[Federal Register Volume 60, Number 220 (Wednesday, November 15, 1995)]
[Notices]
[Pages 57424-57428]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28217]



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FEDERAL COMMUNICATIONS COMMISSION
[FCC 95-455]


Rate Rules for Cable Services

AGENCY: Federal Communications Commission.

ACTION: Notice.

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SUMMARY: The Federal Communications Commission is seeking comment on 
its proposal to waive, on a temporary and trial basis, certain rules 
governing the rates charged for cable services in Dover Township, New 
Jersey, in light of the initiation there of the first permanent 
commercial video dialtone system.

DATES: Interested parties may file comments on or before December 13, 
1995, and reply comments on or before December 28, 1995.

ADDRESSES: Federal Communications Commission, 1919 M Street, N.W., 
Washington, D.C., 20554.

FOR FURTHER INFORMATION CONTACT:
Rick Chessen, Cable Services Bureau (202) 416-0800.

SUPPLEMENTARY INFORMATION: This is a synopsis of the Order Requesting 
Comments adopted November 2, 1995 and released November 6, 1995. The 
complete text of this Order is available for inspection and copying 
during normal business hours in the FCC Cable Reference Center (room 
333), 2033 M Street, N.W., Washington, D.C., 20554.

Synopsis of the Order Requesting Comments

I. Introduction

    Under the Cable Television Consumer Protection and Competition Act 
of 1992 (the ``1992 Cable Act''), the Commission is charged with 
identifying criteria for determining whether rates for cable 
programming service tiers (``CPSTs'') are unreasonable with respect to 
cable operators that are subject to regulation. In carrying out this 
mandate, the Commission has adopted a rate setting approach for CPSTs 
that utilizes a competitive differential, benchmarks, and cost-of-
service factors. By this Order, we seek to develop a record that would 
permit us to decide whether to waive, on a temporary and trial basis, 
certain rules governing the rates charged for CPSTs by cable operators 
serving subscribers in Dover Township, Ocean County, New Jersey, in 
light of the initiation there of the first permanent commercial video 
dialtone (``VDT'') system.
    We tentatively conclude that the provision of video programming by 
multiple independent programmers over a permanent VDT system within the 
franchise areas of these cable operators, along with certain other 
conditions described below, will ensure that the rates the operators 
charge for cable programming services will not be unreasonable. If we 
are correct as to the substantial impact that the VDT programmers will 
have, then we believe that congressional intent would be furthered by a 
properly conditioned waiver of our rules on the initiation of 
commercial operation of the VDT system, to the extent those rules 
require that rates for CPSTs be set in accordance with our benchmark or 
cost-of-service methodologies. Such an approach holds the promise of 
reducing the administrative burdens of rate regulation and providing 
the cable operators greater flexibility in responding to competition 
and developing their systems through programming and technological 
innovation, while ensuring that the rates charged to subscribers for 
CPSTs are not unreasonable. Providing the cable operators such 
flexibility will also promote competition with unaffiliated 

[[Page 57425]]
VDT programmers, who will face no regulatory restrictions in the 
packaging and pricing of their video offerings. We adopt this Order to 
solicit public comment on whether we should adopt such a waiver, and if 
we decide to do so, the appropriate scope, duration, and conditions, of 
such a waiver.

II. The Development of Video Dialtone

    On December 15, 1992, the Bell Atlantic Telephone Companies (``Bell 
Atlantic'') filed a Section 214 application to provide VDT service in 
Dover Township, New Jersey. The VDT system includes fiber optic 
transport facilities, using fiber to the curb architecture. Copper and 
coaxial cable with deliver the signals from the curb to the 
subscribers' premises. The VDT system is capable of delivering up to 
384 channels of video capacity at 6 megabits per second per channel. 
Bell Atlantic expects to add a VDT capability to its Dover Township 
telephone network at an average rate of approximately 1,000 homes per 
month, reaching its planned final buildout of 38,000 homes passed 
within approximately three years. Bell Atlantic has predicted a 
penetration rate of 35% following the completion of its buildout. Our 
records indicate that at least two cable operators, Clear TV Cable and 
Cablevision of Monmouth, offer cable service within Dover Township. 
These operators soon will find themselves in a unique competitive 
environment, given that the Bell Atlantic VDT system in Dover Township 
will be the first such system to be operated on a non-trial basis.

III. Regulation of Rates for Cable Programming Services

    The question of whether to waive our CPST rate rules, on the 
initiation of permanent VDT service in Dover Township, must be viewed 
against the backdrop of our existing rules and the statute from which 
they emanate. The 1992 Cable Act was passed in large part to address 
Congress's finding that cable operators enjoyed ``undue market power . 
. . as compared to that of consumers and video programmers.'' (1992 
Cable Act, Sec. 2(a)(2).) To protect consumers against the exercise of 
this market power, the 1992 Cable Act provides for regulation of the 
rates charged for certain programming and equipment by cable systems 
that are not subject to ``effective competition.'' (47 U.S.C. 
Sec. 543(a)(2).) The 1992 Cable Act authorizes local franchising 
authorities to regulate rates for basic program service and equipment 
according to criteria established by the Commission to ensure that such 
rates are ``reasonable.'' (47 U.S.C. Sec. 543(a)(2)(A) & (b)(1).) The 
Commission is directed to establish criteria to ensure that CPST rates 
are not ``unreasonable.'' (47 U.S.C. Sec. 543(a)(2)(B) & (c)(1)(A).)
    The language and structure of the 1992 Cable Act, and sound policy 
considerations, suggest that we continually monitor the impact and 
appropriateness of our rules as the market for multichannel video 
programming evolves, and that in crafting and applying our rules we 
keep pace with and encourage the development of competition. Congress 
expressly declared its desire for competition as opposed to regulation, 
when feasible. Of course, we must remain cognizant of our paramount 
duty to ensure that CPST rates are not unreasonable. We believe that 
the initiation of services by VDT programmers whose offerings and rates 
will not be subject to regulation, when considered in conjunction with 
other factors, may sufficiently restrain the CPST rates of the Dover 
Township cable operators such that they can be presumed not 
unreasonable. We believe such a conclusion is in accord with Congress' 
express policy under the 1992 Cable Act to ``rely on the marketplace, 
to the maximum extent feasible,'' to promote ``the availability to the 
public of a diversity of views and information through cable television 
and other video distribution media.''
    The statutory definition of effective competition remains the 
dividing line between systems that are subject to rate regulation and 
those that are not. However, nothing in the 1992 Cable Act prohibits 
the Commission from adopting different regulatory rules for different 
categories of operators or from waiving its rules for certain operators 
or categories of operators. For the reasons set forth below, we 
tentatively conclude that the launch of VDT service in Dover Township 
is potentially so significant and unique as to justify, on a two-year 
trial basis, a separate regulatory treatment for the cable operators 
providing service there. Accordingly, we tentatively conclude that for 
the cable systems operating within Dover Township, a two-year 
experimental waiver of our CPST rate rules, subject to certain 
conditions to ensure that rates remain not unreasonable, is in the 
public interest.

IV. The Significance of Video Dialtone and Other MVPDs

    For a number of reasons, we believe that the availability of VDT 
service in Dover Township may have a profound effect on competition 
there. These reasons are grounded in what we believe to be well 
established economic principles relating to competition. In particular, 
we are guided by an accepted competitive analysis that seeks first to 
define the relevant product market and next to examine market power 
within that market.
A. The Relevant Market
    We tentatively conclude that the offerings to be delivered over the 
Dover VDT system will fall within the same product market as the cable 
operators' CPSTs and therefore constitute a potentially competitive 
alternative. We understand that seven programmers have reserved space 
on Bell Atlantic's system. End user subscribers will be able to select 
offerings from these programmers, individually or in combination. One 
of the VDT programmers, Rainbow Holdings, a CableVision affiliate, will 
offer 192 channels. Another programmer, FutureVision, has reserved 96 
channels. In contrast to other alternative MVPDs currently providing 
service in the Dover Township area, both programmers appear capable of 
providing a full range of both broadcast and cablecast services 
comparable to those offered by the two local incumbent cable operators. 
By way of comparison, according to the Warren Publishing 1995 Cable TV 
Factbook one of the cable operators, Clear TV Cable, currently offers 
18 basic service tier channels, 17 CPST channels, and seven premium 
channels, and the other, CableVision of Monmouth, currently offers 21 
basic service tier channels, 15 CPST channels, and six premium 
channels. In addition to being in a position to compete with respect to 
these program offerings, the VDT system will be equipped to provide 
interactive services and other features not currently available from 
existing providers. Thus, there is evidence to suggest that the VDT 
programmers will be potent competitors to cable and will greatly 
enhance consumer choice, thus restraining the cable operators' ability 
to raise CPST rates. To confirm our tentative conclusions, we solicit 
information concerning the specific programming that will be available 
to VDT subscribers in Dover Township and appropriate comparisons of the 
specific VDT offerings to those of the cable operators.
    By statute, the market for comparable programming also includes 
multichannel multipoint distribution service (``MMDS''), direct 
broadcast satellite (``DBS''), and television receive-only (``TVRO'') 
satellite programming service. 47 U.S.C. Sec. 552(12). Similarly, in 
the Competition Report we identified a number of multichannel video 

[[Page 57426]]
programming distributors (``MVPDs''), in addition to VDT providers, 
that offer services that seemed ``reasonably interchangeable'' with a 
typical cable operator's services, including DBS, TVRO, MMDS, and 
satellite master antenna television (``SMATV'') systems. Competition 
Report, 59 Fed. Reg. 64,657, 9 FCC Rcd at 7642, 7473-7492 (1994). The 
competitive significance of these providers will depend upon the 
pricing and structuring of their video offerings and their market 
share. Thus, in our discussion of market power below, we invite 
comparisons between the offerings of these providers and the 
composition and pricing of the CPSTs of the cable operators located in 
Dover Township.
    Although a typical analysis of competition requires identification 
of a relevant geographic market, our proposed waiver effectively 
defines the geographic market, for purposes of this proceeding, as 
being the franchise areas of the two cable operators. However, the 
degree of proposed overlap between the VDT service area and each of the 
cable franchise areas is important. If, for example, Bell Atlantic 
intends its VDT system to pass only 2% of the homes located in a 
franchise area, the cable operator presumably will offer less of a 
competitive response than if Bell Atlantic tends to pass 75% of the 
homes. Thus, our inclination to relax CPST rate regulation may depend 
upon the degree of overlap between the VDT and cable systems. 
Interested parties should comment on the appropriate extent of the 
anticipated overlap.
B. Market Power
    Market power is generally defined as the ability to general excess 
profits by raising and maintaining prices or by adversely affecting 
product quality for a significant period of time. See United States v. 
E.I. du Pont de Nemours & Co., 351 U.S. 377, 391-92 (1956). The marker 
power of a cable operator can be diluted by two categories of entities: 
those currently offering comparable programming and those that could 
commence offering comparable programming within a relatively short 
period of time. See, e.g., United States v. Marine Bancorporation, 
Inc., 418 U.S. 602, 623-25 (1974). Once such entities are identified, 
further analysis is necessary to ensure that they indeed impose 
competitive pressure on cable operator.
    With respect to market power, any waiver would be premised on the 
availability in Dover Township of products that cable subscribers view 
as sufficiently reasonable substitutes for cable programming service. A 
standard method of determining whether a firm can exercise market power 
with respect to a particular product is to answer the question: if this 
firm raised the price of the product, to what degree would consumers 
continue to purchase that product or turn to the products of other 
firms, and what are these other products and other firms?
    Our analysis of this issue is significantly affected by what we 
understand to be the anticipated offerings of the VDT system. As 
described above, it appears that the VDT programmers will be able to 
provide programming fully comparable to that currently provided by the 
Dover Township cable operators. Moreover, the cable operators can 
expect aggressive competition from the VDT programmers with respect to 
pricing strategies, according to press reports. We tentatively conclude 
that the combination of a fully comparable product and aggressive 
pricing, if and when made available to consumers via VDT, may produce 
an effective restraint on cable rates, particularly given that the VDT 
programmers will be able to implement packaging and pricing strategies 
free of regulatory restraints. We seek comment as to the factual and 
analytical validity of this tentative conclusion. We seek similar data 
and comparison with respect to all other MVPDs offering programming 
comparable to that of the cable operators in Dover Township.
    We presume that any competitive pressure felt by the Dover Township 
cable operators as a result of the initiations of VDT service will 
increase over time as Bell Atlantic continues construction of its 
system and as consumers become more familiar with the service and the 
offerings of the VDT programmers. Although the penetration rate of VDT 
programmers will not reach a mature level immediately, in the present 
instance there are several reasons to suggest that the commencement of 
VDT service may restrain prices and prompt other competitive responses 
from the cable operators such that application of our CPST rate rules 
will be unnecessary.
    Initially, we note that the remaining barriers to the initiation of 
service by Bell Atlantic are relatively minor. Bell Atlantic has 
received the required Section 214 authorization from the Commission. In 
addition, Bell Atlantic's VDT tariff has become effective, subject to 
investigation. Bell Atlantic now has substantial control over the 
rollout of its new service and has every incentive to expedite that 
process. Once VDT service is initiated, Bell Atlantic faces a similar 
lack of barriers with respect to the continued buildout of the system. 
Thus, the availability of service may represent a logical point at 
which to make any waiver effective. We seek comment on whether Bell 
Atlantic's entry plan alone is sufficient to exert a present restraint 
on cable prices and cable operator conduct in Dover Township.
    We further note that a current cable subscriber apparently will be 
able to switch from his or her current video provider to one or more of 
the VDT programmers without sacrificing broadcast channels or channel 
capacity. This distinguishes VDT from DBS service, which generally does 
not include local broadcast stations, and from MMDS, which has a lower 
overall channel capacity. Moreover, the DBS and MMDS require the 
installation of receiving antennae and other equipment. Competition 
from VDT may pose a greater competitive threat to cable operators than 
competition from other providers that have more limited channel line-
ups or require significant initial expenditures by the consumer. We do 
not mean to understate, and we welcome comments concerning, the 
significance of DBS and other MVPDs that may be offering service in 
Dover Township. We believe, however, that the addition of permanent VDT 
service to the competitive mix is independently significant. We seek 
comment on the validity of these comparisons, including data concerning 
the initial installation costs of VDT for its end users.
    Dover Township is a laboratory in which these theories can be 
tested. In view of the novelty and potential consequences of this 
situation, we are considering waiving our rules that require these 
cable operators to establish and maintain rates for their CPSTs in 
accordance with our benchmark or cost-of-service methodologies, as 
adjusted for changes in inflation, external costs, and for channel 
additions and deletions. (See 47 C.F.R. Sec. 76.922.) We believe that 
such a waiver may well be justified in light of the rate restraining 
impact that the VDT plus other competitive offerings may have on the 
cable operators' CPSTs. Additionally, such a trial waiver may yield 
information that will prove useful in the future as we continue to 
adapt our regulations to the ever-changing MVPD marketplace.
    To the extent that the particular circumstances of the Dover 
Township MVPD marketplace will ensure that the cable operators refrain 
from charging unreasonable rates for their CPSTs, we tentatively 
conclude that a waiver would be consistent with congressional policy 
favoring competition over regulation. We invite comment on this 
tentative conclusion.

[[Page 57427]]


V. Waiver Analysis

    The Commission may waive rules only for ``good cause shown.'' (47 
C.F.R. Sec. 1.3.) Waiver orders must show that special circumstances 
warrant a deviation from the general rule and that the deviation will 
serve the public interest. See, e.g., WAIT Radio v. FCC, 418 F.2d 1153, 
1159 (D.C. Cir. 1969); Northeast Cellular Telephone Co. v. FCC, 897 
F.2d 1164, 1166 (D.C. Cir. 1990). In this Order, we indicate why we 
believe there may be good cause to waive our CPST rate rules for the 
Dover Township cable operators upon the initiation of VDT service, and 
we seek comment thereon. In particular, we believe that the 
availability to cable subscribers of video services offered by multiple 
VDT programmers may exert competitive pressure on CPST rates, and thus 
may constitute special circumstances justifying waiver of our CPST 
benchmark rules. Such waiver may serve the public interest by 
encouraging operator innovation and programming diversity, establishing 
some measure of regulatory parity between the cable operators and the 
VDT programmers, and reducing the regulatory burdens faced by the cable 
operators, while still satisfying the underlying goal of ensuring that 
CPST rates are not unreasonable.
    We note that in establishing our rate regulation rules, we 
considered the six statutory factors identified by Congress as 
potentially relevant. (See 47 U.S.C. Sec. 543(c)(2).) In the context of 
waiving those rules, we believe it is appropriate to consider as many 
of those factors as are relevant. For example, the 1992 Cable Act 
directs us to consider ``the rates for cable systems, if any, that are 
subject to effective competition . . . .'' Consideration of this factor 
is consistent with Congress' direction that the marketplace be the sole 
arbiter of the reasonableness of an operator's rates once the operator 
is subject to effective competition. Equally consistent with the 
reasoning underlying this statutory factor is the notion that as a 
cable operator nears the effective competition standard, the market 
should play more of a role, and our regulations less of a role, in 
setting rates. We seek comment on our tentative conclusion that 
consideration of this factor weighs in favor of waiving CPST rate rules 
upon the initiation of VDT service.
    Other relevant factors set forth in the 1992 Cable Act include the 
capital and operating costs of the cable system and the system's 
advertising revenues. The presence of competition from programmers on 
the VDT platform suggests that a cable operator's costs may increase 
due to, for example, the need to finance marketing efforts to compete 
with the VDT programmers' offerings. Meanwhile, VDT programmers may 
draw advertising revenues away from the cable operators. Therefore, 
under certain circumstances, both of these statutory factors might 
support a waiver of our CPST rules that generally are applicable to 
operators that do not face such increases in operating costs on the one 
hand and decreases in advertising revenues on the other. While the 
result of these conditions might be higher CPST rates, we cannot 
conclude automatically that such higher rates are unreasonable, 
particularly if they are the product of a competitive environment.
    As the D.C. Circuit recently held, it may be appropriate to 
consider a particular factor, but ultimately attach little weight to it 
in devising a regulatory scheme. See Time Warner Entertainment Co. v. 
FCC, 56 F.3d 151, 175 (D.C. Cir. 1995). Commenters should respond to 
this consideration as well. We note in particular that all of the 
statutory factors specifically identified by Congress in the 1992 Cable 
Act relate either to the rates, costs, and revenues of the regulated 
cable operator itself or to the rates of other cable operators that can 
be used for purposes of comparison. None of the statutory factors calls 
for specific consideration of the presence of a competing MVPD in the 
cable operator's franchise area. This suggests that Congress may have 
intended the specific statutory factors to be of particular relevance 
when no such competition existed, as was more likely to be the case 
when Congress enacted the legislation, but that as the marketplace 
changed, the Commission was given the discretion to place more reliance 
on the ``other factors,'' not specifically identified in the statute, 
that the Commission is permitted to identify and take into account in 
ensuring that CPST rates are not unreasonable. (See 47 U.S.C. 
543(c)(2).) We already have identified one such factor--the provision 
of video services over a VDT platform by programmers who will face no 
regulatory restraints on their ability to design and price their 
programming packages. We request comment on the potential relevance of 
the statutory factors to our waiver analysis and our tentative views 
that the statutory factors may support a waiver.

VI. Scope and Conditions of Waiver

    Because our proposed waiver assumes the absence of effective 
competition as defined by the 1992 Cable Act, we are statutorily 
obligated to ensure that the cable operators' CPST rates will not be 
unreasonable. (47 U.S.C. Sec. 543(c)(1); no waiver would be required if 
effective competition existed, because rates are not subject to 
regulation in such circumstances. 47 U.S.C. Sec. 543(a)(2).) 
Accordingly, complaints against unreasonable rates may continue to be 
filed under 47 U.S.C. Sec. 543(c). But rather than being adjudicated 
against the benchmark, any complaints would be resolved on a case-by-
case basis, subject to a presumption of the reasonableness of the 
rates.
    We stress that we intend the proposed waiver to apply only to 
Section 76.922 to the extent it prescribes rates for CPSTs and Section 
76.956 to the extent it places the burden upon the operator to justify 
a CPST rate that is the subject of a complaint. We do not propose to 
extend the waiver to include the other rules applicable to regulated 
cable operators such as, but not limited to, those concerning a uniform 
rate structure, negative option billing, subscriber notices, and tier 
buy-throughs, to the extent they apply. While recognizing the possible 
need to give the Dover Township cable operators some additional 
flexibility in light of the unique competitive circumstances in which 
they soon may find themselves, we deem it prudent to move cautiously in 
experimenting with waivers of our generally applicable rules.
    For the same reasons we propose to waive our CPST rate regulations, 
we believe it may be appropriate to give the relevant local franchising 
authorities in Dover Township the option of waiving rate regulation 
rules applicable to BSTs and associated equipment. Ordinarily, if a 
local franchising authority has been certified to regulate basic rates 
and seeks to retain that certification, it cannot forbear from 
regulating in accordance with the Commission's rules. With the advent 
of VDT, however, we tentatively conclude that the Dover Township 
franchising authorities should have greater discretion to determine how 
to regulate basic service. Therefore we seek comment on whether local 
authorities should have the option of waiving the BST rate rules on the 
same basis and to the same extent that we propose to waive the CPST 
rate rules.
    Finally, our tentative view is that the waiver will take effect as 
of the date VDT service is actually available in the relevant franchise 
areas. Thus, if initially VDT service is available in only one of Dover 
Township's two franchise areas, the proposed waiver would apply only to 
the cable operator serving the franchise area in which consumers have 
access to VDT service. The second 

[[Page 57428]]
operator would become subject to the waiver upon providing notice to 
this Commission and its local franchising authority that VDT service 
has been initiated in its franchise area. We propose to re-examine any 
waiver of CPST regulation for the Dover Township two years from the 
date the waiver goes into effect. We are concerned that a shorter 
period would not give the operators sufficient incentive or flexibility 
to respond freely to the changes in the competitive landscape. In fact, 
that landscape will continue to evolve throughout the entirety of that 
two year period, according to Bell Atlantic's projections with respect 
to passings and penetration. In two years, we will revisit the issue 
and take steps consistent with the market environment that exists and 
is developing at that time.

VII. Conclusion

    In analyzing these issues, the Commission is guided by the goal of 
reducing unnecessary burdens on cable operators and providing the cable 
operators incentives to innovate and promote program diversity in 
response to competition. At the same time, we must confident that a 
waiver will not lead to unreasonable rates for the CPSTs offered by the 
Dover Township operators. We will look to the record in this proceeding 
to provide us the necessary assurance that the proposed approach will 
satisfy this statutory mandate. We consequently urge commenters to 
support their positions with empirical and other data, and to frame 
their arguments in terms of the economic concepts outlined above or 
other relevant economic analysis. As noted, comments also should take 
into account the factors that the Commission is required by statute to 
consider in establishing criteria for determining when CPS rates are 
unreasonable and other factors that commenters believe to be relevant.

VIII. Procedural Provisions

    Pursuant to its discretion under 47 C.F.R. Sec. 1.1200, the 
Commission is treating this as a non-restricted proceeding. Ex parte 
presentations are permitted, except during the Sunshine Agenda period, 
provided that they are disclosed as provided in the Commission's rules. 
See generally, 47 C.F.R. Secs. 1.1202, 1.1203 and 1.1206.
    Pursuant to applicable procedures set forth in Sections 1.415 and 
1.419 of the Commission's Rules, 47 C.F.R. Secs. 1.415 and 1.419, 
interested parties may file comments on or before December 13, 1995, 
and reply comments on or before December 28, 1995. To file formally in 
this proceeding, you must file an original plus four copies of all 
comments, reply comments, and supporting comments. If you want each 
Commissioner to receive a personal copy of your comments and reply 
comments, you must file an original plus nine copies. You should send 
comments and reply comments to Office of the Secretary, Federal 
Communications Commission, 1919 M Street, N.W., Washington, D.C. 20554. 
Comments and reply comments will be available for public inspection 
during regular business hours in the FCC Reference Center, Room 239, 
Federal Communications Commission, 1919 M Street, N.W., Washington, 
D.C. 20554.

Federal Communications Commission.
William F. Caton,
Acting Secretary.
[FR Doc. 95-28217 Filed 11-14-95; 8:45 am]
BILLING CODE 6712-01-M