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 how2ftp. File how2ftp (.txt & .wp) is in directory /pub/Bureaus/Miscellaneous/Public_Notices/ ***************************************************************** ******** FOR RECORD ONLY $//Letter, Comcast Cable, DA 96-212//$ $/Request for Clarification/$ $/76.981 negative option billing/$ FEDERAL COMMUNICATIONS COMMISSION WASHINGTON, D.C. 20554 IN REPLY REFER TO: February 21, 1996 DA 96-212 Released: February 21, 1996 Comcast Cable Communications, Inc. c/o Thomas R. Nathan, Esq. Vice President/General Counsel 1500 Market Street Philadelphia, PA 19102-2148 Dear Mr. Nathan: We have received your letter of November 2, 1995 in which Comcast Cable Communications, Inc. ("Comcast") requests confirmation: 1) that certain rate and service restructurings implemented by its subsidiaries on or about September 1, 1993 do not violate the Commission's prohibition against negative option billing, and 2) that, to the extent state and local laws would have required the subsidiaries to seek affirmative consent from subscribers to accomplish these restructurings, state and local laws are inconsistent with federal regulation and are, therefore, preempted. The subsidiaries involved in this matter are Comcast Cablevision of Philadelphia, L.P. and Comcast Cablevision Corporation (collectively "the subsidiaries") serving subscribers in Philadelphia, Pennsylvania and certain municipalities in Montgomery County, Pennsylvania. Comcast states that it has sent copies of its letter to opposing counsel in certain litigation involving its restructurings. The Commission has not received a reply to Comcast's letter. According to Comcast, the subsidiaries implemented certain rate and service restructurings on or about September 1, 1993, the effective date of cable rate regulation rules adopted by the Commission pursuant to the Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act"). These restructurings included the creation of a programming service package consisting of channels offered on an individual, or a la carte, basis (referred to as "Value Pak"), the separation of an optional home wiring maintenance service charge (the "Cableguard" service) from the program service charge, a separately stated charge for on optional printed monthly program guide (the "Guide" service), and a specific line item charge for receipt of premium programming on more than one outlet (the "Whole House Premium" charge). Comcast's submission indicates that, prior to September 1, 1993, the subsidiaries offered various multi-channel cable programming packages. On or about September 1, 1993, Comcast removed four channels (TBS, Atlanta; WWOR, New York; TNT, and The Family Channel) from their multi-channel packages and began offering those channels on an individual, or a la carte, basis and in a package known as "Value Pak." As part of the restructuring, the subsidiaries converted customers previously receiving these services as part of a tier to the Value Pak service. In addition to creating Value Pak, beginning in September of 1993, the subsidiaries also established the "Cableguard" wire maintenance insurance program. Cableguard covers charges for in-home service calls to repair subscriber owned equipment and wiring. Rather than being automatically converted to an hourly service charge method of billing for each home maintenance or repair visit, it appears that subscribers were billed monthly for the Cableguard insurance plan which covers wire maintenance and repair costs. The Cableguard service is optional and the charge appears on subscriber bills as a separate line item. Prior to September of 1993, the subsidiaries did not offer Cableguard insurance but provided maintenance and repair service as part of the bundle of services received for the regular monthly programming service charge. Also, since September of 1993, Comcast Cablevision of Philadelphia, L.P. has been automatically billing its customers for a television program guide, called the "Guide." The Guide provides program listings and other information. The Guide charge is listed on customer bills as a separate line item monthly charge in the amount of $0.99. Prior to September of 1993, subscribers were not offered the choice of whether or not to purchase the Guide because the program magazine was offered only as part of the operator's multi-channel packages. Customers who purchased these multi-channel packages before September of 1993 received the Guide and were not charged a separate fee. Finally, another charge that appeared on customer bills beginning in September of 1993 is the "Whole House Premium" charge. This charge is imposed on customers who receive premium channels on more than one television per household. Specifically, the charge appears on the bills of customers who, prior to September of 1993, were receiving premium channel programming on more than one television and who continued to receive such programming during and after September of 1993, as well as on the bills of customers who first ordered premium channel programming on additional outlets during and after September of 1993. The Whole House Premium charge replaced an "Additional Outlets" fee, charged prior to September of 1993, that was imposed on all subscribers who received any type of cable programming on more than one television per household. Comcast explains that the subsidiaries are defendants in a class action lawsuit now pending in Pennsylvania state court, Laarkamp, et al. v. Comcast Corporation, Common Pleas Ct., Philadelphia Co. (1994), in which plaintiffs allege that the restructurings described above violate state consumer protection laws. Specifically, plaintiffs in the Laarkamp suit contend that billing subscribers for Value Pak, Cableguard, the Guide, and Whole House Premium violates the Pennsylvania Unfair Trade Practices and Consumer Protection Law, 73 P.S.  201-2(4) and 201-3, the Unsolicited Merchandise Act, 73 P.S.  2001, as well as Section 623(f) of the Communications Act, 47 U.S.C.  543(f), and Section 76.981 of the Commission's rules, 47 C.F.R.  76.981. Comcast contends that it correctly interpreted federal rules and policies concerning negative option billing. Comcast relies on the Commission's Letter of Inquiry Orders (Comcast Cablevision, Tallahassee, Florida, LOI-93-2, 10 FCC Rcd 2106 (1995) and Paragon Cable, Irving, Texas, LOI-93-25, 10 FCC Rcd 6012 (1995)) to support its claim that the restructurings implemented by the subsidiaries do not violate the prohibition against negative option billing and comply with Commission regulations regarding the unbundling of offerings and charges. Comcast argues that as a consequence of the changes described above, which were implemented coincident with and as part of the process of complying with the Commission's rate regulations, subscribers continued to receive on September 1, 1993 the same services and equipment that they had ordered and received prior to restructuring. Comcast seeks confirmation that the subsidiaries' unbundling of Value Pak, Cableguard, premium service charges, and guide charges beginning in September of 1993, with respect to customers who had affirmatively ordered these services prior to that date, was proper. Comcast seeks further confirmation that state and local laws, including any notification requirements which arguably might have prevented such actions, are preempted. Section 623(f) of the Communications Act, 47 U.S.C.  543(f), 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. 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"), 8 FCC Rcd 5631 (1993), the Commission explained that the prohibition against negative option billing applies to "additions of a new tier of service or a new single channel service without the affirmative assent of a subscriber." Id. at  440. 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. See id. Further, it stated that restructuring of tiers and equipment will not bring the prohibition into play if 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. Id. at  440-441 & n.1105. The Commission's rule on negative option billing is set forth in Section 76.981, 47 C.F.R.  76.981. In a Memorandum Opinion and Order released in Warner Cable Communications, Milwaukee, Wisconsin, LOI-93-14, 10 FCC Rcd 2103 (1995) ("Warner-Milwaukee"), we determined that the negative option billing prohibition was not violated in the context of a channel restructuring that appears similar to the one at issue here. In Warner-Milwaukee, the cable operator moved two channels from the basic tier and two channels from a cable programming service tier to create a four channel a la carte package on September 1, 1993, the effective date of our rate regulations. The operator also automatically subscribed its customers to individual a la carte channels and the a la carte package of four channels so that they received the same channels they had subscribed to prior to the restructuring. We found that, under the circumstances of that case, no negative option billing had occurred. The Court of Appeals for the Seventh Circuit also examined Time Warner's billing practices and restructuring in Milwaukee and determined that the operator's actions were permitted by the federal regulation on negative option billing. See Time Warner Cable v. Doyle, 66 F.3d 867 (7th Cir., 1995), petition. for cert. filed, No. 95-1001, 64 U.S.L.W. 3439 (Dec. 22, 1995). In addition, the Commission determined that certain channel restructurings implemented by Comcast Cablevision and C-TEC Cable Systems on or about September 1, 1993 did not violate the federal prohibition against negative option billing. See Comcast Cablevision, Tallahassee, Florida, LOI-93-2, 10 FCC Rcd 2106 (1995) and In the Matter of Letters of Inquiry on Negative Option Billing, LOI-93-1, et al., 10 FCC Rcd 2139 (1995). Central to our finding that there was no violation in these cases was the fact that the customers who were automatically subscribed to the a la carte packages as part of restructuring had ordered and received the channels contained in those packages prior to restructuring. In addition to the negative option billing prohibition, Commission rules adopted pursuant to the 1992 Cable Act required other changes in the way that cable operators charge subscribers for services, including the requirement that cable operators unbundle or separate equipment and installation rates from programming rates. Rate Order at  287. The 1992 Cable Act sets out certain standards for determining the reasonableness of equipment and installation rates and other criteria for evaluating basic service tier rates. Id. In order to apply the different standards for evaluating equipment and programming rates and to provide subscribers with additional service options, the Commission required that the rates for each must be unbundled from each other. Id. Section 76.923(b), 47 C.F.R.  76.923(b), states that "[a] cable operator shall establish rates for remote control units, converter boxes, other customer equipment, installation, and additional connections separate from rates for basic tier service. In addition, the rates for such equipment and installations shall be unbundled one from the other." Section 76.923, 47 C.F.R.  76.923, also describes the type of equipment which is subject to the unbundling requirement. The type of equipment operators are required to unbundle consists of "all equipment in a subscriber's home that is used to receive the basic service tier." Section 76.923, 47 C.F.R.  76.923, states that such equipment includes converter boxes, remote control units, connections for additional television receivers, and other cable home wiring. The Commission's unbundling requirements have been the basis for its previous resolution of a negative option billing issue in the context of a wire maintenance service plan. In Comcast Cablevision, Tallahassee, Florida, LOI-93-2, 10 FCC Rcd 2106 (1995), the Commission determined that the operator did not violate the prohibition against negative option billing when it began charging subscribers separately for a wire maintenance service plan. In Comcast Cablevision, Tallahassee, Florida, the cable operator claimed that prior to September 1, 1993 it included wire maintenance service in the charges for the basic service tier. The operator indicated that after September 1, 1993, it restructured and billed separately for this service plan. The Commission held that the operator's separate itemization of this charge on subscriber bills was "simply compliance with Commission rules requiring unbundling" and did not constitute negative option billing. The Commission pointed out that subscribers continued to receive the same level of service before and after the operator had unbundled its equipment rates. Our decision in Comcast Cablevision, Tallahassee, Florida is equally relevant to the instant case assuming that the facts surrounding subscription to the wire maintenance insurance plans in both cases are similar. Comcast's letter also presents a negative option billing issue in the context of program guide charges. The Commission addressed the negative option billing questions raised by the assessment of guide charges in Paragon Cable, Irving, Texas, LOI-93-25, 10 FCC Rcd 6012 (1995). In that case, the cable operator eliminated a senior citizen discount package which included, among other things, receipt of a programming guide and began charging senior citizens a separate fee each month for the guide. The Commission determined that the itemization of a separate programming guide charge on the monthly bills of subscribers who had previously received the guide as part of the discount package did not violate federal negative option billing requirements. The Commission concluded that "[a]lthough a program guide is not an item subject to the equipment or installation rate regulation, its unbundling from the regulated tier charge appears indistinguishable from such charges for purposes of our negative option billing analysis." That conclusion appears to be applicable here. Removing the Guide from the package of programming services offered and making it available on a separate unbundled basis is entirely consistent with our unbundling requirements. In its letter, Comcast asserts that allegations of negative option billing have also been made with respect to the Whole House Premium charge. This charge appears on the bills of subscribers who receive premium channels on more than one television per household. Prior to September of 1993, subscribers who ordered and received any type of programming on more than one outlet, including premium programming, were charged an Additional Outlets fee. After September of 1993, such charges were eliminated except with respect to subscribers who received premium service on more than one outlet. Thus, as part of restructuring, the subsidiaries eliminated the Additional Outlets charge with respect to subscribers who received non-premium programming on more than one television. As to these customers, therefore, there can be no claim of negative option billing. At the same time, the subsidiaries continued to charge a fee to subscribers who ordered and received premium service on more than one outlet. These premium service subscribers ordered and paid for the same services after restructuring that they had ordered and paid for prior to restructuring. It does not appear that after September of 1993 subscribers of premium programming on more than one outlet were subscribed to a service or charged a fee additional to that which they had requested or paid for prior to September of 1993. We note, too, that cable operators are permitted to charge subscribers for the receipt of premium service on more than one outlet. See Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation, MM Docket 92-266, First Order on Reconsideration, Second Report and Order, and Third Notice of Proposed Rulemaking, 9 FCC Rcd 1164 (1993), 1194 n.87. Therefore, the imposition of a Whole House Premium charge by the subsidiaries does not appear to violate the federal prohibition against negative option billing given the facts presented by Comcast in its submission. Comcast urges the Commission to find that the enforcement of Pennsylvania state consumer protection law against the subsidiaries under the facts of this case is preempted by federal cable rate regulation. The Commission has made it clear that state and local laws relating to negative option billing are not preempted or displaced by the provisions of the 1992 Cable Act on a general basis. Sixth Order on Reconsideration, Fifth Report and Order, and Seventh Notice of Proposed Rulemaking ("Going Forward Order"), Docket Nos. 92-266 and 93-215, 10 FCC Rcd 1226 at  111 (1994); Section 632(c)(1) of the Communications Act. However, where there is a conflict between the rate regulation rules implementing the 1992 Cable Act and such state or local regulations, system operators are entitled to rely on the federal rules which must prevail over conflicting state or local requirements. Going Forward Order at  112-119 (1994). See also Warner Cable Communications, Milwaukee, Wisconsin, LOI-93-14, 10 FCC Rcd 2103 (1995); Time Warner Cable v. Doyle, 66 F.3d 867 (7th Cir. Sept. 25, 1995), petition. for cert. filed, No. 95-1001, 64 U.S.L.W. 3439 (Dec. 22, 1995); Letter to Charles S. Walsh (DA 95-1527, released July 7, 1995; Letter to Frances J. Chetwynd (DA 95-2203, released October 20, 1995); and Letter to Stuart F. Feldstein (DA 96-66, released January 24, 1996). In Comcast Cablevision, Tallahassee, Florida, LOI- 93-2, supra, at  12, it was concluded that the restructuring undertaken by Comcast was of the type previously referenced by the Commission 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." (citing Going Forward Order at  119). In Warner- Milwaukee we noted that the Commission had 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. Warner-Milwaukee at 12 (citing Going Forward Order at  119). Therefore, state negative option billing rules would be preempted in such cases. The federal appellate court in the Seventh Circuit affirmed this understanding in Time Warner Cable v. Doyle. That conclusion, we believe, is equally applicable here. The subsidiaries implemented a channel restructuring similar to the restructurings at issue in the cases referenced above where it was determined that no negative option billing violation had occurred and that state law was preempted by federal cable rate regulation. The objective of cable rate regulation is to ensure that cable rates are reasonable. Federal rules established pursuant to the 1992 Cable Act seek to achieve reasonable programming tier rates and cost based equipment, outlet, and installation charges, in part, by requiring operators to unbundle the rates previously charged for cable services offered on a package basis. The unbundling and rate restructuring that took place in this instance was undertaken by Comcast in an effort to bring its service offerings into compliance with the structure of the federal rate rules. We believe that the act of unbundling to comply with the federal cable rate regulatory scheme cannot be a basis for a state or local consumer protection law claim. Finally, we note that the expeditious introduction of federal rate regulation and the consequent rate and service changes implemented by cable operators did not allow for the more normal interaction with subscribers that might ordinarily take place when marketing, billing, and service offerings are revised. On July 27, 1993, the Commission, pursuant to Congressional directives, issued an Order that moved the effective date of cable service rate regulation from October 1, 1993 to September 1, 1993. To support the transition to this new effective date, the Commission's July 27 Order also preempted state or local notice requirements and waived the Commission's own notice requirements contained in 47 C.F.R. Sections 76.932, 76.964, and 76.309(c)(3)(i)(B) until September 1, 1993 to permit cable operators to restructure rates and services up until September 1, 1993 without prior notice to subscribers. The July 27 Order is reflective of a unique episode in the implementation phase of the rate regulation provisions of the 1992 Cable Act. Congress was concerned that system operators had been and were continuing to charge rates that were not subject to appropriate regulatory controls and found it imperative that such controls be introduced without delay. As reflected in the July 27 Order, administrative resource issues first delayed and then accelerated the effective date of the rules. Changes in billing practices associated with the introduction of regulation and in particular with the restructuring and unbundling of service offerings, imposed heavy compliance burdens. To facilitate this unique implementation phase of the regulatory process, the July 27 Order of necessity suspended certain notice and billing practice requirements that would otherwise have been associated with these changes. State or local requirements in conflict were necessarily preempted to make compliance with the introduction of both federal and local rate regulation possible. We recognize that the efforts described by Comcast were associated with the effective date of the new rules. Sincerely, Meredith J. Jones Chief, Cable Services Bureau cc: Joseph C. Kohn and Morris M. Shuster (attorneys for plaintiffs in Laarkamp, et al. v. Comcast Corporation)