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CUID No. MA0182 Cablevision of Boston ) LOI 93-12 Limited Partnership ) ) Rate Complaints and ) Letter of Inquiry ) ORDER Adopted: August 7, 1995 Released: August 8, 1995 By the Commission: I. Introduction 1. The Cable Television Consumer Protection and Competition Act of 1992 ("the 1992 Cable Act") created a regulatory scheme giving the Commission and the local franchising authorities jurisdiction over the cable programming and equipment rates of non-competitive cable systems. The 1992 Cable Act provides that in the case of basic service, the rates of cable systems not subject to effective competition may be regulated by local franchising authorities and in the case of cable programming service, by the Commission. A stated policy of the 1992 Cable Act is to ensure that "consumer interests are protected in the receipt of cable service." 2. The Commission has before it a Proposed Resolution submitted by Cablevision of Boston, Limited Partnership ("Cablevision") that proposes to resolve eight rate complaints filed against Cablevision with respect to the rates that Cablevision charged for cable programming services offerings. The Proposed Resolution also seeks to resolve and to terminate a proceeding on a Letter of Inquiry 93-12 ("LOI") in which the Cable Services Bureau has issued an Order. In this Order, we address the Proposed Resolution, including the comments received from the complainants. For the reasons stated below, and based upon our review of the record, we find that the Proposed Resolution serves the interest of Cablevision's subscribers by, among other things, bringing finality and stability to the CPS tiers. We also believe that adoption of the Proposed Resolution is consistent with the Commission's responsibility under the 1992 Cable Act to ensure that consumers interests are protected in the receipt of cable services. II. Background 3. Before September 1, 1993, Cablevision's services included an 18 channel basic service tier, for $9.95 per month, a 34 channel cable programming service tier, called Metro, for $10.50 per month, and a 14 channel cable programming service tier, called Family, for $7.50 per month. 4. The following chart summarizes Cablevision's service tier offerings prior to September 1, 1993: Offering Channels Price 1. Basic 18 $ 9.95 2. Metro 34 $10.50 3. Family 14 $ 7.50 Total 66 $27.95 5. On September 1, 1993, the date the Commission's rate regulations became effective, Cablevision restructured its service offerings. Cablevision's restructured service offerings included a 19 channel basic service tier, for $7.52 per month, and a 32 channel cable programming service tier, called Metro, for $13.58 per month. It also began offering the channels in its former Family cable programming service tier on an individual basis for $1.95 per channel per month. The 12 channels were also offered together as a package, called Family tier for $6.85 per month. 6. The Commission received a letter from the Office of Cable Communications of the City of Boston, Massachusetts to Cablevision dated September 9, 1993, alleging that, as a result of this restructuring, Cablevision violated Commission regulations governing cable television services. In response to this letter, on November 17, 1993, the Commission issued the LOI to Cablevision. The LOI requested information from Cablevision concerning, among other issues, its compliance with the Commission's rules governing rate and service changes for regulated cable services. Cablevision responded to the LOI by letter dated December 16, 1993. 7. The following chart summarizes Cablevision's service tier options as of the date of its response to the LOI: Offering Channels Price 1. Basic 19 $ 7.52 2. Metro 32 $13.58 3. Family 12 $ 6.85 Total 63 $27.95 8. In July 1994, Cablevision further restructured the Family tier of offerings. Subscribers were given the option either of retaining the original 12 channel Family tier package or creating their own Family tier package for the same price by choosing any 12 channels from among the 17 programming services comprised of the original 12 channels and five new programming services. Along with the restructuring, the per channel price for a Family tier service decreased from $1.95 to $1.00. Approximately 8,000 of the roughly 60,000 Family tier subscribers exercised the option to create their own 12-channel Family tier package incorporating one or more of these new channels. 9. On December 22, 1994, the Cable Services Bureau ("Bureau") of the Commission issued an Order resolving the LOI ("LOI Order"). In the LOI Order, the Bureau concluded that Cablevision's Family tier package, as it existed in Boston on November 17, 1993, must be treated as a rate-regulated cable programming service tier. The Bureau ordered that, effective 90 days from the release date of the Order, Cablevision either must offer the channels in the Family tier package as part of the respective rate-regulated tiers from which the channels came or collectively offer the channels as a separate rate-regulated tier of cable programming services. 10. On January 23, 1995, Cablevision submitted a Petition for Reconsideration of the LOI Order. Cablevision argued, among other things, that the 12 channel Family tier package was a legitimate a la carte offering. 11. In addition to the letter from the City of Boston that led to the LOI, during the period from September 1, 1993 to the present, the Bureau received eight valid complaints from seven complainants regarding the rates charged by Cablevision for cable programming services. The date of the first complaint received was September 7, 1993. 12. Following the filing of Cablevision's Petition for Reconsideration, Cablevision and the Cable Services Bureau staff met to discuss the resolution of issues relating to the rate complaints and the LOI Order. The Bureau staff received from Cablevision the Proposed Resolution to resolve the rate complaints as well as the LOI Order. Under this proposal Cablevision would agree to the following: (i) to offer the Family tier package as a regulated CPS tier of 12 channels; (ii) with respect to those subscribers that elected to choose one or more of the five additional channels added in July 1994 to comprise part of their Family tier package, to allow those subscribers to keep their packages at regulated rates; (iii) to treat the five additional channels added in July 1994 as a Migrated Product Tier ("MPT") that will be priced at a regulated rate, and after January 1, 1997, may be converted into a New Product Tier ("NPT"). In addition, the Proposed Resolution noted that, pursuant to its discussions with the City of Boston with respect to its basic rates, Cablevision had agreed to make a reduction of both Basic and Metro tier rates. This reduction was effective on May 15, 1995 and applied retroactively from July 1994, resulting in refunds to subscribers of the system. Finally, in the course of discussions, Cablevision represented to the Bureau staff that Cablevision's current rates were established based upon the Commission's benchmark formula (as opposed to a cost-of-service filing) premised upon Cablevision's good faith assumption that its Family tier package was a lawful a la carte offering. Because of the Bureau's decision in the LOI Order that the Family tier package should be treated as a regulated tier, Cablevision stated that application of the benchmark formula prevented it from charging the rates required to enable it to recover its costs. Therefore, as part of the resolution, Cablevision submitted a cost-of-service showing. That showing justifies Cablevision's Agreed Upon Rates for both the Metro and Family tier offerings. 13. Based upon our initial conclusion that the Proposed Resolution was a reasonable approach to resolve these matters, on April 14, 1995, the Commission directed the Bureau to serve all complainants with the proposal to ensure that the complainants are fully apprised of the proposal and had an opportunity to provide comments. Pursuant to that Order, the complaining parties were given thirty days to review and file comments on the Proposed Resolution. The thirty day period expired on May 22, 1995. The Commission received comments from two of the seven complaining parties -- the City of Boston Office of Cable Communications (the "City") and the Commonwealth of Massachusetts Cable Television Commission (the "Massachusetts Commission"). III. Summary of Comments 14. The City agreed with the overall concept of using non-adjudicatory resolutions as a method of expediting the rate regulatory process. However, the City raises a number of concerns regarding some of the provisions contained in the Proposed Resolution. The City's main arguments include the following: (i) subscribers do not appear to receive any tangible benefit, such as cash refunds or credits despite the fact that they have been overcharged for Family tier services for two years; (ii) Cablevision is allowed to retroactively file a cost-of- service showing in order to justify its Family tier rates; (iii) the Commission has not provided any financial figures or computations to document how it determined the reasonableness of the rates in the proposal; (iv) the Commission has failed to provide any regulatory authority as the basis for approving the Proposed Resolution; (v) by permitting Cablevision to move the five new channels first to a MPT and ultimately to a NPT, the Commission is now sanctioning a situation where Boston cable subscribers will be paying more for services that they currently receive because subscribers will be obliged to purchase more tiers at higher prices to receive some of the same services they now receive; and (vi) the proposal may inappropriately affect the City's Rate Order. Under that Order, the City reserved the right to include Family tier revenues in its Form 1200 calculations in the event that the Commission determined that the tier was regulated. 15. The Massachusetts Commission filed comments supporting the proposal: "the Massachusetts Commission generally supports the FCC's use of alternative rate setting mechanisms and enthusiastically supports the adoption of the Proposed Resolution." The Massachusetts Commission endorses "the concept generally of rate agreements in cable rate setting, as a victory for common sense. Too often, regulators at all levels have bound themselves needlessly by precisely-crafted rules which lead to absurd and unpredictable results not only for cable operators, but also for consumers... ." The Massachusetts Commission did raise some questions concerning the proposal. The Massachusetts Commission specifically asked whether: (i) the Commission has taken a position on whether local rate regulators have the authority to enter into similar agreements; (ii) the subscribers who choose 12 out of 17 offered services may change their programming choices after the effective date of the Proposed Resolution; and (iii) subscribers can now be required to purchase the Metro tier in order to purchase Family tier. These questions are addressed below. IV. Discussion 16. The Commission has determined that it is in the public interest to adopt the Proposed Resolution to resolve the rate complaints as well as the LOI proceeding. As discussed below, we do not believe that the commenters have raised any concerns that cannot be addressed or that warrant a substantive revision of the proposal. Rather, we believe that the resolution meets our responsibilities under the 1992 Cable Act to ensure reasonable rates, while using procedures that are most efficient and in the public interest. 17. As an initial matter, we address the City's concern regarding our regulatory authority to approve this Proposed Resolution. We note that the 1992 Cable Act provides the Commission with wide discretion to resolve cable rate complaints. The 1992 Cable Act directs the Commission to create "fair and expeditious procedures for the receipt, consideration, and resolution of complaints." The Commission also is charged with establishing "the procedures to be used to reduce rates for cable programming services that are determined by the Commission to be unreasonable and to refund such portion of the rates or charges that were paid by subscribers after the filing of such complaint and that are determined to be unreasonable." We believe that the broad language of Congress' mandate allows the Commission to choose the procedures used to resolve complaints. We further believe that Congress' desire to simplify cable rate regulation supports the adoption of the most expeditious means of resolving complaints that will afford adequate protection for the subscribers. Thus, we believe the Commission has authority to consider the Proposed Resolution and to determine -- after submitting the Proposed Resolution to the complainants for their comments -- that the Agreed Upon Rates are not unreasonable. Nonetheless, to the extent the submission of the Proposed Resolution and our action upon it requires a waiver of our rules, we find such waiver to be in the public interest for the reasons specified in this paragraph. 18. Contrary to the City's concern, the proposal does not unjustly deprive subscribers of cash refunds. As noted above, as a part of its proposal Cablevision submitted a cost-of- service showing. The cost-of-service showing (which is available for public inspection) demonstrates that Cablevision's Agreed Upon Rates for both the Metro and Family tier offerings were justified. Therefore, subscribers are not entitled to any cash refunds. The City's related concern that Cablevision was allowed to retroactively file a cost-of-service filing is also misplaced. As noted above, Cablevision established rates based upon the benchmark formula and premised on the incorrect assumptions regarding its Family tier a la carte offerings. As a result of our separate LOI Order, the rates established under the benchmark formula failed to cover Cablevision's costs to such an extent that Cablevision risked suffering severe financial hardship. Under these circumstances we will not hold an operator to a benchmark filing, where that operator could have initially justified its rates using a cost-of-service filing. The Commission adopted rules requiring that operators apply consistent rate-setting approaches across tiers to prevent cost-shifting by cable operators. In the matter before the Commission, the City has already set the basic tier rates, thus, the ability of the cable system operator to shift costs, and thereby "game" the system is substantially reduced. We believe that to hold to such a hard and fast rule in this case runs counter to our responsibilities under the 1992 Cable Act. For these reasons, to the extent our rules require operators to select the same method of regulation for the basic and cable programming service tiers, we find it is in the public interest to waive that requirement in this case. 19. With respect to the City's related concern regarding the lack of financial information documenting how Cablevision's cost-of-service filing justified its rates, we observe that Cablevision's rates are premised on consideration of a publicly filed cost showing that is consistent with the Commission's cost-of-service rules, generally including the presumptions outlined therein. However, the Commission did give consideration to Cablevision's showing that it continued to have losses for a considerable period beyond the FASB-51 defined prematurity period, which is typically expected to be the first two years of operation. Such additional losses were included as prematurity period losses to the extent that the losses represented unrecovered depreciation expense accumulated over the eight additional years of losses and justified the rates actually in effect. 20. With respect to Cablevision's case, the allowable prematurity loss, including the additional depreciation expense allowance, amounts to $81 million. This amount will be amortized over a ten-year period beginning at the time the system began to show profits. This means Cablevision included approximately $8.1 million of the accumulated losses per year in expense in its cost-of-service showing. We find this period to be acceptable in that it spreads the recovery of the losses over a sufficiently long period and effectively provides for the complete recovery of the assets related to the unrecovered depreciation expenses over a period that is consistent with Cablevision's average expected plant life. The amortization period commenced two years ago, when Cablevision first ceased to have operating losses, and Cablevision has effectively amortized two years of the balance. Therefore, on the remaining balance of approximately $65 million ($81 million minus $16.2), Cablevision included in its revenue requirement a return at 11.25%, plus any allowance for income taxes appropriate under the Commission's rules. 21. We further believe that the City's concern regarding the treatment of the five additional channels added in July 1994 is misplaced. With respect to future offerings of these five channels, Cablevision has agreed that the five channels would be placed in a MPT. These channels will initially be priced at a regulated rate of $2.57 for the package. Cablevision may add additional channels to the MPT at the price of 20› per channel, the amount of the mark-up permitted under the Commission's Going Forward rules, plus licensing fees. After January 1, 1997, Cablevision may convert its MPT into a NPT. It is noted that prior to this Proposed Resolution the five additional channels were never offered as a separate package but were offered as part of a larger package. If the five channels were not among the channels customers selected for a 12 channel package, a subscriber would have had to purchase them on an a la carte basis, paying in the aggregate $5.00 per month in contrast to the post-Resolution rate-regulated price of $2.57. Therefore, Boston subscribers are paying less for the five new channels. 22. The MPT (and the NPT it will become in January 1997) will receive the same treatment as other NPTs, with one exception. Subscribers to the MPT may not be required to buy through any other tier, except the basic service tier, to receive the MPT (or the NPT). We believe that this resolution balances the competing needs of all parties. The MPT will provide consumers with choice in both programming and pricing and at the same time allow Cablevision the right to continue to carry those channels already on the system. We believe this resolution is consistent with our rules allowing collective offerings created between April 1, 1993 and September 30, 1994 and involving only a small number of channels moved from basic service tiers and CPS tiers to be treated as NPTs where the Operator had reasonable grounds to believe the collective offering complied with the Commission's rules as of the date it was first offered. Nonetheless, given the overall benefits of the resolution, to the extent necessary, we find it in the public interest to waive NPT rules to allow the MPT to become an NPT after January 1, 1997. 23. Likewise, the City's concern regarding the effect of the proposal on the City's Rate Order does not warrant revision to the proposal. Under that Order, the City reserved the right to include Family tier revenues in its Form 1200 calculations in the event that the FCC determined that the tier was regulated. The Commission respects the separate jurisdiction of the local franchise authority to review rates for basic service programming. The Commission was under the assumption that Cablevision's basic service tier rate was reviewed by the City and, in the absence of an appeal, accepted by Cablevision. The Commission attempted to craft a resolution in a manner that would not interfere with the City's Rate Order. We believe that the Proposed Resolution carefully balances the separation of responsibilities between the Commission and the City. We do not believe that further review would be in the interest of any party or the subscribers. We note that, based upon the staff's review of Cablevision's CPS rates, the Agreed Upon Rates for the Metro and Family service tiers appear to be set at a level below what a cost-of-service showing might justify. Nonetheless, the Proposed Resolution provides that Cablevision will not raise the Metro or Family rates except to reflect future cost increases. We note, however, that in the event the City recomputes the basic service tier rate we would consider a petition to proportionately change the Metro and Family tier rates within the limits of what a cost-of-service showing would justify. 24. Finally, we note that the City overlooks the significant benefits that the proposal provides to the subscribers: (i) subscribers to cable services promptly receive the benefit of rate regulated services on the Family tier, (ii) as a result of the grandfathering provision of the proposed resolution, those consumers (approximately 8,000) who exercised choice when the Family tier was offered as a "pick 12 out of 17" option will retain their choice and will be protected against unnecessary price increases, and (iii) the additional five channels added in July 1994, initially will be offered to any subscriber at rate regulated levels, and subscribers can receive these channels without being required to buy through any other tier. Moreover, we believe that bringing finality and stability to the CPS tiers in Boston has a significant beneficial effect for all parties involved. 25. While the Massachusetts Commission expressed its desire to have been included in the negotiations for the Proposed Resolution, it correctly recognizes that the Resolution leaves intact basic tier rate regulation and affects services over which only the Commission has regulatory authority. In addition, the Massachusetts Commission requested that the following questions be addressed when the Commission adopts the Resolution: (a) Has the Commission taken a position as to whether or not local rate regulators have the authority to enter into similar agreements with cable operators for basic rates? The Commission previously has determined that franchising authorities exercising their regulatory authority under 47 U.S.C.  543(b) may not settle rate disputes unless the settlement is reasonable and justified by the record created in the course of a settlement: We affirm our intention to disallow settlement agreements that are based on factors outside the record of a rate proceeding. Permitting such settlements could potentially allow franchising authorities to bargain away subscribers' statutory protection against unreasonable rates..... Parties in a rate-setting procedure may, of course, stipulate to particular facts and even the final rate level itself, so long as the basis of each such stipulation is clearly articulated, there is some support for each stipulation in the record, and it does not circumvent our rate regulations. The Commission's position on this issue recently was upheld by the United States Court of Appeals for the District of Columbia in Time Warner Entertainment Co., L. P. v. FCC. (b) Can a consumer who exercised the option to "Pick-Any-12" out of the 17 channels on Family tier change his or her programming choices after the effective date of the Resolution? No, under the proposal, the Pick-Any-12 option expires and the Family tier becomes a more traditional CPS tier of 12 fixed channels (the original 12 channels). The five channels added in July, 1994 to make the Pick-Any-12 option would become a MPT, with pricing set at rate regulated levels. (c) Can Cablevision now require the purchase of Metro in order to buy Family? Under the Commission's rules a cable operator may require the subscription to one or more tiers of cable programming services as a condition of access to one or more tiers of cable programming services. The proposal does not dictate whether Cablevision will require the purchase of Metro tier as a condition to purchase Family tier. 26. Thus, for the reasons discussed above, we conclude that it is in the public interest to adopt the Proposed Resolution. While we believe this approach is entirely consistent with the purpose and intent of the 1992 Cable Act, we further note that it is well within the Commission's general authority. VI. Ordering Clauses 27. For the reasons set forth above, IT IS ORDERED that the Resolution attached as Appendix A is adopted. 28. IT IS FURTHER ORDERED that all rate complaints under the jurisdiction of the Commission against Boston Cablevision, Limited Partnership are granted to the extent indicated herein, and denied in all other respects. 29. IT IS FURTHER ORDERED that the Letter of Inquiry against Boston Cablevision, Limited Partnership is terminated and the Bureau's December 12, 1994 Order is vacated. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary