Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) Social Contract for ) Time Warner ) MEMORANDUM OPINION AND ORDER Adopted: November 24, 1998 Released: December 9, 1998 By the Commission: Commissioner Furchtgott-Roth dissenting from Part III and issuing a statement; Commissioner Powell concurring and issuing a statement; Commissioner Tristani concurring in Parts II and IV and, abstaining from Parts I and III. 1. Before the Commission is a Petition for Reconsideration of the Commission's Order ("Social Contract Order") covering the Social Contract ("Social Contract") between the Commission and Time Warner filed on behalf of the Township of Middletown, Pennsylvania ("the Township"). In its Petition, the Township asks that the Commission rule favorably on its complaint about cable service rates that was filed before the Social Contract was entered into and include the Township in the list of communities receiving refunds. This Order denies the Petition for Reconsideration. In addition, on our own motion, we clarify certain matters in the Social Contract Order. I. BACKGROUND 2. The Social Contract was designed to provide upgrade incentives for Time Warner and rate stability and increased quality of service for Time Warner's subscribers. Under the terms of the Social Contract, Time Warner is investing over $4 billion over five years to upgrade all of its systems. To fund this investment, Time Warner may increase the monthly rate by $1 for the most highly penetrated cable programming service tier ("CPST") on each of its systems during each year of the Social Contract, which runs from 1995 until 2000. 3. In addition, the Social Contract resolved over 900 rate complaints and provided for refunds to certain subscribers of approximately $4.7 million plus interest in the aggregate. Systems for which refunds or rate reductions were ordered are listed in Appendix A to the Social Contract. For the remaining systems against which complaints had been filed, the rates current as of the Social Contract's Publication Date, August 3, 1995, were found to be reasonable. 4. Time Warner has reported that by the end of 1996, the first full year of the Social Contract, it had refunded approximately $4.7 million plus interest and invested $1.4 billion in upgrading and rebuilding its systems in compliance with the Social Contract. By the end of 1997 its cumulative investment was $2.1 billion. Approximately 5.5 million customers are being served by upgraded plant in franchises where upgrades were totally or partially completed. Subscribers are benefitting from increased services and programming choice and enhanced system reliability and picture quality. II. PETITION FOR RECONSIDERATION 5. Lower Bucks Cablevision ("Lower Bucks"), Time Warner's division serving the Township, was one of the systems where no refunds were ordered. Before the Commission adopted the Social Contract, the Township had filed a rate complaint with the Commission, stating that Lower Bucks failed to decrease its CPST rate to the benchmark. The Township supplemented its complaint, arguing that Lower Bucks implicitly increased its rates by failing to reduce them when the Commission revised the benchmarks used in setting initial regulated rates. In the event its complaint was barred by the filing deadlines in section 76.953 of the Commission's rules, the Township asked for a waiver of that rule. The Township argued in comments on the proposed Social Contract that it was entitled to a ruling on the merits. 6. The Township now seeks reconsideration of the Social Contract insofar as it resolved that complaint. The Township asks that the Commission address its complaint and issue a refund order. As it did in the supplement to its complaint, the Township argues that Lower Bucks implicitly increased its CPST rate by failing to lower the rate after the Commission adopted revised ratemaking guidelines in May 1994. It again asks for a waiver of the filing deadlines in section 76.953(a), (b) of the Commission's rules. According to the Township, the Commission's failure to consider the complaint on its merits is a violation of the Township's right to fundamental fairness and due process and precludes meaningful judicial review. While Time Warner opposes the Petition for Reconsideration, arguing that the Township's underlying complaint came too late to be considered, it states that it would not object to a written decision addressing the issue. 7. The Communications Act of 1934, as amended ("Communications Act"), gives the Commission authority to regulate the CPST rates of cable systems that are not subject to effective competition. This authority is invoked if the Commission receives a valid and timely complaint. Former section 623(c)(3) of the Communications Act gave local franchising authorities and subscribers 180 days after the Commission's rate regulations became effective to complain about existing rates. Thereafter, complaints could be accepted only if filed "within a reasonable period of time following a change in rates . . . ." The Commission's rules became effective on September 1, 1993, and complaints about existing rates were due by February 28, 1994. The Commission's Rules provided that, thereafter, "a complaint alleging an unreasonable rate for cable programming service . . . may be filed against a cable operator only in the event of a rate change" and must be filed "within 45 days" after the complainant receives a bill reflecting the rate change. "Late-filed complaints will be dismissed with prejudice." 8. When the Commission's rate regulations became effective on September 1, 1993, cable operators were not required to revise their rates, although those that disregarded the criteria were subject to refund liability if a valid complaint was filed and the challenged rate was found to be too high under the Commission's rate regulations. When the Commission revised the criteria for determining maximum permitted rates in May 1994, only cable operators with valid complaints pending against them were required to comply with the revised criteria or justify higher rates with a cost-of-service showing in order to avoid refund liability. Other operators failing to comply with the revised regulations again did so at their own risk. If a complaint was filed against an operator and its rates were subsequently found to be "unreasonable," the Commission could order a refund of the excess amount charged subscribers, with interest, and a reduction of the rate to the maximum permitted rate. The cumulative refund and interest would be calculated from the date a valid complaint was filed with the Commission. 9. The Township filed its complaint on December 30, 1994 and supplemented it on February 23 and June 7, 1995. The Township and Time Warner agree that no complaint was filed against Lower Bucks' September 1, 1993 rate within the 180 day window established by the Act. The Township and Time Warner also agree that Lower Bucks did not change the rate before the Township complained to the Commission. The Township's argument in its Supplement to Complaint and its Petition for Reconsideration, that Lower Bucks' failure to reduce its rate after the Commission revised its ratemaking criteria in 1994 is a de facto or implicit rate increase, is contrary to section 623(c) of the Communications Act. A change in the Commission's ratemaking criteria for regulated systems does not effect a change in a system's rates or otherwise establish Commission jurisdiction over CPST rates which have not been the subject of a timely complaint. 10. The Township argues that the Commission can waive section 76.953 for good cause. While the Commission can waive its own rules, it can do so only if the rule contains provisions about which the Commission has discretion. The requirement that a complaint be filed by February 28, 1994 (180 days from the effective date of rate regulation) or after a rate change is based on limits to the Commission's jurisdiction in the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"). The Commission lacks authority to waive these statutory prerequisites. The only authority cited by the Township, Complaints Regarding Cable Programming Service Prices, Northern Dakota County Cable Communications Comm'n, MN, et al ("Complaints"), does not support its argument that the Commission can waive the 180 day limit to consider a complaint filed ten months beyond the limit or, alternatively, consider a complaint without any underlying rate change. In Complaints, the Cable Services Bureau ("Bureau") recognized an exception to the Commission requirement that complaints had to be received at the Commission by February 28, 1994, and stated that it would consider complaints postmarked on that date, because the Commission's rate complaint form was not clear about whether a complaint had to be postmarked or actually received in order to be timely. The Bureau also recognized an exception for those complainants who attempted to transmit their complaints by facsimile on February 28, 1994, but were unsuccessful because busy lines at the Commission blocked access throughout the day. Those documented efforts to make timely filings distinguish Complaints from the instant situation. 11. The Township's complaint did not meet the statutory requirements or the Commission's implementing regulatory requirements; nor did it fall within the limited exceptions set forth in Complaints for timely attempts to file within the first 180 days after rate regulation became effective. Our process was fair in affording an opportunity to bring a complaint and was reasonable in terms of the elements upon which a complaint could be based. The Township has submitted no information in its complaint, complaint supplements, comments, or petition for reconsideration that the Commission can consider to show that subscribers within the Township are entitled to refunds. The Social Contract will not be amended to include the Township in the list of municipalities where refunds are due. III. CLARIFICATION 12. In light of a pending petition for review in the United States Court of Appeals for the District of Columbia Circuit, we take this opportunity, on our own motion, to elaborate on certain points raised in petitioner's comments on the Social Contract. The Intercommunity Cable Regulatory Commission ("ICRC"), a regional council of governments comprised of 28 communities in the Cincinnati, Ohio area, viewed the proposed Social Contract as consideration for resolving rate complaints. It objected to being included without prior notice or opportunity to participate, arguing that rate complaints from its member communities were not then before the Commission. It also objected to the incentive surcharge and lifeline basic rates in the proposed Social Contract, was concerned that the Social Contract would preempt or be inferior to local franchise requirements regarding state of the art rebuilds and connections to schools, and argued that provisions of the proposed Social Contract were inconsistent with the Commission's social contract requirements. 13. We are clarifying that resolution of rate complaints in the Social Contract is within the authority delegated to the Commission by the Communications Act, and that proper procedures were followed in agreeing to the Social Contract; and that the upgrade incentive surcharge is fair to subscribers and not precluded by Commission rules or orders. A. Authority and Procedures in Negotiating the Social Contract 14. In the Social Contract Order, the Commission concluded that proper procedures were followed with respect to the Social Contract, including those provisions addressing the resolution of rate complaints. The Commission relied on the broad mandate of the 1992 Cable Act, which gives the Commission discretion to resolve rate complaints and directs the Commission to create "fair and expeditious procedures." The Commission also pointed to Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation, and Adoption of a Uniform Accounting System for Provision of Regulated Cable Services, MM Docket No. 93-215, Report and Order and Further Notice of Proposed Rulemaking ("Cost Order), which provided for social contracts as one method for setting cable rates, and explained that a social contract is also an available method for resolving rate complaints and providing refunds of excessive charges. 15. The Communications Act generally provides the Commission with wide discretion to resolve rate cases. Section 4(i) of the Communications Act authorizes the Commission to "perform any and all acts . . . not inconsistent with [the] Act, as may be necessary in the execution of its functions." Section 4(j) of the Communications Act provides that the "Commission may conduct its proceedings in such manner as will best conduce to the proper dispatch of business and the ends of justice. . . ." As the Commission has held in other orders, we believe that sections 4(i) and 4(j) of the Communications Act allow us to consider cable operators' proposals to resolve rate complaints. 16. In addition to the authority from sections 4(i) and 4(j) of the Communications Act, resolution of past overcharges under a social contract is consistent with the intent of the Cost Order. A significant purpose of the Cost Order is to promote the formation and implementation of innovative plans that encourage operators to upgrade their systems. Including a global rate resolution as part of a social contract is one such plan. Otherwise, a cable operator that was concerned about the uncertainty of pending rate controversies could have little or no incentive to enter into a social contract, and the upgrade incentive plans contemplated by the Cost Order would not be available to that operator, despite the benefits a contract could bring to the operator's customers. To exclude global rate settlements from a social contract on the ground that they are not specifically addressed in the Cost Order would preclude other beneficial provisions, such as the home wiring and free service to schools provisions offered by Time Warner, since they, too, are not listed in the Cost Order. Moreover, in Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation, MM Docket No. 93-215, Second Report and Order, First Order on Reconsideration, and Further Notice of Proposed Rulemaking ("Cost Order II"), adopting the social contract approach as part of the Commission's final rules, the Commission reaffirmed its intent to "remain flexible with respect to the scope and terms of such [social contract] arrangements." 17. The courts have long recognized that regulatory agencies have broad discretion to choose among ratemaking methods and procedures in ratemaking determinations. The Commission has found that one way to avoid the lengthy and costly process of adjudicating each rate complaint and litigating those rulings through the court system is to adopt a global rate settlement that ensures reasonable rates, provides prompt refunds to subscribers, and fulfills the Commission's statutory mandate that challenged CPST rates are not unreasonable. Since the Commission approved the Social Contract, Congress has passed the Telecommunications Act of 1996, which demonstrates a desire to streamline cable rate regulation. The Social Contract the Commission approved is consistent with that legislation, for it makes a far more expeditious means available for resolving complaints and affords protection to subscribers. To the extent the Commission has diverged from the Commission's rules in adopting the Social Contract, there was good cause to waive these rules pursuant to section 1.3 of the Commission's rules. The waiver achieves the objectives of the 1992 Act by ensuring the expeditious resolution of rate complaints while protecting consumers from unreasonable CPST rates. 18. As discussed in the Social Contract Order, the Commission conducted this proceeding in a manner consistent with Modification of Ex Parte Procedures in Certain Cable Rate Proceedings ("Cable Ex Parte Order"). Although some franchising authorities complained that they were not part of the discussions themselves, the scope of the Social Contract made participation in discussions by a large number of franchising authorities unrealistic. Comment was invited on the proposed Social Contract and the comment period was extended to accommodate several local franchising authorities. The Social Contract was modified to recognize concerns raised by local franchising authorities about the upgrade and its funding. Although local franchising authorities were not asked to present their written views to Time Warner for inclusion in Time Warner's initial proposal to the Commission, which was the procedure described in the Cost Order for social contracts involving individual franchise areas, local franchising authorities were afforded an adequate opportunity to present their views directly to the Commission before it acted on the Social Contract. Indeed, 220 local franchising authorities filed comments on the draft Social Contract, 167 expressing unqualified support and others expressing support while seeking clarification or adjustments. The difficulty of developing a uniform proposal through negotiations with a large number of local franchising authorities established good cause for waiving the Cost Order provision allowing local franchising authorities to comment to the operator on the Social Contract before its presentation to the Commission. 19. The Social Contract was careful to preserve the authority of local franchising authorities to regulate the basic service tier ("BST"), negotiate more extensive upgrading requirements with the operator, and negotiate more substantial commitments for wiring schools than those included in the Social Contract. The Intercommunity Cable Regulatory Commission objected specifically to the BST lifeline service authorized in the Social Contract, but each franchising authority had the option of opting out of that provision and as a result could not be prejudiced by it. The Intercommunity Cable Regulatory Commission was also concerned about language in the Social Contract preempting "any state or local law, regulation, ordinance or franchise that is inconsistent or conflicts with this [Social] Contract." Because of concerns raised by commenters, Time Warner agreed to a modification of the Social Contract limiting the preemption provision to regulating rates or ordering refunds in a manner inconsistent with the terms of the Social Contract. The Social Contract is not intended to preempt existing or future franchising agreements providing for a different or higher level of upgrades or benefits than required under the Social Contract. In addition, the Social Contract Order preempted on a one-time basis any nonfederal requirement that Time Warner give more than thirty-day notice of its intention to implement the rate and service restructuring allowed by the Social Contract, so that the restructuring could be implemented by January 1, 1996. Such preemption was limited to the period prior to February 1, 1996. The Commission did not preempt any other requirements. B. System Upgrades and Upgrade Incentive Surcharge 20. The Social Contract commits Time Warner to investing more than $4 billion for upgrading all of its cable systems over a five year period. It allows Time Warner to recover some of these upgrade costs by annually increasing its monthly rates by $1.00, the upgrade incentive surcharge. The Social Contract provides that: (1) at least 60 percent of the $4 billion investment would be applied for the benefit of BST and CPST services that are subject to traditional rate regulation; (2) the full amount of capital costs recovered in rate increases on regulated CPST service will be applied for the benefit of BST and CPST subscribers during the period of the Social Contract; and (3) Time Warner will not pass through any capital costs for the upgrade other than the surcharge, unless a local franchising authority requires more than the Social Contract requires. 21. The Social Contract's upgrade provisions represent a valuable benefit to subscribers in terms of technology, improved reliability and picture quality, and increased programming choices, including the possibility of new tiers and new types of services. For all systems, upgrading will increase system quality and make new services possible. We emphasize, however, that the upgrade incentive surcharge is intended to recover only the costs allocable to BST and CPST subscribers. 22. The Social Contract specifies minimum technical standards in the context of minimum bandwidth capacity for Time Warner systems. "[E]ach [Time Warner] cable system with a present capacity of at least 550 MHz will have a bandwidth capacity of at least 750 MHz within five years after the Effective Date; all other [Time Warner] cable systems will have a bandwidth capacity of at least 550 MHz within five years after the Effective Date. At least 50% of all [Time Warner] subscribers will be served by a system with a capacity of at least 750 MHz, of which at least 200 MHz is expected to be allocated to digital distribution." For systems upgraded to at least 750 MHz, fiber-to-the-node architecture must be deployed to improve signal quality and reliability. Adding fiber and the associated connections will generally allow increased system addressability and interactive capability, which will give operators the flexibility to offer a variety of viewing packages from which subscribers can choose, tailoring their viewing packages according to their individual needs and potentially reducing the rates they pay. 23. The technology prescription is general enough to provide Time Warner with the flexibility to employ state of the art technology throughout the building process required by the Social Contract. It also allows local franchising authorities and Time Warner to negotiate reasonable technical requirements, meeting both the local community's and Time Warner's needs. 24. Although the Commission emphasized in the Social Contract Order that the upgrade incentive surcharge is being paid for modernized facilities rather than new services, the Social Contract also requires that at least 60 per cent of new analog services added to Time Warner systems under the Social Contract go to rate regulated BST and CPST, rather than services such as premium services and new product tiers. At least 15 additional CPST channels must be provided on average to the upgraded systems. 25. In exchange for the upgrade incentive surcharge, Time Warner agreed not to file cost-of- service showings for any of this upgrade or take the price increases allowed by the Commission's "going forward" rules for additional CPST channels. Not only does this agreement reduce regulatory burdens on the Commission as well as the operator, but it also provides a commitment that brings a tangible benefit to subscribers. The Commission concluded that the $1.00 increase is reasonable and justified by the magnitude of Time Warner's upgrade commitment. The Commission considered the impact of the incentive surcharge on subscribers and, as shown in Tables A and B below, determined that Time Warner's rates under the Social Contract will be within the parameters of the rates it would be authorized to implement under a typical cost-of- service analysis. Furthermore, by agreeing to forego cost-of-service showings, Time Warner bears all of the risk of cost overruns for the upgrades required by the Social Contract. Table A shows rate increases based upon the current upgrade plan. Table B shows rate increases that would accrue if Time Warner were required to justify increases under cost-of-service and Form 1240 filings based on actual cost forecasts. The projected cost-of-service surcharges are based on composite plant upgrade costs and attendant operating expenses provided by Time Warner for regulated cable services. No non-cable costs or costs attributable to unregulated cable services are included in the projections. The Form 1240 adjustments are based on Time Warner's projected inflation and external cost estimates. For comparison purposes, the Table B rates have been annualized. Table A: Time Warner Rates Under Social Contract 1996 1997 1998 1999 2000 Initial Regulated Rate(a) 21.00 22.63 24.28 25.95 27.64 Inflation(b) 00.63 00.65 00.67 00.69 00.71 Surcharge Pursuant to Contract(c) 01.00 01.00 01.00 01.00 01.00 Year End Regulated Rates(d) 22.63 24.28 25.95 27.64 29.35 Percentage Increase 7.76% 7.29% 6.88% 6.51% 6.19% (a) The Initial Regulated Rate for 1996 represents the average rate for BST and CPST service company- wide. This rate was provided by Time Warner. (b) Assumes a 3% annual inflation rate applied to the Initial Regulated Rates each year. Inflation is not applied to annual surcharges. (c) Represents the incremental change in the surcharge each year to a cap at $5.00 in 2000. (d) Represents the year-to-year percentage increase in the Year End Regulated Rates. Table B: Rates Based on Typical Cost-of-Service Justification 1996 1997 1998 1999 2000 Initial Regulated Rate(a) 21.00 22.81 24.83 26.80 28.74 Inflation(b) 00.63 00.65 00.67 00.69 00.71 Surcharge Pursuant to COS/Form 1240(c) 01.18 01.37 01.30 01.25 01.19 Year End Regulated Rates(d) 22.81 24.83 26.80 28.74 30.64 Percentage Increase 8.62% 8.86% 7.93% 7.24% 6.61% (a) The Initial Regulated Rate for 1996 represents the average rate for BST and CPST service company- wide. This rate was provided by Time Warner. (b) Assumes a 3% annual inflation rate applied to the Initial Regulated Rates each year. Inflation is not applied to annual surcharges, consistent with the Table A assumption, although some surcharge-related costs would entitle Time Warner to inflation adjustments if claimed on Form 1240. (c) Represents the incremental change in the surcharge justifiable under a cost-of-service or Form 1240 for each year through 2000. As a conservative assumption, upgrade costs are spread ratably over five years. (d) Represents the year-to-year percentage increase in the Year End Regulated Rates. 26. Several considerations may materially affect these projections, and most favor subscribers. For instance, if Time Warner's capital investment were to occur more quickly than assumed, subscribers could be subject to extreme price increases under cost-of-service justifications. The phased surcharge price increases minimize price volatility. Subscribers are not subject to inflation on surcharged amounts, but would be subject to inflation on some external cost increases claimed on Form 1240 filings. Under both surcharge and actual pricing, only 60% of upgrade costs are passed on to regulated subscribers. Both pricing schemes assume an 11.25% return on net investment, a 50% debt/ 50% equity capital structure, and income tax allowances based on a 35% Federal and 5% State tax rate. Overall, excluding the inflation avoidance benefit provided by the surcharge, cost-of-service and Form 1240 justifications would result in rates $1.35, or 4.4%, costlier to subscribers than the surcharge over the period 1996-2000. 27. The Social Contract includes provisions to protect subscribers' interests in the upgrade. As noted in the Social Contract Order, it requires annual reporting of the progress during the previous calendar year and projections for the next year, with reports going to both the Commission and the local franchising authorities. If Time Warner does not meet its commitment in any franchise area by the end of the Social Contract, Time Warner must return the upgrade incentive surcharge collected from that franchise area, plus interest and liquidated damages. The Commission can audit Time Warner's books and records to evaluate compliance. If there is any problem, the Commission can exercise the rights and remedies attendant on a violation of any Commission order. These provisions ensure that subscribers will receive the promised value from the upgrade surcharge. 28. The Intercommunity Cable Regulatory Commission saw no reason for the upgrade surcharge, because it had previously negotiated an upgrade commitment without a surcharge when renewing Time Warner's franchises. The ICRC does not say, however, that the upgrade commitment it negotiated with Time Warner included any commitment from Time Warner to forego recovering the costs of the upgrade consistent with the Commission's cost-of-service rule or modified cost-of-service rule for network upgrades. The ICRC also criticized the surcharge as inconsistent with the 1992 Cable Act and the Cost Order's intent that rates for current services should be kept at the benchmark/price cap rate and continue to purchase comparable services after a social contract. We disagree. 29. An important goal of the 1992 Cable Act was to afford cable operators an opportunity to expand capacity and the programming available to subscribers. The Cost Order proposed incentives for operators to pursue this goal. The Cost Order envisioned that an operator, after completing an upgrade, would seek changes in its rates, most likely through a flexible rate structure for the new regulated services resulting from the upgrade. The Commission was concerned, however, that a flexible pricing approach for new services could provide an incentive for operators to seek to recoup investment through these new services to the detriment of current regulated services. The Cost Order proposed to temper this incentive by limiting an operator's flexibility to alter current service if it priced new services flexibly. 30. The Social Contract upheld the premise reflected in the Cost Order that upgrades financed by subscribers protect and enhance current regulated services. It also set forth a reasonable plan for recovering the costs of the upgrade. Through the social contract process, Time Warner sought advance approval of its upgrade plans, committed to add an average of 15 channels to its current CPST, accepted a specific surcharge in lieu of either rate increases to which it would otherwise be entitled or flexible pricing for all of the new channels added, subjected itself to oversight for the period of the Social Contract, and agreed to penalties if the upgrades were not completed by the end of the Social Contract. We do not read the Cost Order as precluding Commission consideration of a proposal like the one in this Social Contract that achieves the Commission's objectives. 31. Although Time Warner could have recovered its costs consistent with Commission parameters through individual cost-of-service showings, the Social Contract was a viable and administratively efficient proposal that would enhance the quality and capacity of cable systems, increase current regulated services, and protect subscribers from unreasonable rates and "rate shock" from a one-time rate increase reflecting all of the upgrade costs to which Time Warner would be entitled at the completion of the upgrade. Moreover, the Social Contract provides a base to attract investment, a factor that brings enhanced services to all subscribers, including those already benefitting from upgrades. That it helps make Time Warner more competitive is also a benefit. Competition brings more services, higher quality, and lower prices. These results are all goals of the 1992 Cable Act and our Cost Order. We find that the balance struck in approving the Social Contract, of allowing a surcharge adjustment in exchange for specific commitments by Time Warner to upgrade its system, comports fully with the statutory structure and intent in the Communications Act. IV. ORDERING CLAUSES 32. ACCORDINGLY, IT IS ORDERED that, pursuant to 47 C.F.R.  1.106(a)(1), (k), the Petition for Reconsideration of Social Contract for Time Warner, FCC 95-478, 11 FCC Rcd 2788 (1995), filed January 11, 1996 on behalf of Township of Middletown, Pennsylvania IS DENIED. 33. IT IS FURTHER ORDERED That, pursuant to 47 C.F.R.  1.106(a)(1), (k), the Petition for Reconsideration of Social Contract for Time Warner Cable, DA 95-2491, 11 FCC Rcd 3099 (Cab. Serv. Bur. 1995) filed January 11, 1996, on behalf of Middletown Township, Pennsylvania IS DISMISSED as moot. FEDERAL COMMUNICATIONS COMMISSION Magalie Roman Salas Secretary Statement of Commissioner Harold W. Furchtgott-Roth, Dissenting In Part In the Matter of Social Contract for Time Warner, FCC 98-316 Because I do not believe that the Commission has the statutory power to resolve cable rate complaints by entering into "social contracts," and because their use raises other legal problems, I dissent from today's ratification of the Time Warner contract and also from the Commission's sua sponte "clarification" of its legality. I. As I have previously explained, I do not think that the Commission possesses statutory authority to adopt global rate resolutions. See, e.g, TCI Communications, Inc., Final Resolution of Cable Programming Service Rate Complaints (released July 9, 1998); Cablevision Systems Corporation, Resolution of Cable Programming Service Rate Complaints (released Aug. 11, 1998). Among the other nettlesome issues raised by this process are questions of fundamental fairness and of the binding nature of the settlement on the complainants, as they themselves were neither party nor otherwise privy to the negotiations that resulted in the agreement. See id. Moreover, in this case, there are new twists. To name a significant one, the subscribers who are paying out additional rates for service in order to cover the costs of upgrades are required to do so in advance of the receipt of any direct benefits from those upgrades. In theory, a subscriber could begin paying the additional rates in the first year of the contract, but not see any upgrades in place until the last year. This violates the basic regulatory principle that the Commission has established in other proceedings, namely, that rates should not include plant investments until that part of the plant becomes "used and useful." See Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation and Adoption of a Uniform Accounting System for Provision of Regulated Cable Service, FCC 94-39 (released March 30, 1994), at paras. 38-40 (adopting "used and useful" standard and explaining that it "ensures that subscribers pay for only those portions of plant that are used and useful in the provision of regulated cable services"), para. 288 (applying standard to network upgrades and concluding that "the upgrade rate increase should not be assessed on customers until the upgrade is complete ). Moreover, the orders and rules adopted therein relied upon by the Commission for authority speak only of setting rates on a prospective basis, not settling disputes about past rates, see Cost Order, 9 FCC Rcd 4527 (1994); Cost Order II, 11 FCC Rcd 2220 (1996), as this agreement does. II. This "social contract" does far more than just globally settle rate complaints, however. The original Memorandum Opinion & Order, which the Commission today ratifies and indeed seeks to buttress as a litigation strategy, purports to regulate Time Warner in breathtakingly detailed and extensive ways. See generally 11 FCC Rcd 2788. Among other things, the "contract" requires that Time Warner: Invest $4 billion to rebuild and upgrade all of its domestic cable systems. In doing so, it must use fiber optic -- specifically, "fiber to the node architecture" -- technology. Id. at paras. 5, 25. Build systems with a minimum bandwidth capacity of 500 MHz and ensure that at least 50% of subscribers have access to 750 MHz systems. Id. at para. 25. Allocate a minimum of 60% of the investment for the benefit of basic and cable programming service tier subscribers. Id. at para. 5. Allocate a minimum of 60% of new analog capacity for "traditionally regulated" cable programming service tiers. Id. Provide, on average, at least 15 additional channels on cable programming service tiers. Id. Create lifeline basic tiers at "affordab[le]" rates. Id. at paras. 7, 52. For systems that serve 85% of total subscribers, reduce the price of basic service by 10% within 6 months of the effective date of the contract and include a revenue-neutral increase in premium services. Id. For all other systems, remove anything other than those stations required by law and move them to the premium level, with revenue-neutral decreases to the basic and increases to the premium services. Id. Provide free cable connections to all public schools in its franchise areas. Id. at paras. 8, 65. For existing public schools, wire additional classrooms at cost. Id. For public schools to be built and those undergoing renovation, wire each classroom free of charge. Id. Provide cable connections at cost to all secondary private schools that receive certain federal funds. Id. Wire additional classrooms in covered private schools at cost. Id. Provide free basic and enhanced programming services to all wired schools. Id. Provide a monthly educational program guide containing "curriculum support ideas" for teachers. Id. Provide a new on-line personal computer service to all wired schools. Id Provide free modems for use with the personal computer service to all wired schools. Id. Not restrict subscribers' ability to remove or maintain cable wiring in situations not covered by Commission home wiring rules. Id. at 76. To "educat[e]" consumers about their home-wiring options under the agreement. Id. "If to describe this case is not to decide it," then, in my view, the idea of federal administrative agencies with only those powers conferred by Congress "no longer has meaning." Morrison v. Olson, 487 U.S. 654, 703 (1988) (Scalia, J., dissenting). Nothing in the Communications Act authorizes the Commission to dictate the technical requirements of cable plants other than in rulemakings under section 624(e); allocate private investment capital as among service offerings; set channel capacity levels on cable systems; regulate rates to be anything other than "reasonable," i.e., "affordable"; mandate the provision of free cable goods and services, programming guides, and educational curricula; or extend home-wiring requirements for one particular regulatee, outside of a rulemaking under section 16(d) of the Cable Television Consumer Protection and Competition Act of 1992. In short, the original Order undertakes virtually everything but a reasoned determination of fair and reasonable rates during the relevant time period and in the relevant franchise areas, the one task that Congress explicitly assigned to the Commission. See 47 USC section 543(c) (Commission must "identify[], in individual cases, rates for cable programming services that are unreasonable"). Indeed, the item assiduously avoids (to an extent verging on the nonsensical) any such finding. See 11 FCC Rcd at para. 46 ("We find that the rates provided for in the Social Contract are reasonable. Although past rates are not found to be unreasonable, the Social Contract provides for refunds of amounts paid in excess of rates we find in this Order to be reasonable.") (emphasis added). The fact that Time Warner agreed to the imposition of these conditions does not create the Commission's requisite statutory authority to demand them. Only Congress can do that. And I am fairly certain, after reviewing the sections of the Act that actually deal with cable rate complaints, that this "social contract" -- with all the conditions it imposes that are wholly unrelated to just and reasonable rates, such as requirement that Time Warner provide school teachers with curriculum plans -- was never contemplated by Congress as an action that the Commission could take. In essence, what the Commission has done is to trade the bulk resolution of rate complaints for a number of conditions that it could not, for lack of statutory authority, otherwise require. Such an approach -- often characterized as "administrative arm-twisting" -- is legally troublesome. See generally Lars Noah, "Administrative Arm-Twisting in the Shadow of Congressional Delegations of Authority," 1997 Wis. L. Rev. 8873; Remarks by Commissioner Harold W. Furchtgott Roth Before the Media Institute, Nov. 17, 1998, at . The Commission should not use standard proceedings -- such as cable rate complaints or license transfer applications -- to create regulations in the form of conditions that it could not require outright. It is an evasion of statutory limits. And the Commission should not be able to place conditions on applications that have nothing to do with the specific underlying issues: here, for instance, what authority does the Federal Communications Commission have to involve itself, or cable companies, in teachers' class plans, much less in the context of adjudicating rate complaints? Even the most generous interpretation of the Communications Act could not yield a finding of such power. * * * For the foregoing reasons, I do not support this "social contract" and thus must dissent from Part III of this item. CONCURRING STATEMENT OF COMMISSIONER MICHAEL K. POWELL IN THE MATTER OF SOCIAL CONTRACT FOR TIME WARNER, FCC 98-316 I concur in this Memorandum Opinion and Order. I do so because the basic decision of the Commission to enter this "Social Contract" with Time Warner has been implemented. Although I wish to make clear that I have serious doubts about the wisdom of entering this deal in the first instance, I believe it is appropriate for the Commission to defend decisions once made. For this reason, I concur in the clarification included in this decision which is intended to aid in the court review.