Federal Communications Commission Washington, D.C. 20554 April 19, 1994 Released: April 22, 1994 Mr. Robert Corn-Revere Ms. Jacqueline Cleary Hogan & Hartson Columbia Square 555 13th Street, N.W. Washington, D.C. 20004-1109 Dear Mr. Corn-Revere and Ms. Cleary: This letter is in response to Ms. Cleary's April 15, 1994 inquiry seeking clarification and waiver of the Commission's rate regulations due to their impact on the launch of the FX channel on June 1, 1994, and follows up on our letter to Mr. Corn-Revere of April 14, 1994. First, your letter seeks clarification that the introduction of a new programming service prior to July 14, 1994 will not constitute a restructuring for purposes of triggering refund liability, pursuant to Section 76.922(b)(6)(B) of the Commission's rules, provided that the operator does not increase rates prior to expiration of the deferral period, even if in conjunction with adding a channel another channel is deleted to make capacity available for the new channel. Our letter of April 14, 1994 explained the background of and rationale for the prohibition against service restructuring as a condition of the deferral of refund liability until July 14, 1994. We now supplement that letter to add that we do not believe that the substitution of a new program channel for a pre- existing channel in a regulated tier during the deferral period, without an increase in rates, raises a serious risk of harm to consumers where the channel substitution was previously planned by the operator, and the cost to the operator of the new channel is at least as high as cost of the one it replaces. Accordingly, absent other factors, the substitution of a new program channel on a regulated tier during the deferral period, without any increase in rates and pursuant to the previous plans of the operator, does not constitute a service and rate restructuring that would trigger refund liability under new Section 76.922(b)(6)(B) of the Commission's rules. As you noted in your letter, we do not reach here the issue of whether restructuring occurs when a less expensive channel is substituted for a more expensive channel. Your second question involves the timing of pass-throughs of programming cost increases for a cable programming services tier when there is a complaint pending at the FCC. You ask us to confirm your understanding that cable operators may increase rates 30 days after the filing of a Form 1210 with the FCC without prior approval from the FCC when such increases are based on increases in programming costs. Under Section 76.958 of the Commission's new rules, "[a] regulated cable operator that proposes to change any rate while a cable service complaint is pending before the Commission shall provide the Commission at least 30 days notice of the proposed change." Thus, notice, not permission, is all that is required in such circumstances. Third, you ask for clarification of whether, in the case of the June 1, 1994 launch of FX, which was already scheduled and announced prior to the release of the Commission's new rules on March 30, 1994, operators may pass through the associated increases in programming costs going back to June 1, 1994. Under Section 76.922(d)(3)(iii) of the Commission's new rules, "[r]ate adjustments made to reflect changes in external costs shall be based on any changes in those external costs that occurred from the end of the last quarter for which an adjustment was previously made through the end of the quarter that has most recently closed preceding the filing of the FCC Form 1210" (emphasis added). Thus, the charges you describe in your letter would not be permitted under our rules to be passed through to subscribers prior to July 1, 1994. We believe, however, that a waiver of our rules is appropriate in this particular case because of the transitional issues it raises. We are persuaded that, in fairness to Fox/FX and other new programming services that had pre-existing commitments to launch between March 30, 1994 and July 14, 1994, operators should be permitted to recover the programming costs of such a new service that are incurred prior to July 1, 1994. Such program services have already expended considerable resources in preparing to launch their channels, and their decisions clearly were made before our rules were announced. We will thus permit operators to include in their permitted rates the costs incurred as a result of carriage of these program services prior to July 1, 1994. Where the operator is subject to regulation at the local level, they may include the accrued costs when they make their first Form 1210 filing. We are limiting this waiver to allow the recovery of costs incurred when operators add a new programming service under the specified circumstances. We believe that a waiver is appropriate in this transitional situation in order to maintain incentives for operators to add previously-planned program channels during the quarter in which our rules become effective. In addition, it will help ensure that programmers are not prejudiced by launch date decisions arrived at before the release date of the Commission's orders. You also request that we clarify that operators who launch FX on a basic tier that is regulated at the local level prior to July 1, 1994 will be able to pass through automatically the programming cost increases associated with the new channel. We are not in a position to waive the statutory requirement that these operators must provide 30 days' notice to the local franchising authority before increasing rates to reflect the costs at issue. See Section 623(b)(6) of the Communications Act. We nonetheless emphasize that local authorities receiving such a rate increase request should act on it promptly, and should endeavor to approve it, where at all possible, within 30 days. We will subsequently provide further details on how operators should supplement their first Form 1210 filing to ensure that they are able to recover the pre-July 1, 1994 programming costs described above. Sincerely, Alexandra M. Wilson Acting Chief Cable Services Bureau