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File how2ftp (.txt & .wp) is in directory /pub/Bureaus/Miscellaneous/Public_Notices/ ***************************************************************** ******** FOR RECORD ONLY $//MO&O, Adelphia Cable Partners, South Dade County, FL, FCC 95-378//$ $/ 1.115 Application for Review/$ $/a la carte orders/$ Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 FCC 95-378 In the Matter of: ) ) Adelphia Cable Partners, L.P. ) LOI-93-42 South Dade County, Florida ) ) Letter of Inquiry ) Application for Review) MEMORANDUM OPINION AND ORDER Adopted: August 23, 1995 Released: December 1, 1995 By the Commission; Commissioner Quello dissenting and issuing a statement at a later date; Commissioner Barrett concurring in part, dissenting in part and issuing a statement: I. Introduction 1. In this Order, we deny the Application for Review ("Application") of Adelphia Cable Partners, L.P. ("Adelphia"), filed on December 19, 1994. In its Application, Adelphia seeks Commission review of the Memorandum Opinion and Order of the Cable Services Bureau ("Bureau") released on November 18, 1994, holding that the CableValue a la carte package offered by Adelphia as it existed on December 13, 1993, must be treated as a rate- regulated cable programming service tier and that the channels composing it must be counted as rate-regulated channels for purposes of rate justification as of September 1, 1993. Dade County, Florida ("the County"), opposes Adelphia's Application for Review. II. Background 2. The Cable Television Consumer Protection and Competition Act of 1992 (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. 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. However, rates for program offerings on a per channel or per program basis may not be regulated under the 1992 Cable Act. 3. The 1992 Cable Act also 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. In its Rate Order adopted April 1, 1993, 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." Recognizing that as regulation developed, it would be difficult to predict the different types of evasive behavior that would be engaged in, the Commission determined in the Rate Order that it would not adopt a specific list of prohibited evasive actions but rather would address issues of alleged evasion on a case-by- case basis. Noting that it had no evidence that operators would shift programming from rate-regulated tiers to a la carte offerings to avoid regulation, the Commission stated that it would not decide, in the absence of a particular factual context, whether the shift of programming from a tier to an a la carte offering would constitute an evasion. Thus the Commission will 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. The Rate Order stated that in cases of alleged evasive behavior, the operator can rebut the allegation by demonstrating that "the alleged evasion actually was primarily for a legitimate business purpose and not simply to evade rate regulation." 4. In the Rate Order, the Commission also determined that packages of channels which were also offered individually (so-called "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." On reconsideration, the Commission retained the two-part test contained in the Rate Order and set out 15 interpretive guidelines to enable operators to better determine what collective offerings of "a la carte" channels will be considered "realistic service offerings." In the Going Forward Order, the Commission reconsidered its 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. However, the Commission determined that packages meeting specified criteria may be treated as New Product Tiers ("NPTs"). III. The Bureau's Order 5. The Bureau issued a Letter of Inquiry ("LOI") to Adelphia on December 13, 1993. The LOI asked Adelphia to provide information concerning its compliance with the Commission's rules governing evasion in the offering of packages which allegedly are not rate-regulated. Adelphia responded to the LOI on January 12, 1994. 6. Adelphia's response to the LOI showed that prior to September 1, 1993, Adelphia offered an 18-channel basic tier for $10.00 per month and a 32-channel cable programming service tier for $13.95 per month. Both tiers of service could be purchased together as a package for $23.95 per month. On August 30, 1993, just prior to the effective date of our regulations, Adelphia restructured its service offerings to include an 18-channel basic tier for $12.00 per month and began offering all of its other channels individually. Adelphia stated that at the time of its response to the LOI, Adelphia's prices for individual channels ranged from $0.10 to $1.05 per month. It also offered these channels in a package, called CableValue, for $12.75 per month. Adelphia's basic tier and CableValue package could be purchased for $24.75 per month. Adelphia's response indicated that as of January 12, 1994, 50,881 of its approximately 51,000 subscribers purchased the CableValue Package; only 102 subscriptions to individual channels were made at that time. 7. In its Adelphia LOI Order, the Bureau first examined whether Adelphia's restructuring of its offerings had the effect of evading regulation for the channels that Congress intended to be rate-regulated. It determined that Adelphia's restructuring fundamentally changed its service to subscribers by removing 32 channels (or 64% of the total channels it offered) from rate regulation and by eliminating an entire cable programming service tier. The Bureau found that in so doing, Adelphia avoided application of our rate regulations which, at the time, generally required cable operators to reduce rates by about 10%. The Bureau stated that it did not believe Adelphia had provided a sufficient justification for this change to overcome a conclusion that there was an evasion. The Bureau noted that virtually all of Adelphia's subscribers to its former cable programming service tier purchased the package of channels identical to those in the former tier and few subscribers actually subscribed to individual channels instead of the CableValue package. The Bureau found that other factors corroborated its finding that the restructuring had the effect of evading rate regulation, including that Adelphia discontinued its cable programming service tier entirely and moved all of the channels comprising it to the new package on the eve of regulation and that it automatically subscribed its cable programming service tier customers to the CableValue package. 8. The Bureau then examined whether the offering met the Commission's requirements for a permissible collective offering of a la carte channels in effect at the time of restructuring. The Bureau found that, in this case, Adelphia's a la carte package complied with the first condition for permissible collective offerings set forth in the Rate Order, but the fact that more than 99% of Adelphia's subscribers did not choose to subscribe to individual a la carte channels, together with other factors in the case, tended to show that the per channel offering did not constitute a "realistic service offering." The Bureau further stated that even if it were to apply the 15 interpretive guidelines set forth in the Second Reconsideration Order, it would still conclude that Adelphia's offering did not constitute a realistic service offering. The Bureau stated that Adelphia's submission revealed additional evidence weighing against a finding that there was a realistic service offering, the most important factor being that "an entire regulated tier has been eliminated and turned into an a la carte package." 9. In its Adelphia LOI Order, the Bureau noted that the Going Forward Order recognized that the a la carte rules adopted in the Rate Order and clarified in the Second Reconsideration Order, as applied to many fact patterns, did not provide a clear test for determining whether an a la carte package was permissible. However, the Bureau concluded that the a la carte rules were not unclear as applied to the fact pattern at issue in this case, where Adelphia moved 32 channels to an allegedly unregulated package and eliminated its entire cable programming service tier. The Bureau found that Adelphia's CableValue package, as it existed on December 13, 1993, the date of the LOI, must be treated as a rate- regulated cable programming service tier and that the package was a rate-regulated offering as of September 1, 1993, the date the Commission's rate regulations became effective. Accordingly, the Bureau required that the channels composing the package be counted as rate- regulated channels for purposes of rate justification as of September 1, 1993. IV. Adelphia's Application for Review 10. Adelphia, in its Application for Review, asserts that the Bureau's Adelphia LOI Order is arbitrary and capricious and not in accordance with the law and Commission policy. Adelphia alleges that the Bureau's Adelphia LOI Order "singles out Adelphia for punitive sanctions, while according unregulated status to the a la carte packages offered by other cable operators." Adelphia argues that the Bureau arbitrarily concluded that Adelphia should have been aware that unbundling an entire service tier would constitute an evasion, particularly in light of the lack of clarity of the Commission's rules governing a la carte packages and its reliance on rules and policies announced subsequent to the introduction of Adelphia's CableValue package. 11. Adelphia also argues that the Bureau erred in concluding that Adelphia's restructuring did not provide subscribers with a realistic service choice. Adelphia states that there were more than 100 subscriptions to individual channels in the CableValue package, although it notes that the number of a la carte subscribers purchasing these channels was less than 20. Adelphia asserts that the low number of subscribers who purchase individual channels is not relevant to determining whether the per channel offerings were a realistic service choice. It also states that its decision to unbundle channels from a regulated tier of service in order to offer the channels a la carte has nothing to do with whether the offerings presented subscribers with a realistic choice and that its prerogative to restructure its services is protected by the Communications Act. Adelphia additionally claims that the Bureau ignored the following other factors relevant to the realistic service option test: (1) subscribers were notified concerning the package and individual channel offerings; (2) the upgrade and downgrade charge policy was "designed to ensure that subscribers are not deterred from selecting individual channels rather than the package"; and (3) the package price was not heavily discounted as compared to the aggregate price of individual channels. 12. Adelphia asserts that, based on these preceding arguments, the Commission should direct the Bureau to rescind its Adelphia LOI Order directing Adelphia to treat its a la carte package as a regulated cable programming services tier both retroactively and prospectively. In the alternative, even if the Commission affirms the Bureau's conclusion that the individual channels comprising the package are not a realistic service choice and that Adelphia's package is subject to regulation, Adelphia requests that the Commission order the Bureau to treat part or all of Adelphia's a la carte package as a new product tier. 13. The County opposes Adelphia's Application, arguing that the limited exemption from regulation for a la carte packages was clearly not intended to allow a cable operator such as Adelphia to avoid rate regulation of an entire 32-channel cable programming services tier. The County asserts that the Bureau correctly found that the low subscribership to Adelphia's individual a la carte offerings was evidence that these offerings did not constitute realistic service choices. In addition, the County states that it favors subjecting Adelphia's a la carte package to rate regulation because this action is remedial in nature and is not punitive, contrary to Adelphia's assertions. V. Discussion 14. Using the analysis set forth above, the Bureau reasonably concluded, first, that Adelphia's restructuring constituted an evasion of the Commission's rate regulations, and second, that the Adelphia restructuring did not produce a permissible collective offering of a la carte channels under the rules in existence at the time the restructuring occurred. The remedy prescribed by the Bureau is justified by each of these findings. 15. The Bureau correctly found that Adelphia's restructuring constituted an evasion because it fundamentally changed its service to subscribers by removing 32 channels, or 64% of the total channels it offered, from rate regulation, by assigning subscribers to this package automatically, and by eliminating an entire cable programming service tier on the eve of rate regulation. These factors, together with the fact that more than 99% of Adelphia's subscribers chose to purchase the a la carte package, led the Bureau to the correct conclusion that Adelphia's actions constituted an evasion of rate regulation. Moreover, we note another additional factor supporting the Bureau's conclusion that Adelphia's restructuring evaded the Commission's rate regulation rules. One effect of Adelphia's restructuring was that the price to purchase the combined basic and cable programming service tiers increased from $23.95 to $24.75. If Adelphia had not restructured in the manner that it did on August 30, 1993, it would have been required to recalculate its rates by counting the channels in its former cable programming service tier as rate-regulated channels in accordance with the Rate Order, released on May 3, 1993, which generally required cable operators to maintain or reduce their rates. 16. The Commission has stated that in cases of alleged evasive behavior, the operator may overcome the allegation of evasion by demonstrating that the behavior challenged as evasive was actually and primarily for a legitimate business purpose and not simply to avoid rate regulation. The Bureau found that Adelphia had provided no sufficient justification for its restructuring such as would overcome its finding of evasion. We affirm this finding and also specifically find that Adelphia has not presented evidence that the restructuring of its cable programming service tier was implemented primarily for a legitimate business purpose. Adelphia makes no such argument in its Application for Review. We therefore affirm the Bureau's determination that Adelphia has failed to provide sufficient justification for its restructuring to overcome the Bureau's determination that there is an evasion of rate regulation. 17. Given the facts described above, we conclude that the Bureau correctly found that Adelphia's restructuring was an evasion under the rules adopted in the Rate Order. Accordingly, the Adelphia LOI Order does not constitute retroactive rulemaking. To the extent, however, that the Adelphia LOI Order is viewed as a new application of the evasion rule, we believe its application is consistent with the decision in Retail, Wholesale & Department Store Union v. NLRB, 466 F.2d 380 (D.C. Cir. 1972). In that case, the court developed a balancing approach using five factors to determine whether an agency is justified in applying an adjudicatory decision retroactively in the case in which it is announced. Applying the analysis of the Retail, Wholesale case to the Adelphia LOI Order, we find that the Bureau's determination was appropriate. First, the Adelphia LOI case was a case of first impression because the specific facts involved raised issues that had not been previously determined by the Commission or the Bureau; second, the Bureau's decision did not represent an abrupt departure from well established practice, but was consistent with policy articulated in the Rate Order. Third, since this is a case of first impression, this is not a case where a party relied on an existing rule and was disadvantaged by the application of a new rule. Rather, the Rate Order put Adelphia on notice that the Commission would decide whether particular practices constituted evasions under the rules on an on-going case-by-case basis in a specific factual context. Moreover, the Rate Order specifically states that the Commission would decide in particular factual contexts whether shifting programming from a regulated tier to an a la carte offering constituted an evasion. Therefore, Adelphia must have been aware that its restructuring would be subject to this type of evasion analysis. Fourth, the burden imposed on Adelphia by the Adelphia LOI Order is reasonable, and is justified by the consumers' interest in receiving cable service at reasonable rates as mandated by Congress. Finally, the statutory interest in applying the Bureau's decision outweighs any interests in a contrary outcome especially in the absence of any reasonable reliance interest by Adelphia. If the Bureau had determined that Adelphia's CableValue package was not subject to rate regulation as of September 1, 1993, Adelphia would have succeeded in avoiding the application of Congress' cable rate regulation mandate, and consumers would be greatly disserved. 18. The Bureau correctly determined that Adelphia's restructuring did not produce a permissible collective offering of a la carte channels under the rules applicable at the time of the restructuring because it failed to provide a realistic service offering. The realistic service offering requirement implements congressional policy favoring unbundling. We noted in the Rate Order that, in encouraging unbundling, "Congress excluded per-channel or per- program service offerings [from rate regulation] on the basis of a determination that greater unbundling of offerings leads to more subscriber choice and greater competition among program services." In determining that we would also exclude permissible collective offerings of such per-channel or per-program services, we stated that these a la carte offerings would be exempt from regulation only if certain conditions are met; for example, the per- channel offering must provide consumers with a realistic service choice. The Commission adopted the realistic service choice standard to ensure that a la carte packages that purported to maximize consumer choice actually offered subscribers a real choice between the package and per-channel programming. To the extent that the individual channels contained in a package are not a realistic service option for consumers, the a la carte offering is not a bona fide unbundling that increases subscriber choice. The Bureau noted that more than 99% of Adelphia's subscribers chose to purchase the a la carte package. Based on revised data submitted by Adelphia in its Reply, it is now apparent that fewer than 20 of Adelphia's 51,000 subscribers -- less than .04% -- purchased individual channels from within the CableValue package. We agree with the Bureau that the fact that such a low number of subscribers took advantage of the per channel offerings is evidence that the offerings did not constitute a realistic service choice. 19. The additional factors which Adelphia claims should have been considered by the Bureau -- the fact that subscribers were notified of the package and individual offerings and that Adelphia did not discourage subscription to individual channel offerings through its upgrade/downgrade charge -- are helpful, but were clearly lacking in significance to subscribers in light of the small number of subscribers who actually chose individual channels in lieu of the a la carte package. Moreover, despite Adelphia's claims to the contrary, the size of the discount offered by Adelphia to subscribers to the a la carte package appears to have been adequate to influence subscriber choice. We thus affirm the Bureau's determination that Adelphia's restructuring did not produce a permissible collective offering of a la carte channels. 20. Adelphia argues that the Bureau acted arbitrarily in concluding that even though the Commission's a la carte rules may have lacked clarity, the rules were not unclear as applied to the fact pattern at issue in this case. The Bureau found that Adelphia had attempted to escape rate regulation by removing 64% of its channels from rate regulation, eliminating an entire regulated tier, and calling what otherwise would be a rate-regulated tier an a la carte package. As indicated in the portion of the Commission's Rate Order dealing with a la carte offerings, [W]e do not think a cable operator can escape rate regulation simply by announcing that tiered services are available a la carte or by offering the services at a per channel rate that ensures that few subscribers will avail themselves of this option. Under the requirements of the evasion prohibition of Section 623(h), we retain the discretion to review such situations on a case-by- case basis. 21. The Bureau cited the Second Reconsideration Order and the Going Forward Order as evidence that Adelphia's restructuring would remain impermissible under the Commission's rules adopted subsequent to the restructuring. The Bureau noted that even if it had applied the 15 factors contained in the Second Reconsideration Order (for determining the validity of an a la carte package), it would still have concluded that Adelphia's offering did not constitute a realistic service offering, because an entire regulated tier was eliminated and turned into an a la carte package. The Bureau also noted that the Going Forward Order determined that a la carte packages are CPS tiers within the meaning of the 1992 Cable Act. Adelphia argues that application of these factors constitutes retroactive rulemaking, since the Second Reconsideration Order and the Going Forward Order were released after Adelphia's restructuring was complete. It is clear, however, that the Bureau did not rely on these orders, but only on the Rate Order, which was released several months before Adelphia's restructuring, in reaching its conclusions in the Adelphia LOI Order. An agency, having adopted rules through the formal rulemaking process, has the authority to refine and develop those rules through case-by-case adjudication. Moreover, to the extent that the Adelphia LOI Order is viewed as a new application of the realistic service choice rule, the Bureau's decision is consistent with the Retail, Wholesale decision, for the reasons set out in para. 17. We therefore affirm the Bureau's finding that Adelphia's restructuring violated our rules, and emphasize that it is not necessary to rely upon, and we do not rely upon, the Second Reconsideration Order or the Going Forward Order to reach this conclusion. 22. Similarly, we reject Adelphia's assertion that the Bureau arbitrarily "singled out" Adelphia's a la carte package for "punitive treatment." See Application at 13. Adelphia was simply the first of ten cable operators that were the subject of Letters of Inquiry and that were found to have evaded the Commission's rate regulations and required to treat their a la carte packages as rate regulated cable programming service tiers as of September 1, 1993. At the time Adelphia filed its Application for Review, the Bureau had not yet released its other nine decisions finding that cable operators had evaded our rate regulations and requiring them to treat their a la carte packages as rate-regulated cable programming services tiers. These orders followed in quick succession, however, over the succeeding months. 23. Adelphia argues that its ability to restructure its services is protected by the Communications Act. Specifically, Adelphia alleges that under Section 625(d) of the Communications Act, 47 U.S.C.  545(d), the "removal of channels from one level of service to another is not properly subject to characterization as an evasion. " In a 1991 Commission order cited by Adelphia to support this assertion, we stated that the Cable Communications Policy Act of 1984 prevented any action by the Commission which interfered with retiering implemented by a cable operator prior to rate regulation. However, the 1992 Cable Act authorized the Commission to adopt standards and guidelines to prevent evasions, "including evasions that result from retiering." As we noted above, the legislative history of the 1992 Cable Act indicates that the Commission has the authority to 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. We believe the Bureau properly determined the regulatory status of Adelphia's CableValue offering in accordance with Commission rules and policies on a la carte packages adopted pursuant to the 1992 Cable Act. Therefore, the Bureau appropriately ordered Adelphia to treat its a la carte package as a rate-regulated cable programming services tier as of September 1, 1993. 24. Adelphia asserts that, in the alternative, all or a part of its CableValue package should be treated as an NPT. We affirm the Bureau's determination that, in light of our statements and conclusions in the Going Forward Order with respect to a la carte packages, Adelphia's a la carte package cannot be afforded treatment as an NPT. As we said in the Going Forward Order: "In [some] cases [where it was not clear whether packages were permissible under the rules in existence at the time], we think it is fair, in light of the uncertainty created by our test, to allow cable operators to treat existing packages as NPTs even though it would not qualify under the rules we establish today, provided that such packages involve only a small number of migrated channels." In the Adelphia case, however, there was no such uncertainty. Furthermore, Section 76.986 of our rules provides for treatment as a new product tier if the collective offering was created between April 1, 1993, and September 30, 1994, and [t]he operator had reasonable grounds to believe the collective offering involving only a small number of migrated channels complied with the Commission's requirements as of the date it was first offered. In this case, Adelphia's CableValue package was made up of 32 channels; this is clearly not the type of small package we contemplated allowing to be treated as a new product tier under the Going Forward Order. Further, we do not think that Adelphia could reasonably have believed its collective offering was offered in compliance with the Commission's requirements for a la carte packages. As the Bureau found in the Adelphia LOI Order, the Commission's a la carte rules and policy in effect at the time of Adelphia's restructuring were not unclear as applied to facts of this case, therefore Adelphia could not have reasonably believed its a la carte package complied with Commission requirements. As a result, the package fails to satisfy the criteria for NPT treatment for the preceding independent reasons. 25. In view of the foregoing considerations, we affirm the Cable Service Bureau's determinations in the Adelphia LOI Order and we find that reconsideration of the Cable Services Bureau's Adelphia LOI Order is not justified. We therefore deny Adelphia's Application for Review. VI. Ordering Clauses 26. Accordingly, IT IS ORDERED that Adelphia's Application for Review IS DENIED. 27. IT IS FURTHER ORDERED that the staff of the Cable Services Bureau shall send copies of this decision to the authorized representatives of the parties by certified mail, return receipt requested. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary