Cable Pricing Flexibility

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 76

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

Cable Pricing Flexibility

AGENCY: Federal Communications Commission.

ACTION: Proposed Rule,

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SUMMARY: In this Notice of Proposed Rulemaking (``NPRM''), the

Commission proposes to modify its current ratemaking rules in order to

allow operators greater flexibility in pricing their regulated tiers of

cable service while continuing to protect subscribers from unreasonable

rates. Specifically, the Commission proposes to permit a cable operator

that has established rates for its regulated service tiers to decrease

the rate for its basic service tier (``BST''), and then take a

corresponding increase in the rate for its cable programming services

tiers (``CPSTs''), as long as the combined rate for the two tiers does

not generate revenues for the operator that exceed what would otherwise

be permitted under our rules. The Commission tentatively concludes that

this proposal would remove an unnecessary restriction on an operator's

pricing strategy, while maintaining effective constraints on the

overall rates paid by subscribers, thus resulting in pricing which more

nearly simulates that of a competitive market. The Commission seeks

comment on this proposal which was adopted concurrently with a Report

and Order requiring operators to use the same methodology when

calculating rates for their BST and their CPST. That Memorandum Opinion

and Order is summarized elsewhere in this issue of the Federal

Register.

DATES: Comments are due on or before October 6, 1996, and reply

comments are due on or before November 8, 1996.

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

Washington, D.C. 20554.

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

SUPPLEMENTARY INFORMATION: This is a synopsis of the Commission's

Notice of Proposed Rulemaking, CS Docket No. 99-157 FCC 96-316 adopted

July 25, 1996, and released August 15, 1996. The full text of this

decision is available for inspection and copying during normal business

hours in the FCC Reference Center (room 239), 1919 M Street, NW,

Washington, D.C., 20554, and may be purchased from the Commission's

copy contractor, International Transcription Service, (202) 857-3800,

1919 M Street, NW, Washington, D.C. 20554.

Synopsis of the Notice of Proposed Rulemaking

1. An operator wishing to use the proposed pricing methodology

first would establish rates for its regulated service tiers using the

same methodology for both tiers. The resulting rate for the BST would

be the cap for that tier. The operator then would determine the amount

by which it was willing to decrease the BST rate and calculate the

total revenue loss derived from the reduction. The operator would then

divide this amount by the total number of CPST subscribers in order to

calculate the rate increase for the CPST. The BST rate decrease would

be reflected on the cable bill of every subscriber because subscription

to the BST is required in order to have access to any other tier of

service. Because subscription to CPSTs is optional, the pool of CPST

subscribers is usually smaller than the BST subscriber pool. The total

loss in BST revenue, therefore, when spread over the smaller CPST

subscriber base, would generate a CPST rate increase that exceeded the

amount of the BST rate decrease. As a result, BST-CPST subscribers

(i.e., all CPST subscribers) would see a net increase in rates. This

increase should be minimal if the operator has a high penetration rate

on the CPST. Industry data available to us indicate that, for the most

highly penetrated CPST on a system, the average penetration rate

approaches or exceeds 90% and the median penetration rate exceeds 95%.

The Commission seeks comment on these estimates and, more generally, on

the likely impact on CPST rates if the proposal is implemented.

2. The Commission believes that individual consumers would be

either substantially better off, or subject to only minor rate

increases, were the Commission to adopt the proposal. BST-only

subscribers would be better off because their rates would decrease with

no diminution in service. Although CPST subscribers could experience a

minor rate increase, all CPST subscribers are also BST subscribers for

whom the increase in CPST rates would be substantially offset by the

decrease in BST rates. However, because the Commission seeks to ensure

that increases to CPST subscribers be minimized, the Commission seeks

comment on whether to limit the amount of increase a CPST subscriber

must pay or to otherwise limit the amount by which the BST and CPST

rates may be adjusted. As noted, any increase to CPST subscribers would

be minimal because of the high penetration rate of CPSTs.

3. In addition to lowering rates for current BST-only subscribers,

this proposal should make the BST more affordable for some consumers

who currently do not subscribe to cable at all. The Commission believes

that its proposal presents other benefits as well. This proposal would

provide cable operators with a rate structure flexibility enjoyed by

providers of video services that are, or soon will be, attempting to

compete with traditional cable operators in the video marketplace,

including providers of direct broadcast satellite (``DBS'') service,

multichannel multipoint distribution service, and

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open video systems. These video competitors offer, or will offer,

consumers an alternative to conventional cable service. Because these

competitors are not subject to the type of rate regulation imposed upon

cable operators by the Communications Act, they have greater

flexibility to restructure their pricing as well as the services they

offer consumers. The Commission tentatively concludes that the proposed

rate adjustment mechanism may enhance a cable operator's ability to

compete with these alternative providers. For example, while currently

a cable operator can attempt to become more competitive by simply

dropping the rate of its BST, this proposal gives the operator an

additional incentive to do so in that BST revenues that otherwise would

be lost due to the rate decrease can be recovered on the CPST, even

though no subscriber would see a significant rate increase.

4. The Commission further concludes that a less expensive BST

service might assist system operators in increasing customer access and

penetration, in preparation for the developing marketplace in which

access to nonvideo services, such as telephony or enhanced services, is

becoming increasingly important.

5. To ensure that these goals can be accomplished while continuing

to protect consumers, the Commission believes that the proposed

mechanism must be subject to several conditions. As stated, an operator

electing this approach first would set rates for its regulated tiers in

accordance with our existing rules. After lowering its BST rate and

increasing its CPST rate in the manner described, the operator would

have a continuing obligation to keep track of what its maximum

permitted rate would be for each tier had it not made the adjustment.

An operator would continue to maintain records of these ``underlying

rates'' so that an LFA, or the Commission, could verify that the

operator had made the adjustment properly. In particular, the LFA must

be able to ensure that the operator prices its BST rate at no more than

what our rules otherwise permit. The Commission invites comment on this

aspect of its proposal.

6. Further, the Commission proposes that systems offering more than

one CPST would be able to allocate the amount deducted from the BST

rate among the CPSTs in any manner, so long as the combined rate

increases for the CPSTs is revenue neutral to the cable operator. As

noted above, to ensure that any CPST rate increase is minimized, the

Commission seeks comment on whether to limit the amount of such

increase.

7. With respect to timing issues, the Commission believes that an

operator should be permitted to use the proposed adjustment mechanism

only when it has the opportunity to adjust rates under our existing

rules. Thus, if an operator has chosen to adjust rates on annual basis,

it would be able to implement the adjustment mechanism proposed herein

only at the time of, and as part of, an annual rate adjustment. This

restriction would ensure that our proposal does not increase the number

of times subscribers experience rate adjustments. The Commission does

not intend to require that the operator make a standard rate adjustment

at the time it uses the proposed mechanism (unless it is otherwise

required to do so), only that it have the choice to make such an

adjustment

8. For LFAs, this proposal should generate no additional burdens.

An LFA will engage in the same rate review process as before. The

Commission seeks comment on how to simplify further the rate review

process.

9. The proposal would add another step to the Commission's review

of a CPST complaint. This is because an operator that elects the

proposed option may have a CPST rate that exceeds what normally would

be permitted by our rules. To determine whether the CPST rate is

nonetheless reasonable, the Commission will have to consider not just

the CPST rate, but also the combined BST-CPST rate. Our consideration

of the combined BST-CPST rate under this proposal will be for the sole

purpose of determining whether the CPST rate is reasonable. BST rate

review will remain the province of LFAs. The Commission invites comment

as to the interaction of this extra step in the Commission's review of

CPST rates and the Commission's statutory mandate to ensure that CPST

rates are not unreasonable.

10. The Commission also seeks comment regarding how this proposed

adjustment should work in cases where the cable operator is subject

only to CPST rate regulation, such as where the LFA has not exercised

authority to regulate the BST. Upon submission of a complaint invoking

its jurisdiction, the Commission is obligated to determine whether the

new CPST rate is not unreasonable. One option in this circumstance

would be to analyze the operator's rates as if its BST were regulated

and to permit the operator to increase its CPST rate by the amount

necessary to recover revenue lost due to a rate decrease on the

unregulated BST. The Commission seeks comment on the extent of these

circumstances and the merits of this suggestion, and invite commenters

to recommend means by which a rate review should be conducted. In

addition, the Commission solicits comment on an operator's ability to

rescind a recently implemented rate adjustment, and whether this would

cause subscriber confusion, particularly if reversing the adjustment

reflects rates the operator intended to charge absent this alternative.

11. As indicated above, when the Commission initially proposed

approaches to rate regulation under the 1992 Cable Act, it considered a

pricing mechanism somewhat similar to that which the Commission

proposes here, the object of which was to encourage or require a low-

cost ``bare bones'' BST. In the Report and Order and Further Notice of

Proposed Rulemaking in MM Docket No. 92-266, 58 FR 29736, (``Rate

Order''), the Commission rejected this idea and adopted the ``tier

neutrality'' requirement. The Commission determined that the public

interest would best be served by basing rates for all rate-regulated

channels of cable services on common principles, rather than forcing

BST rates down through a rate-setting approach applicable only to that

tier. The Commission was concerned that suppressing BST rates in this

manner would result in operators simply moving channels off the BST to

other tiers that would generate more revenues. The Commission concluded

that it was preferable to adopt a framework that resulted in a slightly

higher-cost BST that had more programming. In addition, the Commission

determined that applying a single methodology to all regulated tiers

reduced administrative burdens and confusion for operators, LFAs, and

the Commission.

The current proposal differs from the proposal the Commission

rejected in the Rate Order in two fundamental respects. First, the

current proposal is not a forced reduction in the price of the BST.

Rather, it simply permits operators to reduce the price of the BST as

part of an overall marketing strategy. Second, it does not require any

reduction in the number of channels on the BST. The current proposal

preserves the benefits of the tier neutrality approach since the

operator can make the adjustment proposed above only after establishing

rates for its tiers in accordance with the tier neutrality principle.

The current proposal also preserves the ability of the operator to move

channels in order to accommodate market changes. The Commission

believes this adjustment is

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consistent with our approach to modify and improve the existing rules

continually as the market changes and more information becomes

available, while protecting consumers from more than a minimal rate

increase.

Initial Regulatory Flexibility Analysis for the Notice of Proposed

Rulemaking

13. Pursuant to Section 603 of the Regulatory Flexibility Act, the

Commission has prepared the following initial regulatory flexibility

analysis (``IRFA'') of the expected impact of these proposed policies

and rules on small entities. Written public comments are requested on

the IRFA. These comments must be filed in accordance with the same

filing deadlines as comments on the rest of the NPRM but they must be

have a separate and distinct heading designating them as responses to

the regulatory flexibility analysis. The Secretary shall cause a copy

of this NPRM to be sent to the Chief Counsel for Advocacy of the Small

Business Administration in accordance with Section 603(a) of the

Regulatory Flexibility Act, Public Law No. 96-354, 94 Stat. 1164, 5

U.S.C. Section 601 et seq. (1981).

14. Reason for Action and Objectives of the Proposed Rule. The

Commission has determined that our cable rules do not permit cable

operators to lower rates for the BST and to then recover lost revenues

on the CPST. The proposal contained in this NPRM will allow operators

to offer a better price to BST subscribers while continuing to protect

all subscribers from unreasonable rates. The proposal contained in this

NPRM, if adopted, would be an optional step for a cable operator in

ratemaking, offering rate regulated operators more flexibility in cable

pricing. This proposal will provide a cable operator with the ability

to price services in a manner which duplicates market driven rates

while continuing to offer consumers protections in the absence of

effective competition.

15. Legal Basis. The authority for the action as proposed for this

rulemaking is contained in Section 623 of the Communications Act of

1934, as amended, 47 U.S.C. Sec. 543, and Section 303(r) of the

Communications Act of 1934, as amended, 47 U.S.C. Sec. 303.

Description and Number of Small Entities Affected

16. Small Cable Entities: The Communications Act contains a

definition of a small cable system operator, which is ``a cable

operator that, directly or through an affiliate, serves in the

aggregate fewer than 1 percent of all subscribers in the United States

and is not affiliated with any entity or entities whose gross annual

revenues in the aggregate exceed $250,000,000.'' (47 U.S.C.

Sec. 543(m)(2)). The Commission has determined that there are

61,700,000 subscribers in the United States. Therefore, the Commission

found that an operator serving fewer than 617,000 subscribers is deemed

a small operator, if its annual revenues, when combined with the total

annual revenues of all of its affiliates, do not exceed $250 million in

the aggregate (47 CFR Sec. 76.1403(b)). Based on available data, the

Commission finds that the number of cable operators serving 617,000

subscribers or less totals 1,450. Although it seems certain that some

of these cable system operators are affiliated with entities whose

gross annual revenues exceed $250,000,000, the Commission is unable at

this time to estimate with greater precision the number of cable system

operators that would qualify as small cable operators under the

definition in the Communications Act. The Commission is likewise unable

to estimate the number of these small cable operators that serve 50,000

or fewer subscribers in a franchise area.

17. The Commission has developed its own definition of a small

cable system operator for the purposes of rate regulation. Under the

Commission's rules, a ``small cable company,'' is one serving fewer

than 400,000 subscribers nationwide (47 CFR Sec. 76.901(e)). Based on

our most recent information, the Commission estimates that there were

1,439 cable operators that qualified as small cable system operators at

the end of 1995. Since then, some of those companies may have grown to

serve over 400,000 subscribers, and others may have been involved in

transactions that caused them to be combined with other cable

operators. Consequently, the Commission estimates that there are fewer

than 1,439 small entity cable system operators that may be affected by

the proposal adopted in this NPRM. Under the Commission's rules, a

small cable system is a cable system with 15,000 or fewer subscribers

owned by a cable company serving 400,000 or fewer subscribers over all

of its cable systems. The Commission is unable to estimate the number

of small cable systems nationwide, and the Commission seeks comment on

the number of small cable systems.

18. SBA has developed a definition of small entities for cable and

other pay television services, which includes all such companies

generating less than $11 million in revenue annually. This definition

includes cable systems operators, closed circuit television services,

direct broadcast satellite services, multipoint distribution systems,

satellite master antenna systems and subscription television services.

According to the Census Bureau, there were 1,323 such cable and other

pay television services generating less than $11 million in revenue

that were in operation for at least one year at the end of 1992.

19. Municipalities: The term ``small governmental jurisdiction'' is

defined as ``governments of . . . districts, with a population of less

than fifty thousand.''(5 U.S.C. Sec. 601(5)). Based on most recent

census data, there are 85,006 governmental entities in the United

States. This number includes such entities as states, counties, cities,

utility districts and school districts. The Commission notes that any

official actions with respect to cable operators' BST will typically be

undertaken by LFAs, which primarily consist of counties, cities and

towns. Of the 85,006 governmental entities, 38,978 are counties, cities

and towns. The remainder are primarily utility districts, school

districts, and States, which typically are not LFAs. Of the 38,978

counties, cities and towns, 37,566 or 96%, have populations of fewer

than 50,000.

Steps taken to Minimize Significant Economic Impact on Small Entities

and Significant Alternatives Rejected

20. Small Cable Entities: The Communications Act contains a

definition of a small cable system operator, which is ``a cable

operator that, directly or through an affiliate, serves in the

aggregate fewer than 1 percent of all subscribers in the United States

and is not affiliated with any entity or entities whose gross annual

revenues in the aggregate exceed $250,000,000.'' (47 U.S.C.

Sec. 543(m)(2)). Under the Communications Act, at 47 U.S.C. 543(m) (1),

a small cable operator is not subject to the rate regulation

requirements of Sections 543 (a), (b) and (c) on CPSTs in any franchise

area in which it serves 50,000 or fewer subscribers. The proposed rule

adopted in this NPRM would give a rate regulated operator the option to

lower rates on its BST and to raise rates on its CPST in order to

recover lost revenues from the BST reduction. The CPST rate increase

would be reviewed by the Commission. Because this proposed rule would

not affect operators that are not rate regulated on CPSTs, there would

be no impact on small cable operators that, according to the

Communications Act, are not subject to rate regulation on CPSTs.

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21. The Commission has developed its own definition of a small

cable system operator for the purposes of rate regulation. Under the

Commission's rules, a ``small cable company,'' is one serving fewer

than 400,000 subscribers nationwide, and a small cable system is a

cable system with 15,000 or fewer subscribers owned by a cable company

serving 400,000 or fewer subscribers over all of its cable systems (47

C.F.R. Sec. 76.901(e)). SBA has developed a definition of small

entities for cable and other pay television services, which includes

all such companies generating less than $11 million in revenue

annually.

22. To the extent that any of these operators are rate regulated on

CPSTs, the Commission emphasizes that the proposal would provide an

optional rate adjustment methodology for rate regulated operators in

order to provide for greater flexibility in cable pricing, and would

not impose a mandatory requirement on cable operators. If the

Commission did not modify its rules, a regulated cable operator would

not be able to recover, on its CPST, lost revenues for rate decreases

to the BST. The Commission believes that allowing for such an

adjustment could give operators more flexibility to respond to

competition in the marketplace.

23. Municipalities: The term ``small governmental jurisdiction'' is

defined as ``governments of . . . districts, with a population of less

than fifty thousand.'' (5 U.S.C. Sec. 601(5)). The Commission does not

believe that the proposal contained in this NPRM will have a

significant economic impact on a substantial number of these small

governmental jurisdictions. A small governmental jurisdiction that

regulates the BST would continue its current practice of reviewing an

operator's maximum permitted per channel rate on the BST. Any rate

increase by an operator opting to use the proposal contained in this

NPRM would occur on the CPST and would therefore be reviewed by the

Commission.

24. Reporting, Recordkeeping and other Compliance Requirements. Our

current methodology for calculating maximum permissible rates will need

to be amended to account for the additional optional rate calculation

step proposed in this NPRM. The proposed rule is optional, and would

not be a requirement for any cable operator that does not want to

utilize the proposed option. An operator wishing to use the proposed

pricing methodology first would establish rates for its regulated

service tiers using the same methodology for both tiers. The resulting

rate for the BST would be the cap for that tier. The operator then

would determine the amount by which it was willing to decrease the BST

rate and calculate the total revenue loss derived from the reduction.

The operator would then divide this amount by the total number of CPST

subscribers in order to calculate the rate increase for the CPST. After

lowering its BST rate and increasing its CPST rate in the manner

described, the operator would have a continuing obligation to keep

track of what its maximum permitted rate would be for each tier had it

not made the adjustment. An operator would continue to maintain records

of these ``underlying rates'' so that an LFA, or the Commission, could

verify that the operator had made the adjustment properly. In the NPRM,

the Commission seeks comment on the specific method of implementation

of the proposal. The rule as proposed would not require any additional

special skills beyond any which are already needed in the cable rate

regulatory context.

25. Significant Alternatives to Proposed Rule Which Minimize

Significant Economic Impact on Small Entities and Accomplish Stated

Objectives. In the NPRM, the Commission examines the current rule that

prohibits a rate-regulated cable operator from justifying an increase

in its CPST rate on the basis of a corresponding decrease in the BST

rate. The Commission tentatively concludes that eliminating this aspect

of our current rules would give cable operators greater pricing

flexibility to respond to their growing competition while continuing to

protect consumers. If, in the alternative, the Commission did not

modify its rules, a regulated cable operator would not be able to

recover, on its CPST, lost revenues for rate decreases to the BST. The

Commission believes that allowing for such an adjustment could give

operators more flexibility to respond to competition in the

marketplace. This is consistent with the issues raised in the body of

the NPRM. As explained above, the Commission does not believe the

proposal creates any significant burden for small entities. The

proposed rule change would be purely optional for cable operators, and

local franchising authorities would not be subject to additional rate

regulatory burdens as a result of adoption of the proposal.

Federal Rules which Overlap, Duplicate or Conflict with these Rules--

None

26. Ex parte Rules--Non-Restricted Proceeding. This is a non-

restricted notice and comment rulemaking proceeding. Ex parte

presentations are permitted, except during the Sunshine Agenda period,

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

See generally, 47 C.F.R. Sections 1.1202, 1.1203, and 1.1206(a).

27. Pursuant to applicable procedures set forth in Sections 1.415

and 1.419 of the Commission's rules, interested parties may file

comments on or before October 6, 1996, and reply comments on or before

November 8, 1996. To file formally in this proceeding, you must file an

original plus four copies of all comments, reply comments, and

supporting comments. If you would like each Commissioner to receive a

personal copy of your comments and reply comments, you must file an

original plus nine copies. You should send comments and reply comments

to the Office of the Secretary, Federal Communications Commission, 1919

M Street, N.W. Washington, D.C. 20554. Comments and reply comments will

be available for public inspection during regular business hours in the

FCC Reference Center, Room 239, Federal Communications Commission, 1919

M Street N.W., Washington D.C. 20554.

Ordering Clauses

28. It is ordered that, pursuant to Sections 4(i), 4(j), 623(a),

623(b), and 623(c), of the Communications Act of 1934, as amended, 47

U.S.C. Secs. 154(i), 154(j), 543(a), 543(b), and 543(c), NOTICE IS

HEREBY GIVEN of proposed amendments to Part 76, in accordance with the

proposals, discussions, and statement of issues in this NPRM of

Proposed Rulemaking, and that COMMENT IS SOUGHT regarding such

proposals, discussion, and statement of issues.

29. It is further ordered that, the Secretary shall send a copy of

this NPRM, including the Initial Regulatory Flexibility Analysis, to

the Chief Counsel for Advocacy of the Small Business Administration in

accordance with paragraph 603(a) of the Regulatory Flexibility Act.

Public Law No. 96-354, 94 Stat. 1164, 5 U.S.C. Secs. 601 et seq.

(1981).

Paperwork Reduction Act

This NPRM may contain either proposed or modified information

collections. The Commission, as part of its continuing effort to reduce

paperwork burdens, invites the general public to comment on the

information collections contained in this NPRM, as required by the

Paperwork Reduction Act of 1995, Public Law No. 104-13. Public and

agency comments are due at the same time as other comments on this

NPRM. Comments should address: (a) whether the proposed collection of

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information is necessary for the proper performance of the functions of

the Commission, including whether the information shall have practical

utility; (b) ways to enhance the quality, utility, and clarity of the

information collected; and (c) ways to minimize the burden of the

collection of information on the respondents, including the use of

automated collection techniques or other forms of information

technology.

Federal Communications Commission.

William F. Caton,

Acting Secretary.

[FR Doc. 96-21581 Filed 8-28-96; 8:45 am]

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