QUESTIONS AND ANSWERS ON CABLE TELEVISION RATE REGULATION May 6, 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 and equipment offerings. This is the second set of questions and answers on the revised rules; the first set was released on April 26, 1994. Refund Liability Q1: May a cable operator qualify for the deferral of refund liability even if it is required to add a channel to comply with must-carry obligations between March 30, 1994 and the date it restructures its rates to comply with the Commission's revised rate regulations? If so, does the same answer apply if the cable operator must drop another channel in order to add the must-carry channel? A1: The carriage of must-carry channels is required by law. Accordingly, the addition of a new must-carry channel to the basic service tier during the deferral period, without any increase in rates or retiering, does not constitute a service or rate restructuring for purposes of terminating the refund deferral period. This is true even if the cable system must drop another channel to make room for the additional must-carry channel. Q2: The Commission's rules provide that an FCC Form 393 that would be due on or after May 15, 1994 may be filed on June 15, 1994 along with FCC Form 1200. If a cable operator elects to utilize the refund liability deferral period, whereby the operator may file its Form 1200 up to 30 days after it restructures to comply with the revised rules, may the cable operator also file FCC Form 393 at that time? A2: No. The Commission has provided that FCC Form 393 must be filed by June 15, 1994 in these circumstances. The extension of the June 15, 1994 deadline for filing Form 1200 for systems using the refund deferral does not further extend the deadline for filing Form 393. Q3: If a cable operator elects to utilize the refund deferral mechanism, must it notify subscribers and the local franchise authority? A3: The Commission's rules do not require cable operators to provide notice to subscribers that they will utilize the refund deferral period; however, regulated operators must notify their franchising authorities by June 15, 1994 that they will be deferring refund liability. See Second Order on Reconsideration at n.190. Operators must also provide notice to subscribers and local authorities at least 30 days before a rate or service change is to take effect. For a cable operator utilizing the refund deferral period, this notice must be provided no later than June 14, 1994, which is 30 days before the July 14, 1994 deadline for completing restructuring. Q4: One of the conditions for exercising refund deferral is completing restructuring (including issuing the first bills reflecting that restructuring) by July 14, 1994. If a local franchise authority does not permit billing in advance of service being rendered, can a cable operator still take advantage of the full refund deferral period? A4: Yes. The Commission intended that all cable operators be able to elect the full refund deferral period. Accordingly, cable operators, who otherwise meet the conditions for refund deferral but whose local franchising authorities prohibit advance billing, may restructure rates to comply with the Commission's revised rate regulations as late as July 14, 1994, as long as they provide 30 days' advance notice. These operators need not begin sending out bills reflecting the restructuring by July 14, 1994 to meet the condition of having completed restructuring by that date, but must begin billing the restructured rates at the earliest time permitted by local authorities. Q5. What deadlines do cable operators using cycle billing face if they wish to utilize the refund deferral period? A5. A cable operator that wants to take advantage of the refund deferral period must provide notice to subscribers and local authorities at least 30 days before a rate or service change is to take effect. As explained in answer seven below, a cable operator using cycle billing meets this requirement so long as each subscriber has at least 30 days between the bill notifying him or her that a rate change will be implemented and the next bill implementing the rate change. Accordingly, for a cable operator utilizing the refund deferral period and cycle billing, the first customers must be provided notice no later than June 14, 1994, which is 30 days before the July 14, 1994 deadline for completing restructuring. The operators may then send those customers their first bills reflecting the restructured rates 30 days after notifying them of the rate change and no later than July 14, 1994. All other customers in the billing cycle must be sent notice of restructuring by July 13, with all customers being sent bills reflecting restructured rates by August 12. This complies with the rules' requirements that (1) each customer must receive at least 30 days' notice of any rate change and (2) that to take advantage of the refund deferral, a cable operator must complete restructuring by July 14, 1994 by sending out the first bills reflecting its adjusted rates by that date and completing its billing cycle within 30 days of July 14. Billing Practices/Notice Issues Q6: If a cable operator restructures its rates on July 14, 1994 and July 14 falls in the middle of a period billed for, must the cable operator adjust the bill to charge different rates for the period before and after July 14? A6: No. In those circumstances, each bill may charge a single rate, so long as the period billed for does not exceed one month. A cable operator restructuring on July 14, may charge the pre-restructuring rates on bills sent out before July 14, but it must charge the restructured rate on all bills sent from that date. Q7: Where a cable system uses cycle billing, must every subscriber receive notice at least 30 days in advance of a rate change? A7: Yes. The Commission's Rate Order recognized that a 30-day notice period can be compatible with a staggered billing cycle so long as each subscriber has at least 30 days between the bill notifying him or her that a rate change will be implemented and the next bill implementing the rate change. Q8: Under the Commission's rules, may a cable operator use a billing insert or a mailing separate from a bill to give the required notice of the amount of a rate change and the cause of the change? A8: The Commission's rules provide (1) that cable systems shall give thirty days written notice to both subscribers and franchising authorities before implementing any rate or service change and (2) that such notice shall state the precise amount of the rate change and briefly explain in readily understandable fashion the cause of the rate change. The Second Order on Reconsideration further provides that cable systems will have to include this information on subscriber bills. To provide operators sufficient flexibility, systems may provide such written notice by means of a billing insert. Moreover, while notices mailed separately from bills generally do not meet the Commission's notice requirements with respect to rate changes, where the timing of cycle billing and the Commission's deadlines for compliance with its revised rules make inclusion of the required notice of rate restructuring on the bills infeasible, cable operators may provide such notice in a mailing separate from its bills, so long as the notice is also included in the next bill. External Costs and/or Changes in the Number of Channels Q9: If a cable operator substitutes one programming service for another, but does not change the number of channels offered and does not retier, does this merely constitute a change in external costs, not requiring a separate adjustment for a change in the number of channels on a regulated tier? A9: Yes. The cable operator may add to its external costs the costs of the new programming plus the permitted 7.5% markup for new programming. The cable operator must also reduce its external costs by the amount the deleted programming had cost plus 7.5%. This must be done in the calendar quarter immediately following the quarter in which the change was made. Since the number of channels offered remains constant, it is not necessary to perform the additional calculations required when there is a change in the number of channels offered. Q10: Are FCC regulatory fees ("user fees") charged to cable operators entitled to external cost recovery? A10: No, not currently. The Commission, however, will be considering whether to amend its rules to allow external treatment of user fees. Q11: How must a cable operator present external cost rate adjustments on the customer's bill? A11: The Commission's rules require that notice of a rate change shall state the precise amount of the rate change and briefly explain in readily understandable fashion the cause of the rate change. To meet the requirement of explaining the cause of a rate change in a readily understandable fashion, cable operators should explain external cost adjustments on a category-by-category basis (i.e., state and local taxes, franchise fees, costs of complying with franchise requirements, and programming costs). Q12: May cable operators recover one-time costs (e.g., PEG support payments) in their quarterly external costs filings? A12: Yes. Cable operators may recover one-time costs in their operators' quarterly external costs filings, which reflect the aggregate change in external costs. The amount recovered for such one-time costs may not exceed the amount of external costs incurred. In addition, where large capital expenditures are involved, regulators may require such external costs to be amortized over an extended period, not to exceed the useful life of the capital item involved, in order to avoid rate shock to subscribers. Copyright Q13: When a cable system owned by an MSO is completing Form 1200, how does it allocate copyright costs? A13: The cable operator must treat the copyright costs as other programming costs that, to the extent they are not directly incurred at the franchise level, must be allocated to the franchise level on a per subscriber basis and then to the tier on which the programming is provided. Equipment and Installation and Form 1205 Q14: Do operators have to unbundle equipment if they are not rate regulated? A14: No. A cable operator whose rates are unregulated is not required to unbundle its equipment and installation charges from its programming charges. If, however, such an operator does not unbundle (or otherwise restructure its rates to comply with the FCC's rate rules) and later becomes subject to regulation, it may face refund liability. Q15: In completing Forms 1205 and 393, can a cable operator elect a rate of return on equipment and installation less than 11.25%? A15: The Commission's rules require that cable operators fully unbundle equipment and installation rates from programming rates. Using a return of less than 11.25% in completing Forms 1205 and 393 would improperly leave some equipment and installation costs bundled in the programming charge. Therefore, in completing Forms 1205 and 393, operators must include an 11.25% return on equipment and installation charges before unbundling equipment and installation charges. An operator may choose to charge equipment and installation rates that reflect less than a 11.25% rate of return, but may not make up for a lower rate of return by charging higher rates for cable programming. Q16: What is meant by "net assets" in completing Schedule A, Line G4(b) of Form 1205? A16: For purposes of completing Schedule A, Line G4(b) of Form 1205, "net assets" means total investment in property, plant and equipment, minus accumulated depreciation on these items, and total intangibles minus accumulated amortization. Net assets do not include current assets. Small Systems Q17: Last year, the Commission stayed the imposition of rate regulation on small systems, defined as systems serving 1,000 or fewer subscribers. That stay will be lifted on May 15, 1994. If a system that was a small system when the stay began grew beyond 1,000 subscribers prior to May 15, 1994, is the system subject to refund liability under the Commission's rate regulations in effect prior to May 15, 1994? A17: No. The Commission's stay of rate regulation for small systems did not discuss whether a system that qualified for the stay when rate regulation began on September 1, 1993, but grew to have more than 1,000 subscribers during the period the stay was in effect, would cease to be governed by the stay. Because of this, refund liability for a system that was a small system on September 1, 1993 will not begin to accrue until the later of May 15, 1994, the day on which the stay is lifted, or July 14, 1994 if the system elects to utilize the refund deferral period. Franchising Authority Discretion Q18: What standard of review will the Commission apply to local franchising authorities' interpretations of the Commission's rules? A18: As stated in the Rate Order and the Third Order on Reconsideration, the Commission generally will sustain the decisions of franchising authorities as long as there is a reasonable basis for those decisions. Congress generally allocated to franchising authorities the responsibility for reviewing basic service rates. While the Commission has set out the general rules for rate regulation, it has not attempted to address, nor could it address, every detail of the rate regulation process. Accordingly, a deferential standard of review is appropriate in reviewing franchising authority decisions. One exception to the general rule of deference relates to Commission review of local franchising authorities' decisions as to whether an "a la carte" package is subject to rate regulation as a cable programming services tier. In this situation, the Commission will defer to the local authority's findings of fact if there is a reasonable basis for those findings. The Commission, however, will apply its own analysis of FCC rules and precedent to those facts to determine the appropriate regulatory status of the tier in question. Q19: May a franchising authority and a cable operator mutually agree to extend the deadlines within which cable operators are required to file rate justifications? A19: No. At this time, the Commission's rules do not provide for such an agreement extending the Commission's regulatory deadlines. The rules can only be changed in a rulemaking proceeding, either in response to a petition for reconsideration or otherwise. Accordingly, a local franchising authority and a cable operator may not agree to waive a procedural deadline contained in the Commission's rules. A franchising authority and a cable operator that mutually agree that an extension of time would be desirable may petition for a waiver of the Commission's rules establishing deadlines for filing rate justifications. We would expect to grant such waivers routinely where a reasonable extension is sought. Late Fees Q20: Who has jurisdiction over late fees on consumer bills? A20: Ordinarily, the States and/or local franchising authorities regulate issues relating to late fees. The Commission's Customer Service and Consumer Protection Order declined to adopt regulations in this area. Rather, it provided that late fees were appropriately dealt with through local negotiation or the application of local or state consumer protection and customer service laws. The Commission, however, can consider whether late fees are being used to evade the Commission's rate regulation rules. This may occur, for example, where a cable operator utilizes billing practices that result in all or most of its customers being assessed a late fee, thereby giving the operator a higher effective rate than that permitted under the Commission's rules. Cost-of-Service Q21: May a cable operator that previously elected to use the benchmark mechanism elect to use the cost-of-service mechanism effective May 15, 1994? A21: Yes. Cable systems that previously elected the benchmark approach to rate-setting under the initial rules may justify their rates under the new rules using either the revised benchmark approach or a cost-of-service showing. Likewise, cable systems that previously elected the cost-of-service approach to rate-setting under the initial rules may justify their rates under the new rules using either the revised benchmark approach or a cost-of-service showing. However, consistent with our rules requiring systems to use a uniform approach to rate-setting among regulated tiers, the system must apply the same rate-setting methodology to justify rates for both the basic and cable programming services tiers. Q22: The rules provide that where a cable operator has submitted a Form 393 to a franchising authority and the franchising authority has not yet ruled on those rates, the cable operator must update its filing with a Form 1200. If, however, the cable operator filed a cost-of-service showing rather than a Form 393, is there a requirement for the cable operator to re-file the cost-of-service showing consistent with the Commission's new cost-of-service allocations? A22: Yes. Operators with pending cost-of-service showings generally must file a new showing on FCC Form 1220 or 1225 by July 14, 1994. The filings must be prepared consistent with the Commission's new rules and will be used to review rates from May 15, 1994 forward. They will not be used to evaluate the lawfulness of rates prior to May 15, 1994. Alternatively, operators with pending cost-of-service cases may choose to justify rates after May 15, 1994 under the benchmark approach. In that event, operators will file FCC Form 1200 to justify those rates. Q23: How soon after a cable operator justifies its rates under the benchmark approach may it file a cost-of-service showing? A23: Operators may choose to justify rates for the first time under a cost-of-service approach at any time they are permitted to adjust rates. Thus, an operator could file a cost showing to justify rates at the same time it would be permitted to file FCC Form 1200 or 1210. However, once a cost showing is made, the company is not permitted to file another cost-of-service showing for a period of two years after the effective date of the cost-based rates. "A La Carte" Packages Q24: May a local franchising authority in reviewing a pending FCC Form 393 rate justification on or after May 15, 1994 determine whether an "a la carte" package should be treated as a regulated cable services programming tier? A24: Yes. The revised rules giving the local franchising authority the ability to determine whether the channels in an "a la carte" package should be treated as regulated channels become effective May 15, 1994. Since this change is a procedural rule, it may be applied to cases pending on or after that date. However, local franchising authorities may exercise this authority only for the purposes of determining how many regulated channels a cable system is offering and the system's total regulated revenue. The decisions of local franchising authorities in this regard may be appealed to the Commission as provided in the Commission's rules.