QUESTIONS AND ANSWERS ON CABLE TELEVISION RATE REGULATION April 26, 1994 The Cable Services Bureau has received questions from cable operators and other interested parties concerning the Commission's revised rules governing cable rate regulation. The following questions and answers provide guidance on a variety of issues of general interest regarding the revised rules, as well as the Commission's new forms for calculating maximum permitted rates for regulated service offerings. Refund Liability Q1. What happens if a cable operator who has elected to take advantage of the refund liability deferral period changes regulated rates or restructures regulated service or equipment offerings prior to July 14, 1994? A1. Refund deferral ends whenever rates are changed or services are restructured. An operator who changes rates or restructures before July 14, 1994 may utilize the refund deferral until the date it changes rates or restructures, so long as it otherwise meets the conditions for the deferral of refund liability specified in the Second Order on Reconsideration. For example, if an operator restructures rates or services on July 1, 1994, and complies with the conditions for deferral of refund liability, it will have no refund liability under the revised rules for the period between May 15 and July 1. Refund liability under the revised rules would apply from July 1 forward if a rate put into effect on July 1 proved to be higher than the lawful rate allowed under the revised rules. Refund liability under the old rate rules that became effective on September 1, 1993 would apply until July 1, if the rates charged until that date exceeded the amount that was lawful under those rules. Q2: Do rate restructurings ordered by local authorities preclude a cable operator from electing the deferral of refund liability allowed under the Commission's new rules? A2: No. A cable operator who is ordered by a franchising authority to revise its rates pursuant to the franchising authority's review of the operator's Form 393 must implement rate changes in accordance with the franchising authority's order. If an operator makes only the rate changes required by the franchising authority and otherwise meets the requisite conditions for deferral of refund liability, the operator can still defer refund liability until July 14, 1994. Q3. May a cable operator qualify for the deferral of refund liability even if -- pursuant to plans in existence on March 30, 1994 -- it adds a channel to a regulated tier between March 30, 1994 and the date it restructures its rates to comply with the revised rate regulations? A3. Yes, in some circumstances. For example, the Cable Services Bureau has determined that, absent other factors, the addition or substitution of a new program channel to a regulated tier during the deferral period, without any increase in rates, where the change was planned prior to the release of the Commission's revised rules on March 30, 1994, does not constitute a service or rate restructuring for purposes of terminating the refund deferral period. The Bureau, however, has not reached the issue of whether restructuring occurs when a less expensive channel is substituted for a more expensive channel. See Cable Letters dated April 14, 1994 and April 19, 1994 adopted by Alexandra M. Wilson, Acting Chief, Cable Services Bureau, FCC Daily Digest, Vol. 13, Nos. 74, 75 (April 20 and 22, 1994). These letters are available from the Cable Services Bureau Reference Center, 2033 M Street, NW, Room 207, Washington, D.C. 20554 (202-416-0919). Q4. What is a cable operator's refund liability if a franchising authority is unable to issue a decision on initial rates within the extended 120-day review period for benchmark showings, or the extended 180-day review period for cost-of- service showings? A4. If a franchising authority needs more than 30 days to complete its review of a cable operator's rate filing, it may toll the effective date of the filing for 90 additional days in the case of a benchmark filing or 150 additional days in the case of a cost-of-service filing. If the franchising authority is unable to complete its review within the extended 120- or 180-day period, the new rates go into effect at the end of that period, subject to refund liability if they are later found to be unreasonable. Refunds will be allowed after the termination of the 120- or 180-day period, however, only if the franchising authority issues an accounting order before the end of that period directing the operator to keep accurate account of all amounts paid and on whose behalf such accounts are paid. Refund liability in these circumstances will accrue for a maximum of one year. It will be calculated from the date of the accounting order forward to the point a prospective rate reduction is ordered. To the extent that the time period covered is less than one year, refund liability will also be calculated backward from the date of the accounting order to September 1, 1993 (the effective date of the Commission's rate regulations) or to the point where the total refund period would equal one year, whichever is less. Small Systems Q5: Will a small cable system that was previously subject to the Commission's stay of rate regulation incur refund liability during the refund deferral period if it does not restructure its rates or service offerings during that period? A5: No. A small system previously subject to the Commission's stay of regulation will not incur refund liability until it restructures its rates to comply with the Commission's revised rate regulations if it otherwise qualifies for the refund deferral. This restructuring must occur no later than July 14, 1994. Refund liability will not be imposed under the Commission's old rate regulation rules, because those rules were stayed with respect to small systems. Q6: Are small cable systems that were subject to the stay of rate regulation required to unbundle their equipment and installation charges as of May 15, 1994? A6: Not necessarily. Small systems that are eligible for, and elect, streamlined rate relief are not required to unbundle their equipment and installation charges. In addition, small systems that are not eligible for or do not elect streamlined rate relief, but that meet the conditions for deferral of refund liability, need not unbundle their equipment and installation charges until they restructure their rates on or before July 14, 1994. Transition Relief Q7. May a cable operator qualify for transition relief based on the rate it should have been charging on March 31, 1994 rather than the rate it was actually charging on that date? A7. No. Our revised regulations provide that transition relief is based on rates in effect on March 31, 1994. While the regulations provide that a system's transition rates must later be adjusted to reflect any determination by a local franchising authority or the Commission that the rate in effect on March 31, 1994 was higher (or lower) than that permitted under the Commission's rules, that provision applies only to systems that qualified for transition relief based on their actual March 31, 1994 rates. Systems whose March 31, 1994 rates did not qualify them for transition relief may not subsequently claim transition relief based on the fact that their March 31, 1994 rates were unlawfully high. Obligations for Filing Rate Information Q8. If a complaint about cable programming service rates is pending before the Commission, is a cable operator required to notify the Commission before setting those rates under the revised rules? Are there other circumstances under which a cable operator must notify the Commission or obtain its approval before setting or changing its rates? A8. If a complaint about a cable system's cable programming service rates is pending before the Commission on May 15, 1994, the cable operator must file Forms 1200, 1205 and 1215 with the Commission by June 15, 1994 (unless it qualifies for deferral of refund liability, in which case it must file the forms within 30 days of its restructuring). If a cable operator seeks to change rates at a time when a cable programming services complaint is pending, it must file a rate justification on an appropriate FCC Form (usually Form 1210, Form 1211, or Form 1220) with the Commission at least thirty days before the change is to take effect. The cable operator need not, however, obtain the Commission's approval before changing rates when a complaint is pending. Rather, the operator must simply file the appropriate form. The instructions to FCC Form 1210 erroneously indicated that prior approval was required; that will be corrected in a forthcoming revision to the instructions. A cable operator must also file a rate justification on the appropriate form with the Commission at least thirty days before a cable programming service rate change is to take effect whenever the Commission has ordered a rate reduction for a cable programming service tier within the past year, unless the order requiring the rate reduction specified otherwise. In these circumstances, the Commission's prior approval is required before the rate change may take effect. An order clarifying this point will be released shortly. Finally, when the Commission is regulating a cable operator's basic service tier rates, the cable operator is required to file Form 1200 and/or Form 1210 with the Commission pursuant to the Commission's rules for the regulation of basic tier service. Filing Deadlines Q9: Cable operators who have filed benchmark showings with the Commission on non-FCC forms must refile on actual Form 393 or a copy of the actual form within 14 days of May 15, 1994, the effective date of the Third Order on Reconsideration. May 30, 1994 is Memorial Day. Can these cable operators refile as late as the next day, May 31, 1994? A9: Yes. Under the Commission's rules, if a Commission filing date falls on a holiday, the document shall be filed on the next business day, which in this case would be May 31, 1994. Q10: What is the deadline by which a cable system must make its annual inflation adjustment? A10: Under the Commission's rules, the adjustment through June 30th of each year may be made after September 30th of that year, but no later than August 31 of the next calendar year. The Second Order on Reconsideration erroneously indicated a deadline of December 31 of the same year. It will be corrected to reflect the August 31st date specified in the rules. Q11: What is the deadline by which cable systems subject to regulation on May 15, 1994 must file FCC Form 1200 with respect to basic cable service tier rates? A11: Cable operators subject to regulation of their basic rates must file FCC Form 1200 by June 15, 1994 (unless they qualify for deferral of refund liability, in which case they must file Form 1200 within 30 days of restructuring). Systems becoming subject to regulation after May 15, 1994 must file FCC Form 1200 within 30 days of being notified that they are subject to regulation. Census Data Q12: How should an MSO that serves dozens or hundreds of franchise areas determine the census income figure for Line C5 of Form 1200? Should the MSO fax Form 1201 to the Commission for each franchise area in order to obtain this information? A12: FCC Form 1201, "Facsimile Request for Information Necessary to Complete FCC Form 1200," was created in order to help provide information necessary to complete Form 1200, such as the census income figure, to cable operators who otherwise would have difficulty obtaining this information. The use of Form 1201 is optional; it is not mandatory. Cable operators who are sufficiently large, and who serve a high number of franchise areas, may find it more convenient to obtain this information directly from the 1990 Census of Population and Housing: Summary Social, Economic, and Housing Characteristics, 1990 CPH5 or 1990 U.S. Census Summary Tape File 3-C, which provides information that may be used for purposes of determining the census income data figure for Form 1200. (See Instructions for Module C to FCC Form 1200). Information on how to obtain these materials is available by calling the U.S. Bureau of the Census at (301) 763-7662. Franchise Fees Q13. What is the proper itemization of franchise fees on consumer bills? A13. The 1992 Cable Act allows cable operators to identify as a separate line item on their bills the amount of the total bill assessed as a franchise fee and the identity of the franchising authority to which the fee is paid. The Commission has determined that the separate billing of such fees would burden consumers unnecessarily by requiring them to remit separate payments. Even listing such charges "below the line" would tend to confuse customers as to what is part of their bill. Thus, any bill may require only one payment for the operator's services, the total for which must include any franchising fees itemized. The Commission otherwise has declined to dictate how a cable operator, choosing to itemize, may format its bill. Local franchising authorities may adopt regulations consistent with the Commission's regulations on this matter. Q14. Must a franchising authority refund franchising fees previously paid to it when a cable operator subsequently is ordered to make a rate refund? A14. Yes, in some cases. To the extent that a franchise fee is calculated as a percentage of a cable operator's gross revenues, and those revenues are reduced as a result of refunds ordered by a regulatory authority, the franchising authority must promptly return to the cable operator the amount that was overpaid given the operator's newly reduced gross revenues. Bulk Discounts Q15: How are existing contracts with multiple dwelling units ("MDUs") for bulk discounts treated under the Commission's revised rules? If an operator wants to negotiate new contracts for bulk discounts, how would these pre-existing contracts affect such negotiations? A15: Under the Commission's geographically uniform rate structure requirement, adopted in the April, 1993 Rate Order, a cable operator is generally required to have a uniform rate structure within each franchise area the operator serves. Nonpredatory bulk discounts to MDUs are permitted if offered on a uniform basis. The Commission's Third Order on Reconsideration permits contracts between cable operators and MDUs entered into on or before April 1, 1993, in which the contract rate is lower than the permitted regulated rate, to remain in effect until their previously agreed-upon expiration date. This grandfathering provision does not mean that the negotiated rate for new contracts between cable operators and MDUs must be at the same levels as those grandfathered contracts. Rather, the grandfathered rates are an exception to the geographically uniform rate structure requirement, and are time-limited. A cable operator may negotiate new rates with MDUs, irrespective of those grandfathered rates in place, as long as the new rates are uniform among MDUs of similar size and for contracts of similar duration. Evasions of Commission's Rules Q16: What action may franchising authorities take against cable operators engaging in practices that constitute evasions of the cable rules? A16: Franchising authorities that have power under state or local law to impose forfeitures or fines, or take other actions, against cable operators who violate the franchising authorities' rules, orders, or decisions may do so. Neither the Cable Act nor the Commission's rules prevent such action. Where a cable operator's evasive actions violate the Commission's rules, however, it is the Commission that determines appropriate enforcement action. Under these circumstances, a franchising authority should report to the Commission any apparent violation of the Commission's rules, and the Commission will determine whether in fact a violation has occurred and if so, what enforcement action should be pursued. "A La Carte" Determinations Q17: Who decides whether packages of "a la carte" channels should be treated as regulated service tiers, the Commission or local authorities? A17: Under the Commission's revised rate regulations, the Commission and local authorities have concurrent authority in this area. Beginning May 15, 1994, local authorities may, at their option, make initial determinations as to whether a collective offering of "a la carte" channels should be considered a regulated tier. (This is the case even though the collective offering would be a cable programming service tier if it were regulated). Local authorities must make this initial determination within the 30-day period for reviewing basic cable rates and equipment costs (or within the first 60 days of an extended 120-day period where the franchising authority has requested an additional 90 days). The authority must also provide public notice of its decision. Operators or consumers may then make an interlocutory appeal of this initial decision to the Commission within 14 days of the initial decision. Alternatively, beginning May 15, 1994, a local franchising authority may make any necessary "a la carte" determination as part of its final decision setting rates for the basic service tier. That decision may be appealed to the Commission under rules concerning appeals of local franchising authorities' decisions to the Commission. Or, local franchising authorities may seek a declaratory order from the Commission whether an "a la carte" package should be treated as a regulated tier. Finally, the Commission decides whether "a la carte" offerings should be regulated as cable programming service tiers in response to complaints filed with the Commission. FCC Form 1200 Q18: After Module A, Form 1200 asks "Was your basic tier subject to regulation?" When should the answer be yes? A18: The answer is yes when the local franchising authority has notified the cable operator that the authority has been certified to regulate the operator's basic service tier, or when the Commission has notified the cable operator that it is assuming jurisdiction over regulation of the basic service tier. Q19: The instructions for Module B state "You are entitled to pass through to your subscribers any changes in these external costs (with the exception of franchise fees) that you incurred since the earlier of the initial date you became subject to regulation or February 28, 1994." What is the initial date of regulation? A19: For basic service tier regulation, the initial date of regulation is the date on which the local franchising authority notifies a cable operator that the operator's system is subject to regulation. For cable programming services regulation, the initial date of regulation is the date that a complaint is filed against the cable operator with the Commission. The starting date for adjustments on account of external costs for a tier of regulated programming service is the earlier of the initial date of regulation for any basic or cable service tier, or February 28, 1994. * * * * * * FURTHER INFORMATION REGARDING THE COMMISSION'S RATE REGULATION FORMS Availability of Certain Forms The Cable Services Bureau plans to release shortly Form 1211 (Form to Adjust Rates of Small Systems Electing Administrative Relief), which will be available in both hard copy and on computer diskette. FCC Forms 1220 and 1225 (Cost-of-Service) will also be made available on diskette. In addition, the Bureau is developing a spreadsheet version of Form 393. The Bureau also is evaluating whether it can permit the use of widely-used commercial versions of Form 393 that are identical to the official version. In addition, the Cable Services Bureau will release shortly revised versions of Forms 1200 and 1210 in hard copy and on diskette. The revised forms will incorporate, among other things, the following corrections: FCC Form 1200 -- Module B will be modified to permit adjustments for eligible external costs relating to the cable programming service tiers if such costs are not already reflected in rates. This will address the "lockout" of those costs in Module B. -- The caption for Module E on the form at page 5 should state: "To Be Completed if B19>C10." -- The title of Module H on the instructions and on the form should state: "Adjustments for Channel Changes from September 30, 1992 to the Earlier of the Date of Initial Regulation or February 28, 1994." -- Module I line 1 requires the entry of the gross full reduction rate. The instructions and the form incorrectly refer to line H8. The revised instructions and the form will state: "Enter your gross full reduction rate (line H9)." FCC Form 1210 -- The instructions for FCC Form 1210 (at page 2, last bullet, first sentence) state: "Except when a complaint is pending with the Commission, you do not need prior FCC approval to adjust your cable programming services rates." The revised instructions will state: "If the Commission found your cable programming service rates to be unreasonable less than one year ago and you now wish to increase your rates, you must submit FCC Form 1210 to the Commission for its approval before raising your rates. In addition, if a complaint is pending before the Commission, and you raise your cable programming service rates while a complaint about those rates is pending, you must submit FCC Form 1210, for notice purposes only."