FOR RECORD ONLY $//MO&O, Vision Cable Television Co., Fort Lee, NJ, DA 94-1554//$ $/76.922 Rates for Cable Programming Servie tiers/$ $/a la carte orders/$ Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 DA 94-1554 In the Matter of: ) ) Vision Cable Television Co., Inc., ) Fort Lee, New Jersey ) LOI 93-32 ) Letter of Inquiry ) MEMORANDUM OPINION AND ORDER Adopted: December 19, 1994 Released: December 22, 1994 By the Chief, Cable Services Bureau: I. Introduction 1. The Commission received a Form 329 Complaint on October 26, 1993, concerning the reasonableness of the rates charged for cable programming services by Vision Cable Television Co., Inc., in Fort Lee, New Jersey ("Vision Cable"). In response to this complaint, the Commission issued Letter of Inquiry 93-32 ("LOI") to Vision Cable on December 13, 1993. The LOI asked Vision Cable to provide information concerning its compliance with the Commission's rules governing evasion in the offering of packages which allegedly are not rate-regulated. Vision Cable responded to our LOI on January 12, 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, Vision Cable's services included a 15 channel basic tier, called Broadcast Basic, for $1.00 per month, a 22 channel cable programming service tier, called Cable Service, for $20.20 per month, and an additional 4 channel cable programming service tier, called Preferred Service for $4.40 per month. 7. The following chart summarizes Vision Cable's service tier offerings prior to September 1, 1993: Offering Channels Price 1. Broadcast Basic 15 $ 1.00 2. Cable Service 22 $20.20 3. Preferred Service 4 $ 4.40 TOTAL 41 $25.60 8. On September 1, 1993, the date our rate regulations became effective, Vision Cable restructured its service offerings. Vision Cable's restructured service offerings included a 15 channel Basic Service tier for $ 9.18 per month, and a 19 channel cable programming service tier called Cable Service for $11.63 per month. Vision Cable also created two programming packages, SuperStation Package and a package called Preferred Service, with the channels also offered on an individual basis. 9. The first package, SuperStation Package, included four channels (two channels, WTBS and WSBK, originally offered in Vision Cable's Broadcast Basic tier, and two channels, TNT and The Discovery Channel, originally offered in Vision Cable's Cable Service tier). The channels could be purchased individually for $.75 per month, or as a package for $2.00 per month. The second package, Preferred Service, included the same four channels originally offered on the Preferred Service tier (SportsChannel, Sci-Fi Channel, Court TV, and the Nashville Network (TNN)), plus Black Entertainment Television (BET), which was not previously available on the system. SportsChannel could be purchased individually for $2.00 per month and the other four channels could be purchased individually for $1.25 per month. All five of the Preferred Service channels could be purchased as a package for $4.00 per month. In addition, Vision Cable stated that it automatically subscribed its Broadcast Basic customers to WTBS and WSBK at the a la carte rate of $.75 per month each. 10. The following chart summarizes Vision Cable's service tier options as of the date of its response to our LOI: Offering Channels Price 1. Basic 15 $ 9.18 2. Cable Service 19 $11.63 3. SuperStation Package 4 $ 2.00 4. Preferred Service 5 $ 4.00 TOTAL 43 $26.81 (if purchased both packages) 11. Vision Cable argues, inter alia, that it began offering its Preferred Service channels individually, as well as WTBS, ESPN2, TNT, and the Discovery Channel, individually and through its SuperStation Package, in order to implement Congress' intent to maximize consumer choice. However, based on this record, very few consumers elected to exercise that choice. Vision Cable's response provides a breakdown of its subscribers who chose the packages and the individual channels. As of January 10, 1994, 46,196 subscribers elected to take the SuperStation Package, while the numbers of subscribers taking the individual channels comprising that package are as follows: WTBS-279; ESPN2-216; TNT- 150; Discovery-106. With respect to the Preferred Service package, as of January 10, 1994, 12,921 subscribers elected to take the entire package, while 479 took SportsChannel; 296 took the Sci-Fi Channel; 133 took Court TV; 123 took TNN; and 0 took BET. 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 Vision Cable'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. Vision Cable's restructuring involved (1) its offering of two channels previously offered on its Broadcast Basic tier plus two channels previously offered on its Cable Service tier on an individual and package basis, and (2) its movement of four channels, previously offered on its Preferred Service tier and the addition of one new channel, to create the packages that it alleges are not rate-regulated. Thus, with respect to the SuperStation Package, Vision Cable removed channels from otherwise rate-regulated tiers to create a new package of channels. As to the Preferred Service package, Vision Cable's offering of the component channels on an individual basis (and adding a new channel) purportedly removed the Preferred Service tier from rate regulation. Vision Cable fundamentally changed its service to subscribers by removing 8 channels from rate regulation and by eliminating an entire cable programming service tier. In so doing, Vision Cable avoided the application to eight channels of our rate regulations which generally required cable operators to reduce rates by about 10 percent. That is, if Vision Cable 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 that were receiving the Broadcast Basic tier continued to receive WTBS and WSBK after the restructuring, and it appears that customers who were receiving the Preferred Service tier continued to receive the same four channels as part of the Preferred Service package after the restructuring. 14. We believe that Vision Cable has not provided a sufficient justification for this change to overcome our finding that there is an evasion of rate regulation. Few subscribers actually subscribed to individual channels instead of either of the packages offered; at most, only 1.6 percent of Vision Cable subscribers who took any part of the SuperStation Package took the individual channels, while only approximately 8 percent of subscribers who took any part of the Preferred Service took individual channels at the time of Vision Cable's LOI response. Other than an attempt to evade rate regulation, there appears to be no sufficient justification for this restructuring. 15. Other factors corroborate our finding that Vision Cable's restructuring had the effect of evading rate regulation. First, it made all of the Preferred Service channels available individually and on a package basis, thereby entirely eliminating an entire cable programming service tier and it also offered the SuperStation Package, all on the eve of regulation. Second, it appears that Vision Cable automatically subscribed its Preferred Service customers to the Preferred Package and its Broadcast Basic customers to two of the channels in the SuperStation Package on an a la carte basis. In light of these facts, we find that Vision Cable's restructuring of its offerings constituted an evasion of our rate regulation rules. 16. Because Vision Cable's restructuring is a purported collective offering of a la carte channels, we also must determine whether the offering met the Commission's requirements for a permissible collective offering of a la carte channels. If the offering met the Commission's requirements for a permissible collective offering of a la carte channels, then Vision Cable would not have evaded our rate regulations because it would not be required to reduce its price for the collective a la carte package. 17. 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 Vision Cable 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. 18. Moreover, in the Rate Order, the Commission determined that 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." 19. Under the two-part test that we set forth in the Rate Order, it is clear, first, that the prices for the two combined packages do not exceed the sum of the individual channel charges, because with respect to the SuperStation Package, subscribers may purchase each channel for $ .75, or the four-channel package for $2.00, and with respect to the Preferred Service package, subscribers may purchase SportsChannel for $2.00 and each of the other four channels for $1.25, or the package for $4.00. The second part of the test is whether the separate parts of the package constitute a "realistic service offering." The results of our review of Vision Cable's submission reveal that more than 98 percent of Vision Cable's subscribers who take any part of the SuperStation Package, and 92 percent who take any part of the Preferred Service package, take the whole package rather than any of the individual channels. This fact, together with the other factors present in this case, tends to show that the per-channel offering, in this instance, does not constitute a realistic service offering. 20. Even if we were to apply the 15 interpretive guidelines set forth in our Second Reconsideration Order, we still conclude that Vision Cable's offering does not constitute a realistic service offering. Vision Cable's submission reveals additional evidence weighing against a finding that its individual a la carte channels constitute a realistic service offering. The most important factor, of course, is that "an entire regulated tier has been eliminated and turned into an a la carte package." Moreover, a "significant percentage" of the channels offered in the two a la carte packages (89 percent) was removed from regulated tiers, which would "weigh against unregulated treatment." 21. 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. 22. We do not believe, however, that our a la carte rules are unclear as applied to the fact pattern at issue in this 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." This, however, is exactly what Vision Cable did by moving a total of eight channels to allegedly unregulated packages, and in the process, eliminating an entire cable programming service tier. While we have acknowledged that aspects of our evaluation of a la carte packages were unclear, as applied to these particular facts, this prong of the test is clear and requires no additional guidance or explanation from the Commission. In light of the fact that it is clear that elimination of an entire regulated tier and transformation of that tier into an a la carte package is an evasion of rate regulation, we find that Vision Cable's retiering in fact clearly constitutes just such an evasion. 23. We find that Vision Cable's SuperStation and Preferred Service packages, as the offering existed in Fort Lee, New Jersey, on December 13, 1993, the date of our LOI, must be treated as a rate-regulated cable programming service tiers. As a result, effective 90 days from the release date of this Order, Vision Cable must either offer the channels in these packages as part of the respective rate-regulated tiers from which they came or offer the channels collectively as a separate rate-regulated tier or tiers of cable programming service. We further conclude that these packages are rate-regulated offerings as of September 1, 1993, and that the channels composing them must be counted as rate-regulated channels for purposes of rate justification as of that date. V. Ordering Clauses 24. Accordingly, IT IS ORDERED that Vision Cable's packages are subject to rate regulation as of September 1, 1993, and the channels composing them must be counted by Vision Cable as rate-regulated channels for purposes of rate justification, as of that date. 25. IT IS FURTHER ORDERED that, effective 90 days from the release date of this Order, Vision Cable must either offer these channels as part of the respective rate- regulated tiers from which they came or offer the channels collectively as a separate rate- regulated tier or tiers of cable programming service. 26. IT IS FURTHER ORDERED that this Order is EFFECTIVE upon release. FEDERAL COMMUNICATIONS COMMISSION Meredith J. Jones Chief, Cable Services Bureau