FOR RECORD ONLY $//MO&O, Cablevision Industries, Wake Forest, NC, DA 94-1550//$ $/76.922 Rates for Cable Programming Servie tiers/$ $/a la carte orders/$ Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 DA 94-1550 In the Matter of: ) ) Cablevision Industries ) Wake Forest, North Carolina ) LOI-94-7 ) Letter of Inquiry ) MEMORANDUM OPINION AND ORDER Adopted: December 18, 1994 Released: December 22, 1994 By the Chief, Cable Services Bureau: I. Introduction 1. In a letter received by the Commission, dated December 29, 1993, the Town of Wake Forest, North Carolina, alleged violations by Cablevision Industries ("CVI") of Commission regulations governing the provision of cable television service. In response to this complaint, the Commission issued Letter of Inquiry 94-7 ("LOI") to CVI on February 22, 1994. The LOI asked Cablevision to provide information concerning, among other issues, rate and service changes in anticipation of, and/or in response to, rate regulation, including the offering of channels on an individual and package basis. CVI responded to our LOI on March 24, 1994. II. Background 2. In the Cable Television Consumer Protection and Competition Act of 1992 ("the 1992 Cable Act"), Congress created a regulatory scheme giving the Commission and local franchising authorities jurisdiction over the cable programming and equipment rates of non-competitive cable systems. The 1992 Cable Act provides that the rates of cable systems not subject to effective competition may be regulated by local franchising authorities, in the case of basic service, and by the Commission, in the case of cable programming services. A stated policy of the 1992 Cable Act is to ensure that "consumer interests are protected in the receipt of cable service." 3. The 1992 Cable Act requires cable operators to offer subscribers a basic tier that must contain at least all qualified local broadcast signals and, unless otherwise specified by the local franchising authority, public, educational, and governmental channels. The Commission was charged by the 1992 Cable Act with creating regulations that ensure that the rates for the basic service tier are reasonable. The 1992 Cable Act directs that "[s]uch regulations shall be designed to achieve the goal of protecting subscribers of any cable system that is not subject to effective competition from rates for the basic service tier that exceed the rates that would be charged for the basic service tier if such cable system were subject to effective competition." Under the 1992 Cable Act, operators may offer other channels in a cable programming service tier or tiers. The 1992 Cable Act orders the Commission to create regulations for the cable programming service tiers that allow it to identify individual cases of unreasonable rates. The 1992 Cable Act thus protects consumers' interests in continuing to receive the basic service tier and cable programming service tiers at reasonable rates. 4. The 1992 Cable Act requires the Commission to adopt standards and guidelines to prevent evasions, "including evasions that result from retiering." The 1992 Cable Act's legislative history states that the Commission should scrutinize offerings of non- traditional stand-alone services to "prevent repricing, retiering, or other alterations of rate structures" that could have the effect of evading the purposes of rate regulation. This provision in the 1992 Cable Act is intended to give the Commission the authority to address changes in the cable industry's business practices that would thwart the intent of rate regulation. 5. In the Rate Order, the Commission defined evasion as "any practice or action which avoids the rate regulation provisions of the Cable Act or Commission rules contrary to the intent of the Act or its underlying policies." We must scrutinize a particular operator's marketing or pricing practices to determine whether those practices have the effect of avoiding the requirements of our rate regulations, contrary to the intent of the 1992 Cable Act and our rules. III. Facts 6. Before September 1, 1993, CVI offered a 12 channel basic tier, called Basic Reception Service, for $11.95 per month, and a 21 channel cable programming service tier, called Cable Programming Tier 1, for $11.45 per month. 7. The following charts summarize CVI's service tier offerings prior to September 1, 1993: Offering Channels Price 1. Basic Reception Service 12 $11.95 2. Cable Programming Tier 1 21 $11.45 Total 33 $23.40 8. Beginning September 1, 1993, the date our rate regulations became effective, CVI restructured its service offerings. CVI's restructured service offerings included a 14 channel basic tier, called Basic Reception Service, for $9.15 per month, an 18 channel cable programming service tier, called Cable Programming Tier 1, for $12.70 per month, and three channels it states were offered on an individual basis and as a package. The three channels, HTS, Cable News Network (CNN), and The Discovery Channel, were offered as part of Cable Programming Tier 1 prior to September 1, 1993. 9. CVI states that the three channels could be purchased individually for $1.50 per month. All three channels could be purchased as a package, called Cable Programming Package 1, for $3.00 per month. 10. The following charts summarize CVI's service tier options as of the date of its response to our LOI: Offering Channels Price 1. Basic Reception Service 14 $ 9.15 2. Cable Programming Tier 1 18 $12.70 3. Cable Programming Package 1 3 $ 3.00 Total 35 $24.85 11. CVI argues, inter alia, that it began offering its services individually and through the Cable Programming Package 1 in order to implement Congress' intent to maximize consumer choice. However, based on the record, very few consumers elected to exercise that choice. CVI states that, as of February 1994, 5 of its 1,803 subscribers purchased one or more individual channels, while 1,708 subscribed to the Cable Programming Package 1. IV. Discussion 12. The 1992 Cable Act requires the Commission to adopt standards and guidelines to prevent evasions, "including evasions that result from retiering." An evasion, as defined by the Commission, is an act or practice that "avoids the rate regulation provisions of the [Cable] Act or our rules contrary to the intent of the Act or its underlying policies." In the Rate Order, we stated that "retiering otherwise permitted under our rules will not be deemed an evasion." First, we examine whether CVI's response to the LOI shows that its restructuring of its offerings had the effect of evading rate regulation for the channels that Congress intended to be rate-regulated. 13. CVI's restructuring effective September 1, 1993, involved its movement of three channels (HTS, CNN and Discovery) from its 21 channel Programming Services Tier 1 to create the three-channel package that it alleges is not rate-regulated. Thus, CVI removed channels from an otherwise rate-regulated tier to create a new package of channels. In so doing, CVI avoided application of our rate regulations which generally required cable operators to reduce rates by about 10 percent. That is, if CVI had not restructured on September 1, 1993, it would have been required to recalculate its rates in accordance with the Rate Order we released on May 3, 1993, which generally required cable operators to reduce their rates. Moreover, customers who were receiving the three Programming Services Tier 1 channels at issue apparently continued to receive them after the restructuring, and there appears to be no sufficient justification for CVI's restructuring other than to avoid rate regulation. 14. Other factors corroborate our view that CVI's restructuring may have had the effect of avoiding rate regulation. First, it offered this package on the eve of regulation. Second, it appears that CVI automatically subscribed its Cable Programming Tier 1 customers to the offerings that previously had been part of its cable programming service tier. In light of these facts, it appears that CVI's restructuring of its offerings may have evaded rate regulation. We will not find an actual evasion occurred, however, if CVI's action complied with our a la carte policy that was in effect at the time of its restructuring. If the offering met our requirements for a permissible collective offering of a la carte channels, then CVI would not have evaded our rate regulations because it would not be required to reduce its price for the collective a la carte package. 15. In our Rate Order, the Commission recognized that "a la carte packages" appear to be "cable programming services," but said that "interpreting the statute in such a literal fashion could disadvantage consumers by denying them discounts on packages of per- channel or per-program services and by limiting subscriber access to a greater quantity of premium programming." Thus, we envisioned that cable operators, for the most part, would offer channels that previously had been offered a la carte in discounted packages, and concluded that it would be better for consumers if we construed the 1992 Cable Act to permit such discounting. This is not the type of offering that CVI and others have provided their subscribers. Specifically, these operators did not offer a discounted package of channels that previously had been offered a la carte to subscribers, but instead removed channels from a tier that would be subject to our rate regulations. 16. Moreover, in the Rate Order, the Commission determined that such a la carte packages would be exempt from rate regulation, i.e., would be deemed not to fall within the definition of "cable programming service," if two conditions were met: (1) the price for the combined package must not exceed the sum of the individual charges for each component service; and (2) the cable operator must continue to provide the component parts of the package to subscribers separately in addition to the package. The Commission said that the second condition would be satisfied only when "the per channel offering provides consumers with a realistic service choice." 17. Under the two-part test that we set forth in the Rate Order, it is clear, first, that the price for the combined package does not exceed the sum of the individual charges for the three services, because subscribers may purchase the three channels for $1.50 each or the three-channel package for $3.00. The second part of the test is whether the separate parts of the package constitute a "realistic service offering." Our review of CVI's submission reveals that far less than 1 percent of CVI's subscribers chose to subscribe to individual Cable Programming Package 1 channels. Our test does not specify what percentage would indicate that an offering is "a realistic service offering." However, the fact that such a low percentage of subscribers opted for individual channels rather than the package, together with the other factors present in this case, tends to show, in this instance, that the per-channel offering does not constitute a realistic service offering. 18. Even if we were to apply the 15 interpretive guidelines set forth in our Second Reconsideration Order, we still would not reach a clear answer to the question of what constitutes a realistic service offering. Although some factors support a finding that CVI's offering was not a permissible a la carte package, other factors point the other way. In particular, although a "significant percentage" of the channels offered in the a la carte package (100 percent) was removed from regulated tiers, the absolute number (three) was small. Moreover, our test does not explain how the factors are to be weighed against each other. In these circumstances, we cannot say that it was clear to CVI that its restructuring was not a permissible a la carte package. 19. In our recently adopted Going Forward Order, we have reconsidered our rules relating to a la carte packages and concluded that such packages are cable programming service tiers within the meaning of Section 3(l)(2) of the 1992 Cable Act. For that reason, the package at issue is subject to rate regulation and cannot continue to be treated as an unregulated package of channels. In reaching this conclusion in the Going Forward Order, we acknowledged that, as applied to many fact patterns, we did not provide a clear test in the Rate Order and the Second Reconsideration Order for determining whether an a la carte package was permissible. In adopting the 15 interpretive guidelines in the Second Reconsideration Order to supplement the Rate Order's two-prong test, we hoped to enable operators to better determine what collective offerings of a la carte channels would be considered a realistic service offering, and, hence, not an evasion of rate regulation. Our experience to date, however, indicates that our efforts did not produce the intended result and that, instead, there has been confusion as to whether collective offerings of a la carte channels constituted an evasion of rate regulation. Indeed, we cannot say that it is clear that CVI's restructuring was not a permissible a la carte package. 20. For that reason, we do not think that it would be equitable to subject CVI to refund liability. This result is distinguishable from the result we reached in Adelphia Cable Partners, L.P., in which we determined that we will require refunds if Adelphia's rate justification proceedings show that subscribers' rates were higher than our rules permitted. In that case, the cable operator announced that it would offer all the channels previously offered on a cable programming service tier on an individual basis or as a collective offering of a la carte channels. In so doing, Adelphia removed an entire service tier from rate regulation, while here, CVI did not eliminate any cable programming service tiers. CVI attempted to treat only three channels as an unregulated collective offering of a la carte channels. Moreover, while we have indicated above that our rules for determining whether collective offerings of a la carte channels constitute an evasion were in many instances difficult to apply, we do not believe that our a la carte rules are unclear as applied to the fact pattern in the Adelphia case. In the Rate Order, we stated that a cable operator could not escape rate regulation simply by calling what otherwise would be a rate regulated tier an a la carte package. We reiterated this admonition in the Second Reconsideration Order when we warned against eliminating "an entire regulated tier" and "turning it into an a la carte package." 21. We will not require CVI to restructure its tiers so as to return the channels offered in the a la carte package to the basic or cable programming service tiers. Instead, on a prospective basis, we will consider CVI's collective offering of a la carte channels a new product tier even though it would not qualify as a new product tier under our recently announced Going Forward Order because one of the conditions for a new product tier is that channels may not be removed from a basic service tier or a cable programming service tier. In light of the prior confusion over what constituted a permissible a la carte offering, and because CVI's three-channel tier, unlike Adelphia's offering, did not constitute a clear evasion of our rate rules, we see no good reason to subject CVI or its Wake Forest customers to the confusion and transaction costs that would result if we required CVI to retier. V. Ordering Clauses 22. Accordingly, IT IS ORDERED that CVI's package as it existed on February 22, 1994, may be treated as a new product tier under our Going Forward Order. 23. IT IS FURTHER ORDERED that this Order is EFFECTIVE upon release. FEDERAL COMMUNICATIONS COMMISSION Meredith J. Jones Chief, Cable Services Bureau