FOR RECORD ONLY $//MO&O, Warner Cable, Milwaukee, WI, DA 95-60//$ $/76.981 Negative option billing/$ $/a la carte orders/$ Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 DA 95-60 In the Matter of: ) ) Warner Cable Communications ) LOI-93-14 Milwaukee, Wisconsin ) ) Letter of Inquiry - Negative Option ) Billing Issue ) MEMORANDUM OPINION AND ORDER Adopted: January 19, 1995 Released: January 20, 1995 By the Chief, Cable Services Bureau: I. Introduction 1. In a letter to the Commission dated September 28, 1993, the City of Milwaukee alleged that Warner Cable Communications ("Warner Cable") violated Commission regulations governing the provision of cable television service arising from Warner Cable's Milwaukee offerings. In response to this complaint, the Commission issued Letter of Inquiry 93-14 ("LOI") to Warner Cable on November 17, 1993. The LOI requested Warner Cable to provide information concerning, among other issues, compliance with the Communications Act's prohibition on negative option billing. 2. We conclude that Warner Cable's conduct, during the time period addressed by the LOI, with regard to automatically subscribing its customers to individual a la carte channels and an a la carte package of four channels, did not violate the negative option billing provisions of federal law. II. Facts 3. Beginning September 1, 1993, the effective date of the Commission's rate regulation rules, Warner Cable restructured its channel offering on its cable system in Milwaukee, Wisconsin. Prior to September 1, Warner Cable offered a 27 channel basic tier and a 24 channel cable programming service tier. After September 1, two channels from the basic tier, WTBS and WGN, were offered to subscribers on an optional basis for $.79 each. In addition, two channels from the cable programming service tier, Discovery and E!, were offered on an optional basis for $.79 each. These four channels were also available as a package for $2.20. Subscribers to the basic tier continued to receive the same channels after September 1 that they had received prior to September 1. The same was true for subscribers taking the cable programming service tier. Bills for subscribers to both the basic and cable programming service tiers who did not affirmatively request elimination of any of the new options remained the same in total price as prior to September 1 but contained a separate itemization of the basic, cable programming service, and the new individual or package offerings. 4. Warner Cable states that subscribers were informed of the new a la carte offerings through the following means: (1) a scrawling message that was cablecast on The Weather Channel on August 30, 1993; (2) a September 1, 1993 notice in The Milwaukee Journal; (3) an informational letter sent to all customers on or about September 20, 1993; (4) a message printed on the September and October 1993 monthly billing statements, plus a bill insert; (5) a message continuously shown on Channel 52 from August 30, 1993 until September 10, 1993; (6) a full page advertisement in the television book of The Milwaukee Journal; (7) from September 10, 1993 to October 4, 1993, the continuous showing of a 30 minute television program on Channel 52 explaining rate regulation issues; and (8) a notice posted in the lobby of its local billing office. These various announcements informed subscribers that the service was optional and could be cancelled by mail or telephone. (If a subscriber cancelled the service, the account was credited back to September 1, 1993.) III. Background 5. In the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"), Congress created a process for regulating cable programming and equipment rates. Section 3(f) of the 1992 Cable Act adds a new provision to the Communications Act which states that "[a] cable operator shall not charge a subscriber for any service or equipment that the subscriber has not affirmatively requested by name." It further specifies that "a subscriber's failure to refuse a cable operator's proposal to provide such service or equipment shall not be deemed to be an affirmative request for such service or equipment." This prohibited billing practice is commonly referred to as negative option billing. 6. In the Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation, MM Docket 92-266, Report and Order and Further Notice of Proposed Rulemaking, ("Rate Order") implementing this Section of the 1992 Cable Act, the Commission explained that the prohibition against negative option billing applies to "additions of a new tier of service or a new single channel of service without the affirmative assent of a subscriber." It added, however, that the negative option billing provision does not apply to "a change in the mix of channels in a tier, including additions or deletions of channels . . . unless they change the fundamental nature of the tier" or to rate increases unless the price change is accompanied by a fundamental change in service, such as the addition of a new tier. Further, it stated that restructuring of tiers and equipment will not bring the prohibition into play if the subscribers continue to receive the same number of channels and the same equipment unless the restructuring effects a fundamental change in the nature of the service. 7. The rule adopted, with subsequent revisions, states: Section 76.981 Negative Option Billing (a) A cable operator shall not charge a subscriber for any service or equipment that the subscriber has not affirmatively requested by name. A subscriber's failure to refuse a cable operator's proposal to provide such service or equipment is not an affirmative request for service or equipment. A subscriber's affirmative request for service or equipment may be made orally or in writing. (b) The requirements of paragraph (a) of this Section shall not preclude the adjustment of rates to reflect inflation, cost of living and other external costs, the addition or deletion of a specific program from a service offering, the addition or deletion of specific channels from an existing tier of service, or the restructuring or division of existing tiers of service, or the adjustment of rates as a result of the addition, deletion or substitution of channels pursuant to Section 76.922 of this Subpart, provided that such changes do not constitute a fundamental change in the nature of an existing service or tier of service and are otherwise consistent with applicable regulations. (c) State and local governments may not enforce state and local consumer protection laws that conflict with or undermine paragraph (a) or (b) of this Section or any other sections of this Subpart that were established pursuant to Section 3 of the 1992 Cable Act, 47 U.S.C. 543. IV. Discussion 8. The 1992 Cable Act provides that "[a] cable operator shall not charge a subscriber for any service or equipment that the subscriber has not affirmatively requested by name." Subscribers to the Warner Cable system did not receive any channel not affirmatively requested. After the changes in question, subscribers received the same number of channels they had originally ordered and the same programming services. The bill (from a subscriber receiving 51 channels) that Warner Cable attached to its response, however, shows an entry and charge for the "WTBS/WGN/E!/Discovery" package separate from the basic and standard tiers. Thus the issue remains whether the unbundling or subdivision of existing offerings into smaller component parts, each with different names or designations, precludes subscribers from being billed for those parts that were not specifically named when service initially was requested. After careful review, we conclude that Warner Cable's conduct that is the subject of this LOI does not violate the negative option billing provisions of the statute or the Commission's rules. 9. Warner Cable asserts that these new packages and individual channel offerings are not new services but are simply part of "restructured" or "retiered" offerings of channels that subscribers were receiving prior to the "restructuring." It argues that it followed Commission rules which do not apply the negative option billing prohibition to restructuring that does not result in a fundamental change in the nature of existing tiers of service. In the Rate Order, in which 47 C.F.R.  76.981 initially was adopted, the Commission specifically considered whether subdivision of services in implementing the rate regulation provisions of the 1992 Cable Act would conflict with the negative option restriction. The rule adopted specifically exempts "the restructuring or division of existing tiers of service, . . . provided that such changes do not constitute a fundamental change in the nature of an existing service or tier of service and are otherwise consistent with applicable regulations." In formulating this rule, the Commission had been asked to hold that splitting an existing basic tier into a new basic and an expanded basic tier in association with a rate increase would conflict with the negative option billing restriction. The Commission determined that, "restructuring of tiers and equipment, including restructuring appropriate for implementing the Cable Act's provisions, will not bring the negative option billing provision into play if subscribers will continue to receive the same number of channels and the same equipment." An objection to this approach based on a concern that revenue-neutral changes might result in programming being switched to a deregulated tier was rejected. These statements are directly applicable to the type of restructuring undertaken by Warner Cable. 10. The Commission's rule is based on the reasonable interpretation of the statute. Of course, the statute could be read to require affirmative consent prior to any change in service, no matter how minor. But in the Commission's view, such an interpretation would contravene Congressional intent and the underlying purposes of the federal cable rate regulations. The Conference Report on the 1992 Cable Act made clear that the federal negative option billing provision was "not intended to apply to changes in the mix of programming services that are included in various tiers of cable service." Thus, Congress never intended for Section 3(f) -- the negative option billing prohibition -- to apply to every programming change. Moreover, if Section 3(f) were read that broadly, it would thwart a primary purpose of the cable rate rules: "encourag[ing] the provision of new services that subscribers desire at the reasonable rates mandated by Congress." In light of the legislative history and purpose of the 1992 Cable Act, the Commission concluded that Section 3(f) does not apply to minor restructuring of an existing tier. Moreover, and particularly with respect to the retiering that occurred in 1993 upon the initiation of rate regulation pursuant to the 1992 Cable Act, the Commission concluded in 47 C.F.R.  76.981 that affirmative consent is not required prior to restructuring or division of existing tiers of service that do not result in a fundamental change in the nature of an existing service or tier of service. 11. This interpretation of Commission rules, we believe, protects the interests of subscribers in not being billed for services they have not requested and is necessary to reconcile this provision of the 1992 Cable Act with the rate regulation provisions also adopted therein. The language of Section 3(f) is logically read as permitting subscribers to be billed for a bundle of services "affirmatively ordered by name" even if the name of the service has subsequently changed or that package has been unbundled into smaller component parts; the service received remains the service ordered by name. The words of the section are fairly read as meaning that the purchaser receives what was ordered and not that the name of the service delivered remains unchanged. A different reading could well result in the abrupt withdrawal of service, a result that would be inconsistent with the rate regulation and consumer protection objectives of this section. 12. Further, we believe this is one of those situations that the Commission has previously referenced where state and local officials "may not enforce negative option billing rules that would obstruct the accomplishment of the objectives of Congress's cable rate provisions." The Commission specifically contemplated that, as part of the process of complying with the initial introduction of rate regulation, cable operators would have the flexibility and in some cases be required to retier, divide, or unbundle their service offerings on a faster than usual schedule without complying, for example, with notice or other requirements generally applicable. 13. The concern of Section 3(f) as a consumer protection mechanism is that subscribers not be billed for services that they never ordered. The restrictions of this provision protect subscribers from having to take on the burden of identifying and negatively responding to charges for services that appear on a bill that are not desired and for which no request has been made. It protects subscribers both from inadvertent payment of such charges and from becoming contractually bound for them. Thus, when the service received is not altered, but rather is simply unbundled, the above interpretation is consistent with the achievement of this objective. It protects subscribers from receiving what has not been ordered; but it does not mandate cutting off what has been ordered. To cut off service requested offends the contractual relationship between buyer and seller as much as does adding service not requested. This is especially true when the restoration of service that has been terminated imposes an additional expense on the subscriber for termination or resubscription charges. 14. While we conclude that there was no violation of the prohibition against negative option billing here, we note that the restructuring done in this case by Warner Cable was necessarily done in a situation occasioned by the inception of rate regulation where time was short due to statutory deadlines leading to fundamental industry change. In contrast, creation of new product tiers, (tiers specifically provided for in the Sixth Order on Reconsideration that may be made up of channels that were offered on the basic or cable programming services tiers for a period of time) will come in a more settled environment where operators will be able to take the time necessary to accomplish effective affirmative marketing. Accordingly, Commission rules expressly provide for the affirmative marketing of new product tiers. V. Ordering Clauses 15. Accordingly, IT IS CONCLUDED that Warner Cable Communications operating in Milwaukee, Wisconsin has not, through the conduct described above, violated Section 3(f) of the 1992 Cable Act, 47 U.S.C. 543(f), or Section 76.981 of the Commission's rules. 47 C.F.R.  76.981. FEDERAL COMMUNICATIONS COMMISSION Meredith J. Jones Chief, Cable Services Bureau