Rate Rules for Cable Services

FEDERAL COMMUNICATIONS COMMISSION

[FCC 95-455]

Rate Rules for Cable Services

AGENCY: Federal Communications Commission.

ACTION: Notice.

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SUMMARY: The Federal Communications Commission is seeking comment on

its proposal to waive, on a temporary and trial basis, certain rules

governing the rates charged for cable services in Dover Township, New

Jersey, in light of the initiation there of the first permanent

commercial video dialtone system.

DATES: Interested parties may file comments on or before December 13,

1995, and reply comments on or before December 28, 1995.

ADDRESSES: Federal Communications Commission, 1919 M Street, N.W.,

Washington, D.C., 20554.

FOR FURTHER INFORMATION CONTACT:

Rick Chessen, Cable Services Bureau (202) 416-0800.

SUPPLEMENTARY INFORMATION: This is a synopsis of the Order Requesting

Comments adopted November 2, 1995 and released November 6, 1995. The

complete text of this Order is available for inspection and copying

during normal business hours in the FCC Cable Reference Center (room

333), 2033 M Street, N.W., Washington, D.C., 20554.

Synopsis of the Order Requesting Comments

I. Introduction

Under the Cable Television Consumer Protection and Competition Act

of 1992 (the ``1992 Cable Act''), the Commission is charged with

identifying criteria for determining whether rates for cable

programming service tiers (``CPSTs'') are unreasonable with respect to

cable operators that are subject to regulation. In carrying out this

mandate, the Commission has adopted a rate setting approach for CPSTs

that utilizes a competitive differential, benchmarks, and cost-of-

service factors. By this Order, we seek to develop a record that would

permit us to decide whether to waive, on a temporary and trial basis,

certain rules governing the rates charged for CPSTs by cable operators

serving subscribers in Dover Township, Ocean County, New Jersey, in

light of the initiation there of the first permanent commercial video

dialtone (``VDT'') system.

We tentatively conclude that the provision of video programming by

multiple independent programmers over a permanent VDT system within the

franchise areas of these cable operators, along with certain other

conditions described below, will ensure that the rates the operators

charge for cable programming services will not be unreasonable. If we

are correct as to the substantial impact that the VDT programmers will

have, then we believe that congressional intent would be furthered by a

properly conditioned waiver of our rules on the initiation of

commercial operation of the VDT system, to the extent those rules

require that rates for CPSTs be set in accordance with our benchmark or

cost-of-service methodologies. Such an approach holds the promise of

reducing the administrative burdens of rate regulation and providing

the cable operators greater flexibility in responding to competition

and developing their systems through programming and technological

innovation, while ensuring that the rates charged to subscribers for

CPSTs are not unreasonable. Providing the cable operators such

flexibility will also promote competition with unaffiliated

[[Page 57425]]

VDT programmers, who will face no regulatory restrictions in the

packaging and pricing of their video offerings. We adopt this Order to

solicit public comment on whether we should adopt such a waiver, and if

we decide to do so, the appropriate scope, duration, and conditions, of

such a waiver.

II. The Development of Video Dialtone

On December 15, 1992, the Bell Atlantic Telephone Companies (``Bell

Atlantic'') filed a Section 214 application to provide VDT service in

Dover Township, New Jersey. The VDT system includes fiber optic

transport facilities, using fiber to the curb architecture. Copper and

coaxial cable with deliver the signals from the curb to the

subscribers' premises. The VDT system is capable of delivering up to

384 channels of video capacity at 6 megabits per second per channel.

Bell Atlantic expects to add a VDT capability to its Dover Township

telephone network at an average rate of approximately 1,000 homes per

month, reaching its planned final buildout of 38,000 homes passed

within approximately three years. Bell Atlantic has predicted a

penetration rate of 35% following the completion of its buildout. Our

records indicate that at least two cable operators, Clear TV Cable and

Cablevision of Monmouth, offer cable service within Dover Township.

These operators soon will find themselves in a unique competitive

environment, given that the Bell Atlantic VDT system in Dover Township

will be the first such system to be operated on a non-trial basis.

III. Regulation of Rates for Cable Programming Services

The question of whether to waive our CPST rate rules, on the

initiation of permanent VDT service in Dover Township, must be viewed

against the backdrop of our existing rules and the statute from which

they emanate. The 1992 Cable Act was passed in large part to address

Congress's finding that cable operators enjoyed ``undue market power .

. . as compared to that of consumers and video programmers.'' (1992

Cable Act, Sec. 2(a)(2).) To protect consumers against the exercise of

this market power, the 1992 Cable Act provides for regulation of the

rates charged for certain programming and equipment by cable systems

that are not subject to ``effective competition.'' (47 U.S.C.

Sec. 543(a)(2).) The 1992 Cable Act authorizes local franchising

authorities to regulate rates for basic program service and equipment

according to criteria established by the Commission to ensure that such

rates are ``reasonable.'' (47 U.S.C. Sec. 543(a)(2)(A) & (b)(1).) The

Commission is directed to establish criteria to ensure that CPST rates

are not ``unreasonable.'' (47 U.S.C. Sec. 543(a)(2)(B) & (c)(1)(A).)

The language and structure of the 1992 Cable Act, and sound policy

considerations, suggest that we continually monitor the impact and

appropriateness of our rules as the market for multichannel video

programming evolves, and that in crafting and applying our rules we

keep pace with and encourage the development of competition. Congress

expressly declared its desire for competition as opposed to regulation,

when feasible. Of course, we must remain cognizant of our paramount

duty to ensure that CPST rates are not unreasonable. We believe that

the initiation of services by VDT programmers whose offerings and rates

will not be subject to regulation, when considered in conjunction with

other factors, may sufficiently restrain the CPST rates of the Dover

Township cable operators such that they can be presumed not

unreasonable. We believe such a conclusion is in accord with Congress'

express policy under the 1992 Cable Act to ``rely on the marketplace,

to the maximum extent feasible,'' to promote ``the availability to the

public of a diversity of views and information through cable television

and other video distribution media.''

The statutory definition of effective competition remains the

dividing line between systems that are subject to rate regulation and

those that are not. However, nothing in the 1992 Cable Act prohibits

the Commission from adopting different regulatory rules for different

categories of operators or from waiving its rules for certain operators

or categories of operators. For the reasons set forth below, we

tentatively conclude that the launch of VDT service in Dover Township

is potentially so significant and unique as to justify, on a two-year

trial basis, a separate regulatory treatment for the cable operators

providing service there. Accordingly, we tentatively conclude that for

the cable systems operating within Dover Township, a two-year

experimental waiver of our CPST rate rules, subject to certain

conditions to ensure that rates remain not unreasonable, is in the

public interest.

IV. The Significance of Video Dialtone and Other MVPDs

For a number of reasons, we believe that the availability of VDT

service in Dover Township may have a profound effect on competition

there. These reasons are grounded in what we believe to be well

established economic principles relating to competition. In particular,

we are guided by an accepted competitive analysis that seeks first to

define the relevant product market and next to examine market power

within that market.

A. The Relevant Market

We tentatively conclude that the offerings to be delivered over the

Dover VDT system will fall within the same product market as the cable

operators' CPSTs and therefore constitute a potentially competitive

alternative. We understand that seven programmers have reserved space

on Bell Atlantic's system. End user subscribers will be able to select

offerings from these programmers, individually or in combination. One

of the VDT programmers, Rainbow Holdings, a CableVision affiliate, will

offer 192 channels. Another programmer, FutureVision, has reserved 96

channels. In contrast to other alternative MVPDs currently providing

service in the Dover Township area, both programmers appear capable of

providing a full range of both broadcast and cablecast services

comparable to those offered by the two local incumbent cable operators.

By way of comparison, according to the Warren Publishing 1995 Cable TV

Factbook one of the cable operators, Clear TV Cable, currently offers

18 basic service tier channels, 17 CPST channels, and seven premium

channels, and the other, CableVision of Monmouth, currently offers 21

basic service tier channels, 15 CPST channels, and six premium

channels. In addition to being in a position to compete with respect to

these program offerings, the VDT system will be equipped to provide

interactive services and other features not currently available from

existing providers. Thus, there is evidence to suggest that the VDT

programmers will be potent competitors to cable and will greatly

enhance consumer choice, thus restraining the cable operators' ability

to raise CPST rates. To confirm our tentative conclusions, we solicit

information concerning the specific programming that will be available

to VDT subscribers in Dover Township and appropriate comparisons of the

specific VDT offerings to those of the cable operators.

By statute, the market for comparable programming also includes

multichannel multipoint distribution service (``MMDS''), direct

broadcast satellite (``DBS''), and television receive-only (``TVRO'')

satellite programming service. 47 U.S.C. Sec. 552(12). Similarly, in

the Competition Report we identified a number of multichannel video

[[Page 57426]]

programming distributors (``MVPDs''), in addition to VDT providers,

that offer services that seemed ``reasonably interchangeable'' with a

typical cable operator's services, including DBS, TVRO, MMDS, and

satellite master antenna television (``SMATV'') systems. Competition

Report, 59 Fed. Reg. 64,657, 9 FCC Rcd at 7642, 7473-7492 (1994). The

competitive significance of these providers will depend upon the

pricing and structuring of their video offerings and their market

share. Thus, in our discussion of market power below, we invite

comparisons between the offerings of these providers and the

composition and pricing of the CPSTs of the cable operators located in

Dover Township.

Although a typical analysis of competition requires identification

of a relevant geographic market, our proposed waiver effectively

defines the geographic market, for purposes of this proceeding, as

being the franchise areas of the two cable operators. However, the

degree of proposed overlap between the VDT service area and each of the

cable franchise areas is important. If, for example, Bell Atlantic

intends its VDT system to pass only 2% of the homes located in a

franchise area, the cable operator presumably will offer less of a

competitive response than if Bell Atlantic tends to pass 75% of the

homes. Thus, our inclination to relax CPST rate regulation may depend

upon the degree of overlap between the VDT and cable systems.

Interested parties should comment on the appropriate extent of the

anticipated overlap.

B. Market Power

Market power is generally defined as the ability to general excess

profits by raising and maintaining prices or by adversely affecting

product quality for a significant period of time. See United States v.

E.I. du Pont de Nemours & Co., 351 U.S. 377, 391-92 (1956). The marker

power of a cable operator can be diluted by two categories of entities:

those currently offering comparable programming and those that could

commence offering comparable programming within a relatively short

period of time. See, e.g., United States v. Marine Bancorporation,

Inc., 418 U.S. 602, 623-25 (1974). Once such entities are identified,

further analysis is necessary to ensure that they indeed impose

competitive pressure on cable operator.

With respect to market power, any waiver would be premised on the

availability in Dover Township of products that cable subscribers view

as sufficiently reasonable substitutes for cable programming service. A

standard method of determining whether a firm can exercise market power

with respect to a particular product is to answer the question: if this

firm raised the price of the product, to what degree would consumers

continue to purchase that product or turn to the products of other

firms, and what are these other products and other firms?

Our analysis of this issue is significantly affected by what we

understand to be the anticipated offerings of the VDT system. As

described above, it appears that the VDT programmers will be able to

provide programming fully comparable to that currently provided by the

Dover Township cable operators. Moreover, the cable operators can

expect aggressive competition from the VDT programmers with respect to

pricing strategies, according to press reports. We tentatively conclude

that the combination of a fully comparable product and aggressive

pricing, if and when made available to consumers via VDT, may produce

an effective restraint on cable rates, particularly given that the VDT

programmers will be able to implement packaging and pricing strategies

free of regulatory restraints. We seek comment as to the factual and

analytical validity of this tentative conclusion. We seek similar data

and comparison with respect to all other MVPDs offering programming

comparable to that of the cable operators in Dover Township.

We presume that any competitive pressure felt by the Dover Township

cable operators as a result of the initiations of VDT service will

increase over time as Bell Atlantic continues construction of its

system and as consumers become more familiar with the service and the

offerings of the VDT programmers. Although the penetration rate of VDT

programmers will not reach a mature level immediately, in the present

instance there are several reasons to suggest that the commencement of

VDT service may restrain prices and prompt other competitive responses

from the cable operators such that application of our CPST rate rules

will be unnecessary.

Initially, we note that the remaining barriers to the initiation of

service by Bell Atlantic are relatively minor. Bell Atlantic has

received the required Section 214 authorization from the Commission. In

addition, Bell Atlantic's VDT tariff has become effective, subject to

investigation. Bell Atlantic now has substantial control over the

rollout of its new service and has every incentive to expedite that

process. Once VDT service is initiated, Bell Atlantic faces a similar

lack of barriers with respect to the continued buildout of the system.

Thus, the availability of service may represent a logical point at

which to make any waiver effective. We seek comment on whether Bell

Atlantic's entry plan alone is sufficient to exert a present restraint

on cable prices and cable operator conduct in Dover Township.

We further note that a current cable subscriber apparently will be

able to switch from his or her current video provider to one or more of

the VDT programmers without sacrificing broadcast channels or channel

capacity. This distinguishes VDT from DBS service, which generally does

not include local broadcast stations, and from MMDS, which has a lower

overall channel capacity. Moreover, the DBS and MMDS require the

installation of receiving antennae and other equipment. Competition

from VDT may pose a greater competitive threat to cable operators than

competition from other providers that have more limited channel line-

ups or require significant initial expenditures by the consumer. We do

not mean to understate, and we welcome comments concerning, the

significance of DBS and other MVPDs that may be offering service in

Dover Township. We believe, however, that the addition of permanent VDT

service to the competitive mix is independently significant. We seek

comment on the validity of these comparisons, including data concerning

the initial installation costs of VDT for its end users.

Dover Township is a laboratory in which these theories can be

tested. In view of the novelty and potential consequences of this

situation, we are considering waiving our rules that require these

cable operators to establish and maintain rates for their CPSTs in

accordance with our benchmark or cost-of-service methodologies, as

adjusted for changes in inflation, external costs, and for channel

additions and deletions. (See 47 C.F.R. Sec. 76.922.) We believe that

such a waiver may well be justified in light of the rate restraining

impact that the VDT plus other competitive offerings may have on the

cable operators' CPSTs. Additionally, such a trial waiver may yield

information that will prove useful in the future as we continue to

adapt our regulations to the ever-changing MVPD marketplace.

To the extent that the particular circumstances of the Dover

Township MVPD marketplace will ensure that the cable operators refrain

from charging unreasonable rates for their CPSTs, we tentatively

conclude that a waiver would be consistent with congressional policy

favoring competition over regulation. We invite comment on this

tentative conclusion.

[[Page 57427]]

V. Waiver Analysis

The Commission may waive rules only for ``good cause shown.'' (47

C.F.R. Sec. 1.3.) Waiver orders must show that special circumstances

warrant a deviation from the general rule and that the deviation will

serve the public interest. See, e.g., WAIT Radio v. FCC, 418 F.2d 1153,

1159 (D.C. Cir. 1969); Northeast Cellular Telephone Co. v. FCC, 897

F.2d 1164, 1166 (D.C. Cir. 1990). In this Order, we indicate why we

believe there may be good cause to waive our CPST rate rules for the

Dover Township cable operators upon the initiation of VDT service, and

we seek comment thereon. In particular, we believe that the

availability to cable subscribers of video services offered by multiple

VDT programmers may exert competitive pressure on CPST rates, and thus

may constitute special circumstances justifying waiver of our CPST

benchmark rules. Such waiver may serve the public interest by

encouraging operator innovation and programming diversity, establishing

some measure of regulatory parity between the cable operators and the

VDT programmers, and reducing the regulatory burdens faced by the cable

operators, while still satisfying the underlying goal of ensuring that

CPST rates are not unreasonable.

We note that in establishing our rate regulation rules, we

considered the six statutory factors identified by Congress as

potentially relevant. (See 47 U.S.C. Sec. 543(c)(2).) In the context of

waiving those rules, we believe it is appropriate to consider as many

of those factors as are relevant. For example, the 1992 Cable Act

directs us to consider ``the rates for cable systems, if any, that are

subject to effective competition . . . .'' Consideration of this factor

is consistent with Congress' direction that the marketplace be the sole

arbiter of the reasonableness of an operator's rates once the operator

is subject to effective competition. Equally consistent with the

reasoning underlying this statutory factor is the notion that as a

cable operator nears the effective competition standard, the market

should play more of a role, and our regulations less of a role, in

setting rates. We seek comment on our tentative conclusion that

consideration of this factor weighs in favor of waiving CPST rate rules

upon the initiation of VDT service.

Other relevant factors set forth in the 1992 Cable Act include the

capital and operating costs of the cable system and the system's

advertising revenues. The presence of competition from programmers on

the VDT platform suggests that a cable operator's costs may increase

due to, for example, the need to finance marketing efforts to compete

with the VDT programmers' offerings. Meanwhile, VDT programmers may

draw advertising revenues away from the cable operators. Therefore,

under certain circumstances, both of these statutory factors might

support a waiver of our CPST rules that generally are applicable to

operators that do not face such increases in operating costs on the one

hand and decreases in advertising revenues on the other. While the

result of these conditions might be higher CPST rates, we cannot

conclude automatically that such higher rates are unreasonable,

particularly if they are the product of a competitive environment.

As the D.C. Circuit recently held, it may be appropriate to

consider a particular factor, but ultimately attach little weight to it

in devising a regulatory scheme. See Time Warner Entertainment Co. v.

FCC, 56 F.3d 151, 175 (D.C. Cir. 1995). Commenters should respond to

this consideration as well. We note in particular that all of the

statutory factors specifically identified by Congress in the 1992 Cable

Act relate either to the rates, costs, and revenues of the regulated

cable operator itself or to the rates of other cable operators that can

be used for purposes of comparison. None of the statutory factors calls

for specific consideration of the presence of a competing MVPD in the

cable operator's franchise area. This suggests that Congress may have

intended the specific statutory factors to be of particular relevance

when no such competition existed, as was more likely to be the case

when Congress enacted the legislation, but that as the marketplace

changed, the Commission was given the discretion to place more reliance

on the ``other factors,'' not specifically identified in the statute,

that the Commission is permitted to identify and take into account in

ensuring that CPST rates are not unreasonable. (See 47 U.S.C.

543(c)(2).) We already have identified one such factor--the provision

of video services over a VDT platform by programmers who will face no

regulatory restraints on their ability to design and price their

programming packages. We request comment on the potential relevance of

the statutory factors to our waiver analysis and our tentative views

that the statutory factors may support a waiver.

VI. Scope and Conditions of Waiver

Because our proposed waiver assumes the absence of effective

competition as defined by the 1992 Cable Act, we are statutorily

obligated to ensure that the cable operators' CPST rates will not be

unreasonable. (47 U.S.C. Sec. 543(c)(1); no waiver would be required if

effective competition existed, because rates are not subject to

regulation in such circumstances. 47 U.S.C. Sec. 543(a)(2).)

Accordingly, complaints against unreasonable rates may continue to be

filed under 47 U.S.C. Sec. 543(c). But rather than being adjudicated

against the benchmark, any complaints would be resolved on a case-by-

case basis, subject to a presumption of the reasonableness of the

rates.

We stress that we intend the proposed waiver to apply only to

Section 76.922 to the extent it prescribes rates for CPSTs and Section

76.956 to the extent it places the burden upon the operator to justify

a CPST rate that is the subject of a complaint. We do not propose to

extend the waiver to include the other rules applicable to regulated

cable operators such as, but not limited to, those concerning a uniform

rate structure, negative option billing, subscriber notices, and tier

buy-throughs, to the extent they apply. While recognizing the possible

need to give the Dover Township cable operators some additional

flexibility in light of the unique competitive circumstances in which

they soon may find themselves, we deem it prudent to move cautiously in

experimenting with waivers of our generally applicable rules.

For the same reasons we propose to waive our CPST rate regulations,

we believe it may be appropriate to give the relevant local franchising

authorities in Dover Township the option of waiving rate regulation

rules applicable to BSTs and associated equipment. Ordinarily, if a

local franchising authority has been certified to regulate basic rates

and seeks to retain that certification, it cannot forbear from

regulating in accordance with the Commission's rules. With the advent

of VDT, however, we tentatively conclude that the Dover Township

franchising authorities should have greater discretion to determine how

to regulate basic service. Therefore we seek comment on whether local

authorities should have the option of waiving the BST rate rules on the

same basis and to the same extent that we propose to waive the CPST

rate rules.

Finally, our tentative view is that the waiver will take effect as

of the date VDT service is actually available in the relevant franchise

areas. Thus, if initially VDT service is available in only one of Dover

Township's two franchise areas, the proposed waiver would apply only to

the cable operator serving the franchise area in which consumers have

access to VDT service. The second

[[Page 57428]]

operator would become subject to the waiver upon providing notice to

this Commission and its local franchising authority that VDT service

has been initiated in its franchise area. We propose to re-examine any

waiver of CPST regulation for the Dover Township two years from the

date the waiver goes into effect. We are concerned that a shorter

period would not give the operators sufficient incentive or flexibility

to respond freely to the changes in the competitive landscape. In fact,

that landscape will continue to evolve throughout the entirety of that

two year period, according to Bell Atlantic's projections with respect

to passings and penetration. In two years, we will revisit the issue

and take steps consistent with the market environment that exists and

is developing at that time.

VII. Conclusion

In analyzing these issues, the Commission is guided by the goal of

reducing unnecessary burdens on cable operators and providing the cable

operators incentives to innovate and promote program diversity in

response to competition. At the same time, we must confident that a

waiver will not lead to unreasonable rates for the CPSTs offered by the

Dover Township operators. We will look to the record in this proceeding

to provide us the necessary assurance that the proposed approach will

satisfy this statutory mandate. We consequently urge commenters to

support their positions with empirical and other data, and to frame

their arguments in terms of the economic concepts outlined above or

other relevant economic analysis. As noted, comments also should take

into account the factors that the Commission is required by statute to

consider in establishing criteria for determining when CPS rates are

unreasonable and other factors that commenters believe to be relevant.

VIII. Procedural Provisions

Pursuant to its discretion under 47 C.F.R. Sec. 1.1200, the

Commission is treating this as a non-restricted proceeding. Ex parte

presentations are permitted, except during the Sunshine Agenda period,

provided that they are disclosed as provided in the Commission's rules.

See generally, 47 C.F.R. Secs. 1.1202, 1.1203 and 1.1206.

Pursuant to applicable procedures set forth in Sections 1.415 and

1.419 of the Commission's Rules, 47 C.F.R. Secs. 1.415 and 1.419,

interested parties may file comments on or before December 13, 1995,

and reply comments on or before December 28, 1995. To file formally in

this proceeding, you must file an original plus four copies of all

comments, reply comments, and supporting comments. If you want each

Commissioner to receive a personal copy of your comments and reply

comments, you must file an original plus nine copies. You should send

comments and reply comments to Office of the Secretary, Federal

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

Comments and reply comments will be available for public inspection

during regular business hours in the FCC Reference Center, Room 239,

Federal Communications Commission, 1919 M Street, N.W., Washington,

D.C. 20554.

Federal Communications Commission.

William F. Caton,

Acting Secretary.

[FR Doc. 95-28217 Filed 11-14-95; 8:45 am]

BILLING CODE 6712-01-M