Cable Television Act of 1992

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.

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\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