FOR RECORD ONLY $//MO&O, Chattanooga Cable TV Company, Chattanooga, TN, DA 94-1427//$ $/76.922 Rates for Cable Programming Servie tiers/$ $/a la carte orders/$ Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 DA 94-1427 In the Matter of: ) ) Chattanooga Cable TV Company, ) LOI-93-51 Chattanooga, TN ) ) 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 response to an FCC Form 329 complaint filed November 15, 1993, against Chattanooga Cable TV Company, a Scripps Howard system ("Scripps Howard"), the Commission issued Letter of Inquiry 93-51 ("LOI") to Scripps Howard on December 13, 1993. The LOI asked Scripps Howard to provide information concerning its compliance with the Commission's rules governing evasion in the offering of packages which allegedly are not rate-regulated. Scripps Howard responded to our LOI by letter dated January 13, 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 service. 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. In its response, Scripps Howard states that it is constructing a new fiber optic system that was partially complete as of the date of its response. Customers in rebuilt areas (the "new system") are offered 48 channels and customers in non-rebuilt areas (the "old system") are offered 27 channels. Before September 1, 1993, Scripps Howard's services included a 12 channel basic tier on both the old and new systems, called Lifeline Basic, for $9.99 per month, a 15 channel cable programming service tier on the old system and a 25 channel cable programming service tier on the new system, both called Expanded Service, for $12.99 per month. On the new system, customers were also offered an additional six channel cable programming service tier, called the Entertainment Tier, for $3.95 per month. 7. The following chart summarizes Scripps Howard's service tier offerings prior to September 1, 1993: Old System: Offering Channels Price 1. Lifeline Basic 12 $ 9.99 2. Expanded Service 15 $12.99 Total 27 $22.98 New System: Offering Channels Price 1. Lifeline Basic 12 $ 9.99 2. Expanded Service 25 $12.99 3. Entertainment Tier 6 $ 3.95 Total 43 $26.93 8. On September 1, 1993, the date our rate regulations became effective, Scripps Howard restructured its service offerings. Scripps Howard's restructured services included a 12 channel basic tier on both the old and new systems, called Lifeline Basic, for $6.56 per month, a 15 channel cable programming service tier on the old system for $13.44 per month and a 30 channel cable programming service tier on the new system for $16.39 per month, called Expanded Service. In addition, Scripps Howard removed two of the new system's Entertainment Tier channels, The Learning Channel and E!, from that tier and offered them as part of the 30 channel Expanded Service available to subscribers on the new system. It offered four of the six channels previously on the new system's Entertainment Tier along with two new channels -- Court TV and Encore -- in a package on the new system called "Entertainment Pak." Neither Court TV nor Encore had been offered previously on the new or old Scripps Howard system. The six channels comprising the Entertainment Pak (Court TV, Encore, The Sci-Fi Channel, The Cartoon Network, Comedy Central and Nostalgia Network) were available to subscribers on the new system as a package for $3.95 per month or on an individual basis for $1.00 each per month. The Entertainment Pak was not available on the old system. 9. The following chart summarizes Scripps Howard's service tier options as of the date of its response to our LOI: Old System: Offering Channels Price 1. Lifeline Basic 12 $ 6.56 2. Expanded Service 15 $13.44 Total 27 $20.00 New System: Offering Channels Price 1. Lifeline Basic 12 $ 6.56 2. Expanded Service 30 $16.39 3. Entertainment Pak 6 $ 3.95 Total 48 $26.90 10. At the time of Scripps Howard's response, 2,611 customers on the new system received the Entertainment Pak package, while there were 71 subscriptions to individual channels in the package. IV. Discussion 11. 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 Scripps Howard'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. 12. Scripps Howard's restructuring on its new system effective September 1, 1993, involved taking four channels from its six channel Entertainment Tier (The Cartoon Network, Comedy Central, Nostalgia, and the Sci-Fi Channel) and adding two channels that previously had not been offered on the new or old system (Encore and Court TV), to create the six- channel package that it alleges is not regulated. In so doing, Scripps Howard avoided application of our rate regulations which generally required cable operators to reduce rates by about 10 percent. That is, if Scripps Howard had not restructured its service offerings on its new system 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, Scripps Howard's response suggests that customers on the new system that were receiving the Entertainment Tier prior to rate regulation continued to receive Entertainment Pak after the restructuring, and there appears to be no sufficient justification for Scripps Howard's restructuring other than to avoid rate regulation. 13. Other factors corroborate our view that Scripps Howard's restructuring on its new system may have had the effect of avoiding rate regulation. First, it offered this offering on the eve of regulation. Second, its response suggests that it automatically subscribed existing Entertainment Tier customers to the September 1, 1993 Entertainment Pak package. In light of these facts, it appears that Scripps Howard's restructuring of its offerings on its new system may have evaded rate regulation. We will not find an actual evasion occurred, however, if Scripps Howard'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 Scripps Howard would not have evaded our rate regulations because it would not be required to reduce its price for the collective a la carte package. 14. 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 Scripps Howard 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 (and, in the case of Scripps Howard, added two channels that previously had not been offered on its system). 15. 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." 16. 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 four services, because the sum of the per channel prices is $6.00 (assuming a $1.00 per month charge for Encore) in contrast to the package price of $3.95. The second part of the test is whether the separate parts of the package constitute a "realistic service offering." Our review of Scripps Howard's submission reveals that of the subscribers taking either individual channles or the package, more than 97 percent subscribe to the package. Although most customers subscribe to the package, our test does not specify what percentage would indicate that an offering is "a realistic service offering." However, this fact, 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. 17. Even if we were to apply the 15 interpretative 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 Scripps Howard'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 (66 percent) was removed from a regulated tier, the absolute number (four) was not overwhelming. 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 Scripps Howard that its restructuring on its new system was not a permissible a la carte package. 18. 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 Scripps Howard's restructuring on its new system was not a permissible a la carte package. 19. For that reason, we do not think that it would be equitable to subject Scripps Howard to refund liability. This result is distinguishable from the result we reached in Adelphia Cable Partners, L.P., South Dade County, Florida, LOI-93-42, 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. In contrast, Scripps Howard attempted to treat only four channels previously offered on a cable programming service tier and two channels not previously offered on its system as an unregulated collective offering of a la carte channels. Furthermore, Scripps Howard still maintained a substantial cable programming service tier which was supuplemented by two of the channels which were formerly on the Entertainment Tier. 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." 20. We will not require Scripps Howard to restructure its tiers on its new system so as to return the channels offered in the a la carte package to rate-regulated tiers. Instead, on a prospective basis, therefore, we will consider Scripps Howard's Entertainment Pak 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 Scripps Howard's six channel tier, unlike Adelphia's offering, did not constitute a clear evasion of our rate rules, we see no good reason to subject Scripps Howard or its Chattanooga customers to the confusion and transaction costs that would result if we required Scripps Howard to retier. V. Ordering Clauses 21. Accordingly, IT IS ORDERED that Scripps Howard's Entertainment Pak package as it existed on December 13, 1993, may be treated as a new product tier under our Going Forward Order. 22. IT IS FURTHER ORDERED that this Order is EFFECTIVE upon release. FEDERAL COMMUNICATIONS COMMISSION Meredith J. Jones Chief, Cable Services Bureau