industry generally opposes the proposed rule arguing that
the proposal would require operators and programmers to adopt costly,
inefficient and unnecessary methodologies to document the estimated
fair market value of the assets or services exchanged. Some operators
argue that the 75% bright-line test would impose administrative burdens
that would be excessive and outweigh the speculative benefits that
might result. Several other parties oppose the proposed rules on the
grounds that these requirements would discourage vertical integration
and would result in decreased investment in quality cable programming.
Others also oppose the proposal and state that the only rationale for
the rules comes from an incorrect premise that the application of such
rules in the telephone context necessitates similar rules in the cable
industry.
2. Discussion
The Commission declines to adopt the proposal to prevent cable
operators from valuing assets or services at the operators' prevailing
company prices unless the providing affiliates sell more than 75% of
their output to non-affiliates. The Commission finds that this proposal
would prevent, in many cases, cable operators from establishing a
prevailing company price for programming services that have achieved
wide distribution among cable operators. In addition, the Commission is
concerned that by preventing cable operators from valuing programming
at the prevailing company price, it may discourage major MSOs with
substantial resources from investing in cable programming and related
services that could benefit subscribers.
The Commission will, therefore, retain the existing cable affiliate
transaction rule which provides that a cable operator may value an
asset or service at the prevailing company price if the provider has
sold the same kind of service or asset to a substantial number of third
parties at a generally available price. For cable affiliate
transactions, the sale of an asset to a substantial number of third
parties will ensure that cable operators will not have an incentive to
pay excessive prices when they obtain services and assets from
affiliates because in such cases the primary purpose of the transaction
would not be to provide services and assets to the affiliated
programmer. However, the Commission will continue to examine our test
for the establishment of a prevailing company price in MM Docket No.
93-215 and as the Commission gains experience with our current cable
affiliate transaction rule, it may seek further comment in order to
refine the rule.
Finally, the Cost Further Notice sought comment on (1) the proposal
to require cable operators that do not meet the prevailing company
price test to value services at the higher of cost and fair market
value when the cable operator is the seller and the lower of cost and
fair market value when the cable operator is the buyer; (2) whether the
current definition of an affiliate should be retained; (3) whether the
interim cable affiliate transaction rules should be adopted as our
final rules; and (4) whether our final cable affiliate transaction rule
should be included in the uniform system of accounts that we adopted
for cable operators. The Commission will address these issues in
conjunction with our general consideration of final cost rules in MM
Docket No. 93-215 at a later time.
Administrative Matters
Regulatory Flexibility Act Analysis
Pursuant to the Regulatory Flexibility Act of 1980, 5 U.S.C. 601-
12, the Commission's final analysis with respect to the Sixth Order on
Reconsideration and Fifth Report and Order is as follows:
Need and purpose of this action. The Commission, in compliance with
section 3(i) of the Cable Television Consumer Protection and
Competition Act of 1992 pertaining to rate regulation, adopts rules and
procedures intended to ensure cable subscribers reasonable rates for
cable services with minimum regulatory and administrative burden on
cable entities.
Summary of issues raised by the public comments in response to the
Initial Regulatory Flexibility Analysis. There were no comments
submitted in response to the Initial Regulatory Flexibility Analysis.
The Chief Counsel for Advocacy of the United States Small Business
Administration (SBA) filed comments in the original rulemaking order.
The Commission addressed the concerns raised by the Office of Advocacy
in the Rate Order. The SBA also filed reply comments in response to the
Fifth Notice.
Significant alternatives considered and rejected. Petitioners
representing cable interests and franchising authorities submitted
several alternatives aimed at minimizing administrative burdens. In the
course of this proceeding, the Commission has attempted to accommodate
the concerns expressed by these parties. For example, the revised going
forward mechanisms are designed to enhance incentives to add new
channels to regulated tiers without creating new regulatory burdens and
to provide additional options tailored to the concerns of small
systems. In addition, the New Products Tier is designed to ensure that
regulated cable service rates are reasonable while reducing
administrative burdens.
Paperwork Reduction Act
The requirements adopted herein have been analyzed with respect to
the Paperwork Reduction Act of 1980 and are found to impose a new or
modified information collection requirement on the public.
Implementation of any new or modified requirement will be subject to
approval by the Office of Management and Budget as prescribed by the
Act.
Ordering Clauses
Accordingly, it is ordered, That, pursuant to Sections 4(i), 4(j),
303(r), 612, 622(c) and 623 of the Communications Act of 1934, as
amended, 47 U.S.C. 154(i), 154(j), 303(r), 532, 542(c) and 543, the
rules, requirements and policies discussed in this Sixth Order on
Reconsideration and Fifth Report and Order, are adopted and Part 76 of
the Commission's rules, 47 CFR Part 76, is amended as set forth in
below.
It is further ordered, That the Secretary shall send a copy of this
Report and Order, including the Initial 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. Pub. L. No. 96-354, 94 Stat. 1164, 5 U.S.C. 601 et
seq. (1981).
It is further ordered, That the requirements and regulations
established in this decision shall become effective January 1, 1995,\5\
with the exception of new reporting requirements which will become
effective on that date or as soon thereafter as they may be approved by
the Office of Management and Budget.
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\5\Good cause exists to make these requirements effective on
less than 30 days notice in the Federal Register. See 5 U.S.C.
section 553(d)(3). Good cause exists to make the requirements
effective January 1, 1995 because this Order provides additional
opportunities and incentives to cable operators and many of the
Commission's rate regulations apply on a calendar quarter system.
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List of Subjects in 47 CFR Part 76
Cable television.
Federal Communications Commission.
LaVera F. Marshall,
Acting Secretary.
Amendatory Text
Part 76 of Chapter I 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: Secs. 2, 3, 4, 301, 303, 307, 308, 309, 48 Stat. as
amended, 1064, 1065, 1066, 1081, 1082,1083, 1084, 1085, 1101; 47
U.S.C. Secs. 152, 153, 154, 301, 303, 307, 308, 309, 532, 535, 542,
543, 552 as amended, 106 Stat. 1460.
2. Section 76.901 is amended by adding paragraph (d) to read as
follows:
Sec. 76.901 Definitions
* * * * *
(d) New Product Tier. A new product tier (``NPT'') is a cable
programming service tier meeting the conditions set forth in
Sec. 76.987.
3. Section 76.922 is amended by revising paragraphs (d)(3)(x),
(d)(3)(xi) and (e) to read as follows:
Sec. 76.922 Rates for the basic service tier and cable programming
services tiers.
* * * * *
(d) * * *
(3) * * *
(x) Adjustments to permitted charges on account of increase in
costs of programming shall be further adjusted to reflect any revenues
received by the operator from the programmer. Such adjustments shall
apply on a channel-by-channel basis.
(xi) In calculating programming expense, operators may add a mark-
up of 7.5% for increases in programming costs occurring after March 31,
1994, except that operators may not file for or take the 7.5% mark-up
on programming costs for new channels added on or after May 15, 1994
for which the operator has used the methodology set forth in paragraph
(e)(3) of this section for adjusting rates for channels added to cable
programming service tiers. Operators shall reduce rates by decreases in
programming expense plus an additional 7.5% for decreases occurring
after May 15, 1994 except with respect to programming cost decreases on
channels added after May 15, 1994 for which the rate adjustment
methodology in paragraph (e)(3) of this section was used.
(e) Changes in the number of channels on regulated tiers--(1)
Generally. A system may adjust the residual component of its permitted
rate for a tier to reflect changes in the number of channels offered on
the tier on a quarterly basis. Cable systems shall use FCC Form 1210
(or FCC Form 1211, where applicable) to justify rate changes made on
account on changes in the number of channels on a basic service tier
(``BST'') or a cable programming service tier (``CPST''). Such rate
adjustments shall be based on any changes in the number of regulated
channels that occurred from the end of the last quarter for which an
adjustment was previously made through the end of the quarter that has
most recently closed preceding the filing of the FCC Form 1210 (or FCC
Form 1211, where applicable). However, when a system deletes channels
in a calendar quarter, the system must adjust the residual component of
the tier charge in the next calendar quarter to reflect that deletion.
Operators must elect between the channel addition rules in paragraphs
(e)(2) and (e)(3) of this section the first time they adjust rates
after December 31, 1994, to reflect a channel addition to a CPST that
occurred on or after May 15, 1994, and must use the elected methodology
for all rate adjustments through December 31, 1997. A system that
adjusted rates after May 15, 1994, but before January 1, 1995 on
account of a change in the number of channels on a CPST that occurred
after May 15, 1994, may elect to revise its rates to charge the rates
permitted by paragraph (e)(3) of this section on or after January 1,
1995, but is not required to do so as a condition for using the
methodology in paragraph (e)(3) of this section for rate adjustments
after January 1, 1995. Rates for the BST will be governed exclusively
by paragraph (e)(2) of this section, except that where a system offered
only one tier on May 14, 1994, the cable operator will be allowed to
elect between paragraphs (e)(2) and (e)(3) of this section as if the
tier was a CPST.
(2) Adjusting Rates for increases in the number of channels offered
between May 15, 1994, and December 31, 1997, on a basic service tier
and at the election of the operator on a cable programming service
tier. The following table shall be used to adjust permitted rates for
increases in the number of channels offered between May 15, 1994, and
December 31, 1997, on a basic service tier and subject to the
conditions in paragraph (e)(1) of this section at the election of the
operator on a CPST. The entries in the table provide the cents per
channel per subscriber per month by which cable operators will adjust
the residual component using FCC Form 1210 (or FCC Form 1211, where
applicable).
------------------------------------------------------------------------
Per- Per-
channel Average No. channel
Average No. of regulated channels adjustment of regulated adjustment
factor channels factor
------------------------------------------------------------------------
7................................ $0.52 14........... 0.14
7.5.............................. 0.45 14.5......... 0.13
8................................ 0.40 15-15.5...... 0.12
8.5.............................. 0.36 16........... 0.11
9................................ 0.33 16.5-17...... 0.10
9.5.............................. 0.29 17.5-18...... 0.09
10............................... 0.27 18.5-19...... 0.08
10.5............................. 0.24 19.5-21.5.... 0.07
11............................... 0.22 22-23.5...... 0.06
11.5............................. 0.20 24-26........ 0.05
12............................... 0.19 26.5-29.5.... 0.04
12.5............................. 0.17 30-35.5...... 0.03
13............................... 0.16 34-46........ 0.02
13.5............................. 0.15 46.5-99.5.... 0.01
------------------------------------------------------------------------
In order to adjust the residual component of the tier charge when
there is an increase in the number of channels on a tier, the operator
shall perform the following calculations:
(i) Take the sum of the old total number of channels on tiers
subject to regulation (i.e., tiers that are, or could be, regulated but
excluding New Product Tiers) and the new total number of channels and
divide the resulting number by two;
(ii) Consult the above table to find the applicable per channel
adjustment factor for the number of channels produced by the
calculations in paragraph (e)(2)(i) of this section. For each tier for
which there has been an increase in the number of channels, multiply
the per-channel adjustment factor times the change in the number of
channels on that tier. The result is the total adjustment for that
tier.
(3) Alternative methodology for adjusting rates for changes in the
number of channels offered on a cable programming service tier or a
single tier system between May 15, 1994, and December 31, 1997. This
paragraph at the Operator's discretion as set forth in paragraph (e)(1)
of this section shall be used to adjust permitted rates for a CPST
after December 31, 1994, for changes in the number of channels offered
on a CPST between May 15, 1994, and December 31, 1997. For purposes of
this paragraph (e)(3) of this section, a single tier system may be
treated as if it were a CPST.
(i) Operators cap attributable to new channels on all CPSTs through
December 31, 1997. Operators electing to use the methodology set forth
in this paragraph may increase their rates between January 1, 1995, and
December 31, 1997, by up to 20 cents per channel, exclusive of
programming costs, for new channels added to CPSTs on or after May 15,
1994, except that they may not make rate adjustments totalling more
than $1.20 per month, per subscriber through December 31, 1996, and by
more than $1.40 per month, per subscriber through December 31, 1997
(the ``Operator's Cap''). Except to the extent that the programming
costs of such channels are covered by the License Fee Reserve provided
for in paragraph (e)(3)(iii) of this section, programming costs
associated with channels for which a rate adjustment is made pursuant
to this paragraph (e)(3) of this section must fall within the
Operator's Cap if the programming costs (including any increases
therein) are reflected in rates before January 1, 1997. Inflation
adjustments pursuant to Sec. 76.922(d)(2) are not counted against the
Operator's Cap.
(ii) Per channel adjustment. Operators may increase rates by a per
channel adjustment of up to 20 cents per subscriber per month,
exclusive of programming costs, for each channel added to a CPST
between May 15, 1994, and December 31, 1997, except that an operator
may take the per channel adjustment only for channel additions that
result in an increase in the highest number of channels offered on all
CPSTs as compared to May 14, 1994, and each date thereafter. Any
revenues received from a programmer, or shared by a programmer and an
operator in connection with the addition of a channel to a CPST shall
first be deducted from programming costs for that channel pursuant to
paragraph (d)(3)(x) of this section and then, to the extent revenues
received from the programmer are greater than the programming costs,
shall be deducted from the per channel adjustment. This deduction will
apply on a channel by channel basis.
(iii) License fee reserve. In addition to the rate adjustments
permitted in paragraphs (e)(3)(i) and (e)(3)(ii) of this section
operators that make channel additions on or after May 15, 1994 may
increase their rates by a total of 30 cents per month, per subscriber
between January 1, 1995, and December 31, 1996, for license fees
associated with such channels (the ``License Fee Reserve''). The
License Fee Reserve may be applied against the initial license fee and
any increase in the license fee for such channels during this period.
An operator may pass-through to subscribers more than the 30 cents
between January 1, 1995, and December 31, 1996, for license fees
associated with channels added after May 15, 1994, provided that the
total amount recovered from subscribers for such channels, including
the License Fee Reserve, does not exceed $1.50 per subscriber, per
month. After December 31, 1996, license fees may be passed through to
subscribers pursuant to paragraph (d) of this section, except that
license fees associated with channels added pursuant to this paragraph
(d)(3) of this section will not be eligible for the 7.5% mark-up on
increases in programming costs.
(iv) Timing. For purposes of determining whether a rate increase
counts against the maximum rate increases specified in paragraphs
(e)(3)(i) through (e)(3)(iii) of this section, the relevant date shall
be when rates are increased as a result of channel additions, not when
the addition occurs.
(4) Deletion of Channels. When dropping a channel from a BST or
CPST, operators shall reflect the net reduction in external costs in
their rates pursuant to paragraphs (d)(3) (i) and (ii) of this section.
With respect to channels to which the 7.5% mark-up on programming costs
applied pursuant to paragraph (d)(3)(xi) of this section, the operator
shall treat the mark-up as part of its programming costs and subtract
the mark-up from its external costs. Operators shall also reduce the
price of that tier by the ``residual'' associated with that channel.
For channels that were on a BST or CPST on May 14, 1994, or channels
added after that date pursuant to paragraph (e)(2) of this section, the
per channel residual is the charge for the tier, minus the external
costs for the tier, and any per channel adjustments made after that
date, divided by the total number of channels on the tier minus the
number of channels on the tier that received the per channel adjustment
specified in paragraph (e)(3) of this section. For channels added to a
CPST after May 14, 1994, pursuant to paragraph (e)(3) of this section,
the residuals shall be the actual per channel adjustment taken for that
channel when it was added to the tier.
(5) Movement of channels between tiers. When a channel is moved
from a CPST or a BST to another CPST or BST, the price of the tier from
which the channel is dropped shall be reduced to reflect the decrease
in programming costs and residual as described in paragraph (e)(4) of
this section. The residual associated with the shifted channel shall
then be converted from per subscriber to aggregate numbers to ensure
aggregate revenues from the channel remain the same when the channel is
moved. The aggregate residual associated with the shifted channel may
be shifted to the tier to which the channel is being moved. The
residual shall then be converted to per subscriber figures on the new
tier, plus any subsequent inflation adjustment. The price of the tier
to which the channel is shifted may then be increased to reflect this
amount. The price of that tier may also be increased to reflect any
increase in programming cost. An operator may not shift a channel for
which it received a per channel adjustment pursuant to paragraph (e)(3)
of this section from a CPST to a BST.
(6) Substitution of channels on a BST or CPST. If an operator
substitutes a new channel for an existing channel on a CPST or a BST,
no per channel adjustment may be made. Operators substituting channels
on a CPST or a BST shall be required to reflect any reduction in
programming costs in their rates and may reflect any increase in
programming costs pursuant to paragraphs (d)(3)(i) and (d)(3)(ii) of
this section. If the programming cost for the new channel is greater
than the programming cost for the replaced channel, and the operator
chooses to pass that increase through to subscribers, the excess shall
count against the License Fee Reserve or the Operator Cap when the
increased cost is passed through to subscribers. Where an operator
substitutes a new channel for a channel on which a 7.5% mark-up on
programming costs was taken pursuant to paragraph (d)(3)(xi) of this
section, the operator may retain the 7.5% mark-up on the license fee of
the dropped channel to the extent that it is no greater than 7.5% of
programming cost of the new service.
(7) Headend upgrades for small systems. When adding channels to
CPSTs, independent small systems, as defined in Sec. 76.901(c), and
small systems owned by small multiple system operators, as defined in
Sec. 76.922(b)(5), may choose among the methodologies set forth in this
paragraph and in paragraphs (e)(2) and (e)(3) of this section.
Operators choosing the methodology of this paragraph may increase rates
to recover the actual cost of the headend equipment required to add up
to seven channels to CPSTs, not to exceed $5,000 per additional
channel, plus any applicable programming costs. Rate increases pursuant
to this paragraph may occur between January 1, 1995, and December 31,
1997, as a result of additional channels offered on those tiers after
May 14, 1994. Headend costs shall be depreciated over the useful life
of the headend equipment. The rate of return on this investment shall
not exceed 11.25 percent. In order to recover costs for headend
equipment pursuant to this paragraph, small systems must certify to the
Commission their eligibility to use this paragraph, the level of costs
they have actually incurred for adding the headend equipment and the
depreciation schedule for the equipment.
(8) Sunset provision. Paragraph (e) of this section shall cease to
be effective on January 1, 1998 unless renewed by the Commission.
* * * * *
4. Section 76.964 is amended by revising the section heading to
read as follows:
Sec. 76.964 Written notification of changes in rates and services.
* * * * *
5. Section 76.981 is revised to read as follows:
Sec. 76.981 Negative option billing.
(a) A cable operator shall not charge a subscriber for any service
or equipment that the subscriber has not affirmatively requested by
name. A subscriber's failure to refuse a cable operator's proposal to
provide such service or equipment is not an affirmative request for
service or equipment. A subscriber's affirmative request for service or
equipment may be made orally or in writing.
(b) The requirements of paragraph (a) of this section shall not
preclude the adjustment of rates to reflect inflation, cost of living
and other external costs, the addition or deletion of a specific
program from a service offering, the addition or deletion of specific
channels from an existing tier or service, the restructuring or
division of existing tiers of service, or the adjustment of rates as a
result of the addition, deletion or substitution of channels pursuant
to Sec. 76.922, provided that such changes do not constitute a
fundamental change in the nature of an existing service or tier of
service and are otherwise consistent with applicable regulations.
(c) State and local governments may not enforce state and local
consumer protection laws that conflict with or undermine paragraph (a)
or (b) of this section or any other sections of this Subpart that were
established pursuant to Section 3 of the 1992 Cable Act, 47 U.S.C. 543.
6. Section 76.986 is revised to read as follows:
Sec. 76.986 ``A la carte'' offerings.
(a) Collective offerings of unregulated per-channel or per-program
(``a la carte'') video programming shall be regulated as CPSTs pursuant
to Sec. 76.922. For purposes of this section, ``multiplexed'' channels
shall be treated as one channel.
(b) A discounted package price offered by a cable system is not
unreasonable with respect to any collective offering of channels if the
component channels' collective offering also have been continuously
available on the system on a per channel basis since April 1, 1993.
(c) A collective offering of per channel offerings may be treated
as New Product Tier if:
(1) The collective offering meets the conditions set forth in
Sec. 76.987; or
(2) The operator had reasonable grounds to believe the collective
offering involving only a small number of migrated channels complied
with the Commission's requirements as of the date it was first offered.
(d) In reviewing a basic service rate filing, local franchising
authorities may make an initial decision addressing whether a
collective offering of ``a la carte'' channels will be treated as a
cable programming service tier that is an NPT under Sec. 76.987 or a
CPST that is regulated under Sec. 76.922. The franchising authority
must make this initial decision within the 30 day period established
for review of basic cable rates and equipment costs in Sec. 76.933(a),
or within the first 60 days of an extended 120 day period (if the
franchise authority has requested an additional 90 days) pursuant to
Sec. 76.933(b). The franchising authority shall provide notice of its
decision to the cable system and shall provide public notice of its
initial decision within seven days pursuant to local procedural rules
for public notice. Operators or consumers may make an interlocutory
appeal of the initial decision to the Commission within 14 days of the
initial decision. Operators shall provide notice to franchise
authorities of their decision whether or not to appeal to the
Commission within this period. Consumers shall provide notice to
franchise authorities of their decision to appeal to the Commission
within this period.
(e) A limited initial decision under paragraph (b) of this section
shall toll the time periods under Sec. 76.933 within which local
authorities must decide local rate cases. The time period shall resume
running seven days after the Commission decides the interlocutory
appeal, or seven days following the expiration of the period in which
an interlocutory appeal pursuant to paragraph (b) of this section may
be filed.
(f) A local franchising authority alternatively may decide whether
a collective offering of ``a la carte'' channels will be treated as an
NPT as a part of its final decision setting rates for the basic service
tier. That decision may then be appealed to the Commission as provided
for under Sec. 76.945.
7. Section 76.987 is added to read as follows:
Sec. 76.987 New product tiers.
(a) Operators may establish a category of CPSTs, referred to as
``new product tiers'' (``NPTs''), and offer these tiers to subscribers
at prices they elect.
(b) In order to be eligible to offer NPTs, cable operators must
meet the following conditions:
(1) Operators offering NPTs are prohibited from making fundamental
changes to what they offer on their BSTs and CPSTs offerings on
September 30, 1994. Operators may drop channels or move channels
between BSTs and/or CPSTs or to an a la carte offering so long as the
aggregation of such changes do not constitute a fundamental change in
their BST or CPSTs.
(2) Operators may not drop channels that were offered on their BSTs
or CPSTs on September 30, 1994 and move them to NPTs unless they wait
at least two years from the date the channels were dropped from the
BSTs or CPSTs. Time shifted versions, slightly altered versions or
renamed versions of channels offered on BSTs and CPSTs on September 30,
1994 shall not be exempt from this restriction.
(3) Operators must market their BSTs and CPSTs so that customers
should be reasonably aware that:
(i) Those tiers are being offered to the public;
(ii) The names of the channels available on those tiers; and
(iii) The price of the tiers. A subscriber may not be charged for
an NPT unless the cable operator has obtained the subscriber's
affirmative consent. Changes to the fundamental nature of an NPT must
be approved by subscribers in accordance with Sec. 76.981.
(4) Operators may not require the subscription to any tier, other
than a BST, as a condition for subscribing to an NPT and operators may
not require subscription to an NPT as a condition for subscribing to a
CPST. These restrictions will not apply to cable operators prior to
October 5, 2002, if such operators lack the capacity to offer BSTs and
NPTs without also providing other intermediate tiers of service as
provided in Sec. 76.900(c).
(c) Operators may offer the same service on NPTs as are on one or
more BSTs or CPSTs. A channel that occupied a CPST or BST part-time on
September 30, 1994 also may be offered full-time on an NPT as long as
it continues to be offered at least part-time on CPST or BST, under
substantially the same conditions as before it was offered on the NPT.
If a channel occupies a BST or CPST (regulated pursuant to Sec. 76.922)
full-time on September 30, 1994, and is subsequently reduced to part-
time on the BST or CPST, that channel may not be offered on an NPT
full-time. Operators that offer a channel both on an NPT and a BST or
CPST will have a continuing obligation to ensure that subscribers are
aware that the channels are available on the CPST or BST.
(d) Operators may temporarily place new channels on CPSTs for
marketing purposes and then move them to NPTs. In order for an operator
to move a channel from a CPST to an NPT pursuant to this paragraph, the
channel must not have been offered on a BST or CPST prior to October 1,
1994.
(e) After initially electing to offer an NPT, a cable operator may
cease to provide the NPT, upon proper notice to subscribers pursuant to
Sec. 76.964. If an operator drops an NPT and subsequently determines to
reestablish that tier, at the time of the reestablishment it must
comply with the conditions for offering NPTs set forth in paragraph (b)
of this section.
(f) If the Commission receives a complaint about an NPT, the
operator need not file the rate justification provided in Sec. 76.956,
but shall within the time period provided by that rule file
documentation that the NPT meets all the conditions set forth in this
section.
(g) Within 30 days of the offering of an NPT, operators shall file
with the Commission, a copy of the new rate card that contains the
following information on their BSTs, CPSTs and NPTs:
(1) The names of the programming services contained on each tier;
and
(2) The price of each tier. Operators also must file with the
Commission, copies of notifications that were sent to subscribers
regarding the initial offering of NPTs. After this initial filing,
cable operators must file updated rate cards and copies of customer
notifications with the Commission within 30 days of rate or service
changes affecting the NPT.
[FR Doc. 94-29442 Filed 12-5-94; 8:45 am]
BILLING CODE 6712-01-M