NOTICE ********************************************************* NOTICE ********************************************************* This document was originally prepared in Word Perfect. If the original document contained-- * Footnotes * Boldface & Italics --this information is missing in this version The document format (spacing, margins, tabs, etc.) is changed too. If you need the complete document, download the Word Perfect version. For information about downloading documents (FTP) see file pnmc5021. File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ***************************************************************** ******** May 26, 1995 DA 95-1175 Wesley R. Heppler, Esq. Paul Glist, Esq. Cole, Raywid & Braverman 1919 Pennsylvania Avenue, N.W. Washington, D.C. 20006-3458 Dear Mr. Heppler and Mr. Glist: This is in response to your letters of August 8, September 19, and October 28, 1994 on behalf of "numerous cable television programmers and operators," seeking clarification that in requesting approval of external programming cost pass throughs on the basic level of service pursuant to Section 76.922(d)(3) of the Commission's rules, cable television operators are not required to provide individual programming contracts that are confidential in nature to local franchising authorities. In order to provide local authorities with sufficient information to conduct the necessary review while maintaining the confidentiality of the contracts in question, you suggest use of a process similar to that previously adopted by the Commission in the SCIS Disclosure Order, 7 FCC Rcd 1526 (1992). You state that programming contracts between cable operators and programmers are nearly always confidential and that there would be practical and legal problems associated with maintaining the confidentiality of these contracts if franchising authorities are permitted to examine them. First, you state that with distribution of these contracts to a large number of franchising authorities, it would be impossible to maintain the confidentiality of these contracts. Second, you state that, in certain states, municipalities do not have the legal ability to maintain confidentiality because there is no recognition of the confidentiality of financial data and proprietary business information in those states and such information must, therefore, be treated as public information. Further, you state that programmers likely will seek to enforce the contract confidentiality provisions in these contracts and cable operators may be prevented from disclosing these contracts to franchising authorities. In light of these concerns, you recommend that a cable operator could provide support for the aggregate programming cost increases contained in the FCC Form 1210 by providing a certification from an independent accounting firm retained by the operator as to the appropriate programming cost increases or decreases. If the franchising authority wants further verification, you recommend that the franchising authority be permitted to ask the Commission to make an in camera review of the contracts. Under your proposed procedures, the firm making the certification would have to be a recognized and established accounting firm and the cost of the certification would be borne by the cable operator. The accounting firm would review the relevant programming contracts and calculate the appropriate programming cost increases or decreases. In making its independent verification, the accounting firm would, as necessary, complete the following tasks: 1. Reconcile the accuracy of the number of subscribers from appropriate billing reports. 2. Recalculate the "Cost of Old Programming per Tier" through a review of all programming contracts and contract rate cards. 3. Recalculate current programming cost through a review of all programming contracts and rate cards as of the appropriate regulatory external pass through quarterly date. 4. Review channel line up cards for each relevant time period to determine changes in channels per tier. For each tier, recompute the programming cost calculations required by Module B in Form 1200 or Form 1210. 5. At the conclusion of the above procedures, if differences are found, the specific differences must be noted in the independent accountant's report. In conducting its independent verification, the accounting firm would follow the auditing standards adopted by the American Institute of Certified Public Accountants, Inc. for "Special Reports - Applying Agreed-Upon Procedures to Specified Elements, Accounts, or Items of a Financial Statement." See Statement on Auditing Standards No. 35. If, after receiving the accounting certification from the cable operator, the local franchising authority desired further verification of programming costs, you propose that the franchising authority could request that the Commission undertake an in camera review of the programming contracts at issue. Upon such a request, a cable operator would be required to submit these contracts to the Commission for review. Local franchising authorities could not delay making their decision on the FCC Form 1210 while the request for in camera review was pending before the Commission. Upon completion of an in camera review of the contracts, the Commission would determine the accuracy of the Form 1210 figures supplied by the cable operator. The local authority would then be notified of the Commission's findings. If the Commission's in camera review ultimately determined that the programming cost figures provided by the cable operator were inaccurate, appropriate refunds and/or forfeitures could be ordered. We have received several letters objecting to your proposal. Among the objections raised in one or more of the responses are the following: 1. Your proposal conflicts with our rate regulation rules, which provide that local franchising authorities will have access to cable operators' proprietary information, even though such information may be publicly released pursuant to state or local law. 2. There can be no modification of that policy without a formal rulemaking. 3. The 1992 Cable Act requires that rates be reviewed and set by local franchising authorities and the Commission, not by private parties. 4. There is no reason why programming contracts should be treated differently from other proprietary information handled daily by state and local regulatory bodies. 5. There is no evidence that local franchising authorities are not competent to maintain the confidentiality of programming contracts. 6. There is no evidence that cable operators are contractually bound to withhold the terms of programming contracts, or that such agreements would be legally enforceable. 7. There is no evidence of the alleged harm from disclosure of programming contracts, because much of the purportedly sensitive information is already available to cable competitors. 8. The periodic disclosure of programming contracts would foster competition and keep rates down by requiring cable operators to disclose their rates, thus permitting other cable operators and other multichannel video programming distributors to bargain more effectively for similar terms and conditions. 9. Accounting firms hired by cable operators would not be impartial arbiters, but would be biased in the cable operators' favor. 10. In camera Commission review would only extend the already protracted rate review process, and further tax the Commission's limited resources. After careful consideration of the various submissions, we decline to address the merits of your proposal here in the absence of a rulemaking proceeding. In our Third Order on Reconsideration of cable rate regulation, released March 30, 1994, we reaffirmed that local franchising authorities had the right to collect additional information -- including proprietary information -- that is "reasonably necessary to make a rate determination." (See Third Order on Reconsideration ("Order"), 9 FCC Rcd. 4316 (1994), at  77-78.) In obtaining proprietary information, we required franchising authorities to state clearly the reason each request was needed, and where related to an FCC Form 393 (and/or FCC form 1200/1205), to indicate the question or section of the form to which the request specifically relates. (Order at  77.) Once proprietary information is submitted, the Order specifically held that the confidentiality of such information should be determined on the state and local level, notwithstanding the fact that the operation of certain state or local laws might lead to the information's public disclosure: We find it neither necessary nor desirable to preempt state and local laws governing access to information. Rate regulation of basic cable services has been designated by the Congress and this Commission as an essentially local matter, and it involves local businesses providing local services. Local (including state) governments have instituted access laws to govern the confidentiality of the business information of the business entities in their respective jurisdictions as they have seen fit for their particular circumstances and interests. We see no reason sufficiently compelling to override that prerogative. (Order at  79.) No Petitions for Reconsideration were filed on this issue. In essence, your proposal would require us to issue a blanket exemption from our general rules for a single type of allegedly proprietary information -- i.e., programming contracts. Whatever the merits of that proposal, we believe that its adoption would constitute a clear modification -- rather than simply a clarification -- of the Commission's rules. We decline to consider such an action here without providing public notice and an opportunity for comment. Nevertheless, we wish to emphasize that the Commission's ruling provides that franchising authorities may only request information that is "reasonably necessary" to their rate-setting function. (Order at  77.) We believe that confidential programming contracts may contain a substantial amount of information that does not meet that standard, the production of which would unnecessarily risk the disclosure of sensitive business information. We therefore expect local franchising authorities to be judicious in their requests for programming contracts, to make sure that the information is needed, and to narrow their requests, if appropriate, to permit cable operators to submit only the specific information required. We urge franchising authorities and cable operators to adopt procedures that will achieve the proper balance between the franchising authority's right to review relevant information and the cable operator's interest in maintaining the confidentiality of sensitive business information. Sincerely, Meredith J. Jones Chief, Cable Services Bureau cc: Mr. Joseph Van Eaton, Esq. Mr. John W. Pestle, Esq. Mr. Norman M. Sinel, Esq. Mr. Nickolas Davatzes (A & E Network) Ms. Jane Tollinger (Lifetime Television) Mr. Stephen A. Brenner (USA Networks) Ms. Maurita K. Coley (BET) Mr. Frederick Kuperberg (Disney Channel) Mr. Bertram W. Carp (Turner Broadcasting) Mr. Mark Feldman (E! Entertainment Television) Ms. Donna C. Gregg, Esq. Mr. Edwin M. Durso (ESPN)