[Federal Register Volume 61, Number 169 (Thursday, August 29, 1996)]
[Proposed Rules]
[Pages 45387-45391]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21581]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 76

[CS Docket No. 96-157; FCC 96-316]


Cable Pricing Flexibility

AGENCY: Federal Communications Commission.

ACTION: Proposed Rule,

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SUMMARY: In this Notice of Proposed Rulemaking (``NPRM''), the 
Commission proposes to modify its current ratemaking rules in order to 
allow operators greater flexibility in pricing their regulated tiers of 
cable service while continuing to protect subscribers from unreasonable 
rates. Specifically, the Commission proposes to permit a cable operator 
that has established rates for its regulated service tiers to decrease 
the rate for its basic service tier (``BST''), and then take a 
corresponding increase in the rate for its cable programming services 
tiers (``CPSTs''), as long as the combined rate for the two tiers does 
not generate revenues for the operator that exceed what would otherwise 
be permitted under our rules. The Commission tentatively concludes that 
this proposal would remove an unnecessary restriction on an operator's 
pricing strategy, while maintaining effective constraints on the 
overall rates paid by subscribers, thus resulting in pricing which more 
nearly simulates that of a competitive market. The Commission seeks 
comment on this proposal which was adopted concurrently with a Report 
and Order requiring operators to use the same methodology when 
calculating rates for their BST and their CPST. That Memorandum Opinion 
and Order is summarized elsewhere in this issue of the Federal 
Register.

DATES: Comments are due on or before October 6, 1996, and reply 
comments are due on or before November 8, 1996.

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

FOR FURTHER INFORMATION CONTACT: Cable Services Bureau, (202) 418-7200.

SUPPLEMENTARY INFORMATION: This is a synopsis of the Commission's 
Notice of Proposed Rulemaking, CS Docket No. 99-157 FCC 96-316 adopted 
July 25, 1996, and released August 15, 1996. The full text of this 
decision is available for inspection and copying during normal business 
hours in the FCC Reference Center (room 239), 1919 M Street, NW, 
Washington, D.C., 20554, and may be purchased from the Commission's 
copy contractor, International Transcription Service, (202) 857-3800, 
1919 M Street, NW, Washington, D.C. 20554.

Synopsis of the Notice of Proposed Rulemaking

    1. An operator wishing to use the proposed pricing methodology 
first would establish rates for its regulated service tiers using the 
same methodology for both tiers. The resulting rate for the BST would 
be the cap for that tier. The operator then would determine the amount 
by which it was willing to decrease the BST rate and calculate the 
total revenue loss derived from the reduction. The operator would then 
divide this amount by the total number of CPST subscribers in order to 
calculate the rate increase for the CPST. The BST rate decrease would 
be reflected on the cable bill of every subscriber because subscription 
to the BST is required in order to have access to any other tier of 
service. Because subscription to CPSTs is optional, the pool of CPST 
subscribers is usually smaller than the BST subscriber pool. The total 
loss in BST revenue, therefore, when spread over the smaller CPST 
subscriber base, would generate a CPST rate increase that exceeded the 
amount of the BST rate decrease. As a result, BST-CPST subscribers 
(i.e., all CPST subscribers) would see a net increase in rates. This 
increase should be minimal if the operator has a high penetration rate 
on the CPST. Industry data available to us indicate that, for the most 
highly penetrated CPST on a system, the average penetration rate 
approaches or exceeds 90% and the median penetration rate exceeds 95%. 
The Commission seeks comment on these estimates and, more generally, on 
the likely impact on CPST rates if the proposal is implemented.
    2. The Commission believes that individual consumers would be 
either substantially better off, or subject to only minor rate 
increases, were the Commission to adopt the proposal. BST-only 
subscribers would be better off because their rates would decrease with 
no diminution in service. Although CPST subscribers could experience a 
minor rate increase, all CPST subscribers are also BST subscribers for 
whom the increase in CPST rates would be substantially offset by the 
decrease in BST rates. However, because the Commission seeks to ensure 
that increases to CPST subscribers be minimized, the Commission seeks 
comment on whether to limit the amount of increase a CPST subscriber 
must pay or to otherwise limit the amount by which the BST and CPST 
rates may be adjusted. As noted, any increase to CPST subscribers would 
be minimal because of the high penetration rate of CPSTs.
    3. In addition to lowering rates for current BST-only subscribers, 
this proposal should make the BST more affordable for some consumers 
who currently do not subscribe to cable at all. The Commission believes 
that its proposal presents other benefits as well. This proposal would 
provide cable operators with a rate structure flexibility enjoyed by 
providers of video services that are, or soon will be, attempting to 
compete with traditional cable operators in the video marketplace, 
including providers of direct broadcast satellite (``DBS'') service, 
multichannel multipoint distribution service, and

[[Page 45388]]

open video systems. These video competitors offer, or will offer, 
consumers an alternative to conventional cable service. Because these 
competitors are not subject to the type of rate regulation imposed upon 
cable operators by the Communications Act, they have greater 
flexibility to restructure their pricing as well as the services they 
offer consumers. The Commission tentatively concludes that the proposed 
rate adjustment mechanism may enhance a cable operator's ability to 
compete with these alternative providers. For example, while currently 
a cable operator can attempt to become more competitive by simply 
dropping the rate of its BST, this proposal gives the operator an 
additional incentive to do so in that BST revenues that otherwise would 
be lost due to the rate decrease can be recovered on the CPST, even 
though no subscriber would see a significant rate increase.
    4. The Commission further concludes that a less expensive BST 
service might assist system operators in increasing customer access and 
penetration, in preparation for the developing marketplace in which 
access to nonvideo services, such as telephony or enhanced services, is 
becoming increasingly important.
    5. To ensure that these goals can be accomplished while continuing 
to protect consumers, the Commission believes that the proposed 
mechanism must be subject to several conditions. As stated, an operator 
electing this approach first would set rates for its regulated tiers in 
accordance with our existing rules. After lowering its BST rate and 
increasing its CPST rate in the manner described, the operator would 
have a continuing obligation to keep track of what its maximum 
permitted rate would be for each tier had it not made the adjustment. 
An operator would continue to maintain records of these ``underlying 
rates'' so that an LFA, or the Commission, could verify that the 
operator had made the adjustment properly. In particular, the LFA must 
be able to ensure that the operator prices its BST rate at no more than 
what our rules otherwise permit. The Commission invites comment on this 
aspect of its proposal.
    6. Further, the Commission proposes that systems offering more than 
one CPST would be able to allocate the amount deducted from the BST 
rate among the CPSTs in any manner, so long as the combined rate 
increases for the CPSTs is revenue neutral to the cable operator. As 
noted above, to ensure that any CPST rate increase is minimized, the 
Commission seeks comment on whether to limit the amount of such 
increase.
    7. With respect to timing issues, the Commission believes that an 
operator should be permitted to use the proposed adjustment mechanism 
only when it has the opportunity to adjust rates under our existing 
rules. Thus, if an operator has chosen to adjust rates on annual basis, 
it would be able to implement the adjustment mechanism proposed herein 
only at the time of, and as part of, an annual rate adjustment. This 
restriction would ensure that our proposal does not increase the number 
of times subscribers experience rate adjustments. The Commission does 
not intend to require that the operator make a standard rate adjustment 
at the time it uses the proposed mechanism (unless it is otherwise 
required to do so), only that it have the choice to make such an 
adjustment
    8. For LFAs, this proposal should generate no additional burdens. 
An LFA will engage in the same rate review process as before. The 
Commission seeks comment on how to simplify further the rate review 
process.
    9. The proposal would add another step to the Commission's review 
of a CPST complaint. This is because an operator that elects the 
proposed option may have a CPST rate that exceeds what normally would 
be permitted by our rules. To determine whether the CPST rate is 
nonetheless reasonable, the Commission will have to consider not just 
the CPST rate, but also the combined BST-CPST rate. Our consideration 
of the combined BST-CPST rate under this proposal will be for the sole 
purpose of determining whether the CPST rate is reasonable. BST rate 
review will remain the province of LFAs. The Commission invites comment 
as to the interaction of this extra step in the Commission's review of 
CPST rates and the Commission's statutory mandate to ensure that CPST 
rates are not unreasonable.
    10. The Commission also seeks comment regarding how this proposed 
adjustment should work in cases where the cable operator is subject 
only to CPST rate regulation, such as where the LFA has not exercised 
authority to regulate the BST. Upon submission of a complaint invoking 
its jurisdiction, the Commission is obligated to determine whether the 
new CPST rate is not unreasonable. One option in this circumstance 
would be to analyze the operator's rates as if its BST were regulated 
and to permit the operator to increase its CPST rate by the amount 
necessary to recover revenue lost due to a rate decrease on the 
unregulated BST. The Commission seeks comment on the extent of these 
circumstances and the merits of this suggestion, and invite commenters 
to recommend means by which a rate review should be conducted. In 
addition, the Commission solicits comment on an operator's ability to 
rescind a recently implemented rate adjustment, and whether this would 
cause subscriber confusion, particularly if reversing the adjustment 
reflects rates the operator intended to charge absent this alternative.
    11. As indicated above, when the Commission initially proposed 
approaches to rate regulation under the 1992 Cable Act, it considered a 
pricing mechanism somewhat similar to that which the Commission 
proposes here, the object of which was to encourage or require a low-
cost ``bare bones'' BST. In the Report and Order and Further Notice of 
Proposed Rulemaking in MM Docket No. 92-266, 58 FR 29736, (``Rate 
Order''), the Commission rejected this idea and adopted the ``tier 
neutrality'' requirement. The Commission determined that the public 
interest would best be served by basing rates for all rate-regulated 
channels of cable services on common principles, rather than forcing 
BST rates down through a rate-setting approach applicable only to that 
tier. The Commission was concerned that suppressing BST rates in this 
manner would result in operators simply moving channels off the BST to 
other tiers that would generate more revenues. The Commission concluded 
that it was preferable to adopt a framework that resulted in a slightly 
higher-cost BST that had more programming. In addition, the Commission 
determined that applying a single methodology to all regulated tiers 
reduced administrative burdens and confusion for operators, LFAs, and 
the Commission.
    The current proposal differs from the proposal the Commission 
rejected in the Rate Order in two fundamental respects. First, the 
current proposal is not a forced reduction in the price of the BST. 
Rather, it simply permits operators to reduce the price of the BST as 
part of an overall marketing strategy. Second, it does not require any 
reduction in the number of channels on the BST. The current proposal 
preserves the benefits of the tier neutrality approach since the 
operator can make the adjustment proposed above only after establishing 
rates for its tiers in accordance with the tier neutrality principle. 
The current proposal also preserves the ability of the operator to move 
channels in order to accommodate market changes. The Commission 
believes this adjustment is

[[Page 45389]]

consistent with our approach to modify and improve the existing rules 
continually as the market changes and more information becomes 
available, while protecting consumers from more than a minimal rate 
increase.

Initial Regulatory Flexibility Analysis for the Notice of Proposed 
Rulemaking

    13. Pursuant to Section 603 of the Regulatory Flexibility Act, the 
Commission has prepared the following initial regulatory flexibility 
analysis (``IRFA'') of the expected impact of these proposed policies 
and rules on small entities. Written public comments are requested on 
the IRFA. These comments must be filed in accordance with the same 
filing deadlines as comments on the rest of the NPRM but they must be 
have a separate and distinct heading designating them as responses to 
the regulatory flexibility analysis. The Secretary shall cause a copy 
of this NPRM to be sent to the Chief Counsel for Advocacy of the Small 
Business Administration in accordance with Section 603(a) of the 
Regulatory Flexibility Act, Public Law No. 96-354, 94 Stat. 1164, 5 
U.S.C. Section 601 et seq. (1981).
    14. Reason for Action and Objectives of the Proposed Rule. The 
Commission has determined that our cable rules do not permit cable 
operators to lower rates for the BST and to then recover lost revenues 
on the CPST. The proposal contained in this NPRM will allow operators 
to offer a better price to BST subscribers while continuing to protect 
all subscribers from unreasonable rates. The proposal contained in this 
NPRM, if adopted, would be an optional step for a cable operator in 
ratemaking, offering rate regulated operators more flexibility in cable 
pricing. This proposal will provide a cable operator with the ability 
to price services in a manner which duplicates market driven rates 
while continuing to offer consumers protections in the absence of 
effective competition.
    15. Legal Basis. The authority for the action as proposed for this 
rulemaking is contained in Section 623 of the Communications Act of 
1934, as amended, 47 U.S.C. Sec. 543, and Section 303(r) of the 
Communications Act of 1934, as amended, 47 U.S.C. Sec. 303.

Description and Number of Small Entities Affected

    16. Small Cable Entities: The Communications Act contains a 
definition of a small cable system operator, which is ``a cable 
operator that, directly or through an affiliate, serves in the 
aggregate fewer than 1 percent of all subscribers in the United States 
and is not affiliated with any entity or entities whose gross annual 
revenues in the aggregate exceed $250,000,000.'' (47 U.S.C. 
Sec. 543(m)(2)). The Commission has determined that there are 
61,700,000 subscribers in the United States. Therefore, the Commission 
found that an operator serving fewer than 617,000 subscribers is deemed 
a small operator, if its annual revenues, when combined with the total 
annual revenues of all of its affiliates, do not exceed $250 million in 
the aggregate (47 CFR Sec. 76.1403(b)). Based on available data, the 
Commission finds that the number of cable operators serving 617,000 
subscribers or less totals 1,450. Although it seems certain that some 
of these cable system operators are affiliated with entities whose 
gross annual revenues exceed $250,000,000, the Commission is unable at 
this time to estimate with greater precision the number of cable system 
operators that would qualify as small cable operators under the 
definition in the Communications Act. The Commission is likewise unable 
to estimate the number of these small cable operators that serve 50,000 
or fewer subscribers in a franchise area.
    17. The Commission has developed its own definition of a small 
cable system operator for the purposes of rate regulation. Under the 
Commission's rules, a ``small cable company,'' is one serving fewer 
than 400,000 subscribers nationwide (47 CFR Sec. 76.901(e)). Based on 
our most recent information, the Commission estimates that there were 
1,439 cable operators that qualified as small cable system operators at 
the end of 1995. Since then, some of those companies may have grown to 
serve over 400,000 subscribers, and others may have been involved in 
transactions that caused them to be combined with other cable 
operators. Consequently, the Commission estimates that there are fewer 
than 1,439 small entity cable system operators that may be affected by 
the proposal adopted in this NPRM. Under the Commission's rules, a 
small cable system is a cable system with 15,000 or fewer subscribers 
owned by a cable company serving 400,000 or fewer subscribers over all 
of its cable systems. The Commission is unable to estimate the number 
of small cable systems nationwide, and the Commission seeks comment on 
the number of small cable systems.
    18. SBA has developed a definition of small entities for cable and 
other pay television services, which includes all such companies 
generating less than $11 million in revenue annually. This definition 
includes cable systems operators, closed circuit television services, 
direct broadcast satellite services, multipoint distribution systems, 
satellite master antenna systems and subscription television services. 
According to the Census Bureau, there were 1,323 such cable and other 
pay television services generating less than $11 million in revenue 
that were in operation for at least one year at the end of 1992.
    19. Municipalities: The term ``small governmental jurisdiction'' is 
defined as ``governments of . . . districts, with a population of less 
than fifty thousand.''(5 U.S.C. Sec. 601(5)). Based on most recent 
census data, there are 85,006 governmental entities in the United 
States. This number includes such entities as states, counties, cities, 
utility districts and school districts. The Commission notes that any 
official actions with respect to cable operators' BST will typically be 
undertaken by LFAs, which primarily consist of counties, cities and 
towns. Of the 85,006 governmental entities, 38,978 are counties, cities 
and towns. The remainder are primarily utility districts, school 
districts, and States, which typically are not LFAs. Of the 38,978 
counties, cities and towns, 37,566 or 96%, have populations of fewer 
than 50,000.

Steps taken to Minimize Significant Economic Impact on Small Entities 
and Significant Alternatives Rejected

    20. Small Cable Entities: The Communications Act contains a 
definition of a small cable system operator, which is ``a cable 
operator that, directly or through an affiliate, serves in the 
aggregate fewer than 1 percent of all subscribers in the United States 
and is not affiliated with any entity or entities whose gross annual 
revenues in the aggregate exceed $250,000,000.'' (47 U.S.C. 
Sec. 543(m)(2)). Under the Communications Act, at 47 U.S.C. 543(m) (1), 
a small cable operator is not subject to the rate regulation 
requirements of Sections 543 (a), (b) and (c) on CPSTs in any franchise 
area in which it serves 50,000 or fewer subscribers. The proposed rule 
adopted in this NPRM would give a rate regulated operator the option to 
lower rates on its BST and to raise rates on its CPST in order to 
recover lost revenues from the BST reduction. The CPST rate increase 
would be reviewed by the Commission. Because this proposed rule would 
not affect operators that are not rate regulated on CPSTs, there would 
be no impact on small cable operators that, according to the 
Communications Act, are not subject to rate regulation on CPSTs.

[[Page 45390]]

    21. The Commission has developed its own definition of a small 
cable system operator for the purposes of rate regulation. Under the 
Commission's rules, a ``small cable company,'' is one serving fewer 
than 400,000 subscribers nationwide, and a small cable system is a 
cable system with 15,000 or fewer subscribers owned by a cable company 
serving 400,000 or fewer subscribers over all of its cable systems (47 
C.F.R. Sec. 76.901(e)). SBA has developed a definition of small 
entities for cable and other pay television services, which includes 
all such companies generating less than $11 million in revenue 
annually.
    22. To the extent that any of these operators are rate regulated on 
CPSTs, the Commission emphasizes that the proposal would provide an 
optional rate adjustment methodology for rate regulated operators in 
order to provide for greater flexibility in cable pricing, and would 
not impose a mandatory requirement on cable operators. If the 
Commission did not modify its rules, a regulated cable operator would 
not be able to recover, on its CPST, lost revenues for rate decreases 
to the BST. The Commission believes that allowing for such an 
adjustment could give operators more flexibility to respond to 
competition in the marketplace.
    23. Municipalities: The term ``small governmental jurisdiction'' is 
defined as ``governments of . . . districts, with a population of less 
than fifty thousand.'' (5 U.S.C. Sec. 601(5)). The Commission does not 
believe that the proposal contained in this NPRM will have a 
significant economic impact on a substantial number of these small 
governmental jurisdictions. A small governmental jurisdiction that 
regulates the BST would continue its current practice of reviewing an 
operator's maximum permitted per channel rate on the BST. Any rate 
increase by an operator opting to use the proposal contained in this 
NPRM would occur on the CPST and would therefore be reviewed by the 
Commission.
    24. Reporting, Recordkeeping and other Compliance Requirements. Our 
current methodology for calculating maximum permissible rates will need 
to be amended to account for the additional optional rate calculation 
step proposed in this NPRM. The proposed rule is optional, and would 
not be a requirement for any cable operator that does not want to 
utilize the proposed option. An operator wishing to use the proposed 
pricing methodology first would establish rates for its regulated 
service tiers using the same methodology for both tiers. The resulting 
rate for the BST would be the cap for that tier. The operator then 
would determine the amount by which it was willing to decrease the BST 
rate and calculate the total revenue loss derived from the reduction. 
The operator would then divide this amount by the total number of CPST 
subscribers in order to calculate the rate increase for the CPST. After 
lowering its BST rate and increasing its CPST rate in the manner 
described, the operator would have a continuing obligation to keep 
track of what its maximum permitted rate would be for each tier had it 
not made the adjustment. An operator would continue to maintain records 
of these ``underlying rates'' so that an LFA, or the Commission, could 
verify that the operator had made the adjustment properly. In the NPRM, 
the Commission seeks comment on the specific method of implementation 
of the proposal. The rule as proposed would not require any additional 
special skills beyond any which are already needed in the cable rate 
regulatory context.
    25. Significant Alternatives to Proposed Rule Which Minimize 
Significant Economic Impact on Small Entities and Accomplish Stated 
Objectives. In the NPRM, the Commission examines the current rule that 
prohibits a rate-regulated cable operator from justifying an increase 
in its CPST rate on the basis of a corresponding decrease in the BST 
rate. The Commission tentatively concludes that eliminating this aspect 
of our current rules would give cable operators greater pricing 
flexibility to respond to their growing competition while continuing to 
protect consumers. If, in the alternative, the Commission did not 
modify its rules, a regulated cable operator would not be able to 
recover, on its CPST, lost revenues for rate decreases to the BST. The 
Commission believes that allowing for such an adjustment could give 
operators more flexibility to respond to competition in the 
marketplace. This is consistent with the issues raised in the body of 
the NPRM. As explained above, the Commission does not believe the 
proposal creates any significant burden for small entities. The 
proposed rule change would be purely optional for cable operators, and 
local franchising authorities would not be subject to additional rate 
regulatory burdens as a result of adoption of the proposal.

Federal Rules which Overlap, Duplicate or Conflict with these Rules--
None

    26. Ex parte Rules--Non-Restricted Proceeding. This is a non-
restricted notice and comment rulemaking 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. Sections 1.1202, 1.1203, and 1.1206(a).
    27. Pursuant to applicable procedures set forth in Sections 1.415 
and 1.419 of the Commission's rules, interested parties may file 
comments on or before October 6, 1996, and reply comments on or before 
November 8, 1996. To file formally in this proceeding, you must file an 
original plus four copies of all comments, reply comments, and 
supporting comments. If you would like 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 the 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.

Ordering Clauses

    28. It is ordered that, pursuant to Sections 4(i), 4(j), 623(a), 
623(b), and 623(c), of the Communications Act of 1934, as amended, 47 
U.S.C. Secs. 154(i), 154(j), 543(a), 543(b), and 543(c), NOTICE IS 
HEREBY GIVEN of proposed amendments to Part 76, in accordance with the 
proposals, discussions, and statement of issues in this NPRM of 
Proposed Rulemaking, and that COMMENT IS SOUGHT regarding such 
proposals, discussion, and statement of issues.
    29. It is further ordered that, the Secretary shall send a copy of 
this NPRM, 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. 
Public Law No. 96-354, 94 Stat. 1164, 5 U.S.C. Secs. 601 et seq. 
(1981).

Paperwork Reduction Act

    This NPRM may contain either proposed or modified information 
collections. The Commission, as part of its continuing effort to reduce 
paperwork burdens, invites the general public to comment on the 
information collections contained in this NPRM, as required by the 
Paperwork Reduction Act of 1995, Public Law No. 104-13. Public and 
agency comments are due at the same time as other comments on this 
NPRM. Comments should address: (a) whether the proposed collection of

[[Page 45391]]

information is necessary for the proper performance of the functions of 
the Commission, including whether the information shall have practical 
utility; (b) ways to enhance the quality, utility, and clarity of the 
information collected; and (c) ways to minimize the burden of the 
collection of information on the respondents, including the use of 
automated collection techniques or other forms of information 
technology.

Federal Communications Commission.
William F. Caton,
Acting Secretary.
[FR Doc. 96-21581 Filed 8-28-96; 8:45 am]
BILLING CODE 6712-01-U