QUESTIONS AND ANSWERS ON CABLE TELEVISION RATE REGULATION December 29, 1994 The Cable Services Bureau has received questions from cable operators and other interested parties concerning the Commission's revised "going forward" rules governing cable rate regulation. See Sixth Order on Reconsideration, Fifth Report and Order, and Seventh Notice of Proposed Rulemaking ("Going Forward Order") (FCC 94-286, adopted November 10, 1994 and released November 18, 1994). The following questions and answers provide guidance on a variety of issues that have been raised since the revised rules were issued. New Product Tier Q1. Is a premium channel offered on a system on September 30, 1994 considered a new channel for purposes of including the channel in a new product tier ("NPT")? A1. A premium channel offered on a system on September 30, 1994 may be offered on an NPT if that channel previously was offered only on a stand alone basis. Moreover, in some instances, such a premium channel may be offered on an NPT if it previously was offered as part of certain types of packages of services. The prohibition against migration to NPTs of channels offered on September 30, 1994 only applies to channels offered on a basic service tier ("BST") or cable programming service tier ("CPST"). See Going Forward Order at para. 32. Thus, a channel that was offered only on a per channel basis on September 30, 1994 may be placed on an NPT. The situation for a channel offered as part of an a la carte package is somewhat more complex. In the Going Forward Order, the Commission determined that (1) a la carte packages are CPSTs, (2) packages available on April 1, 1993 would remain grandfathered, and (3) a la carte packages created between April 1, 1993, and September 30, 1994 would be treated as NPTs, provided that such packages involve only a small number of migrated channels and the operator had reasonable grounds to believe that the collective offering complied with the Commission's requirements as of the date it was first offered. See Going Forward Order at paras. 46, 51. Accordingly, a channel offered as part of an a la carte package on September 30, 1994 may be considered an NPT on January 1, 1995 if that package was available on April 1, 1993 or that package involved only a small number of channels that previously had been migrated from a BST or a CPST and the operator had reasonable grounds to believe that the collective offering complied with the Commission's requirements as of the date it was first offered. Q2. Can operators using the benchmark rate methodology charge a monthly additional outlet charge for NPTs? A2. No. An additional outlet charge is not permitted except to the extent operators incur additional programming costs when providing service to additional outlets. In the Going Forward Order, the Commission determined that NPTs are CPSTs within the meaning of the Communications Act of 1934, as amended. See Going Forward Order at note 3*. The Commission previously determined that because the Communications Act required that equipment be priced on the basis of "actual cost," there is no basis in the statute to allow operators to charge for the value of additional connections above "actual cost." An exception exists for additional outlets used to provide per view or per channel services because those services are completely unregulated under the Communications Act. See First Order on Reconsideration, FCC 93-428 (adopted and released August 27, 1993) at para. 54 & n. 87. Because NPTs are CPSTs under the Communications Act, the actual cost standard applies and an additional outlet charge is not allowed when more than one outlet is used to receive an NPT except to the extent the operator incurs additional programming costs when providing service to additional outlets. Q3. Can a system consisting of a single tier as of September 30, 1994 offer an NPT? A3. Yes. The Commission determined that the price charged for NPTs would not be unreasonable so long as consumers retain the option to subscribe to CPSTs and/or the BST which are regulated under the benchmark mechanism or cost-of-service standards. Operators offering NPTs are prohibited, however, from making fundamental changes to what they offered on their BSTs and any CPSTs on September 30, 1994. See Going Forward Order at paras. 25-26. Q4. The Going Forward Order states that a la carte packages created between April 1, 1993, and September 30, 1994 may be treated as NPTs even though they would not qualify under the NPT rules, provided that (1) such packages involve only a small number of migrated channels and (2) the operator had reasonable grounds to believe that the collective offering complied with the Commission's requirements as of the date it was first offered. Does a qualifying a la carte package automatically become an NPT or is some action required on the part of a cable operator? A4. A qualifying a la carte package automatically becomes an NPT on January 1, 1995. To maintain the NPT status, however, the operator must meet all the conditions for offering an NPT with the following exceptions. First, the NPT may consist of channels that were part of an a la carte package (which the Going Forward Order determined to be a CPST) containing only a small number of migrated channels on September 30, 1994. Second, the NPT need not be affirmatively marketed to subscribers of the former a la carte package, presuming that there has not been a change in the fundamental nature of the package. Within 30 days of the offering of an NPT, operators shall file with the Commission a copy of the new rate card that contains the following information on their BSTs, CPSTs, and NPTs: (i) the names of the programming services contained on each tier, and (ii) the price of each tier. Operators also must file with the Commission copies of any notifications that were sent to subscribers regarding the initial offering of NPTs. See Going Forward Order at para. 28. For existing services that automatically become NPTs on January 1, 1995, such as premium channel packages or a la carte packages containing only a small number of migrated channels, the initial filing must be made within 30 days of the January 1, 1995 effective date of the NPT rules or within 30 days of Office of Management and Budget approval of the reporting requirements, whichever is later. After this initial filing, cable operators must file updated rate cards and copies of customer notifications with the Commission within 30 days of rate or service changes affecting the NPT. Channel Additions to CPSTs Q5. Can an operator add channels to its CPSTs between May 15, 1994 and December 31, 1994 and use the existing rules to raise rates for those channels after January 1, 1995, but still use the 20 cent per channel adjustment for channels added after January 1? A5. Yes. The Going Forward Order provides that operators must elect to apply either our new rules or our current rules the first time they adjust rates after December 31, 1994, to reflect a channel addition to a CPST that occurred on or after May 15, 1994, and must use the elected methodology for all rate adjustments through December 31, 1997. See Going Forward Order at para. 65. The Cable Services Bureau has issued a blanket waiver allowing operators to raise rates under the existing rules after December 31, 1994 for channels added by that date, and then adjust rates under the new "going forward" rules for channels added after that date. The Bureau issued the waiver because some operators may have relied on the current rules in deciding to add channels prior to December 31, 1994. The waiver is accordingly limited to operators that were contractually bound, prior to the release of the Going Forward Order, to introduce a channel no later than December 31, 1994. See Letter to Peter H. Feinberg, DA94-1508 (from Chief, Cable Services Bureau, released December 23, 1994). Q6. Can an operator selectively elect to treat some channels introduced between May 15, 1994 and December 31, 1994 under the new going forward rules allowing a per channel adjustment of up to 20 cents and some under the existing rules? A6. Yes. The Going Forward Order provides that while an operator must use either the existing or the new going forward rules consistently for channel additions to CPSTs after December 31, 1994, an operator that chooses to use the new rules after that date may, but is not required to, adjust rates to reflect the new rules for channel additions made between May 15, 1994 and December 31, 1994. See Going Forward Order at para. 65 and note 21*. The Order does not require operators to use a single methodology for channels added through December 31, 1994. Q7. Can a regulated cable operator increase rates immediately upon adding a channel or must it wait a quarter? A7. Ordinarily, a cable operator may change its regulated rates to reflect a channel addition only following the close of the calendar quarter in which the channel addition occurred. Section 76.922(e) of the Commission's rules, adopted February 22, 1994, provided that "A system may adjust the residual component of its permitted rate for a tier to reflect changes in the number of channels offered on the tier on a quarterly basis." See Second Order on Reconsideration, 9 FCC Rcd 4119 (1994), Appendix B. This portion of the rules was restated without change in the Going Forward Order. Going Forward Order, Appendix B, 47 C.F.R.  76.922(e)(1). Because the new going forward rules were issued too late for many operators to use them to add new channels before January 1, 1995 and because the Cable Services Bureau believes it is in the public interest to encourage operators to add new channels as early as possible, the Bureau has issued a waiver of the quarterly filing limitation for new channels added between January 1, 1995 and March 31, 1995. See Letter to Peter H. Feinberg, DA94-1568 (from Chief, Cable Services Bureau, released December 23, 1994). Q8. When is notice to the FCC required with respect to a rate adjustment associated with a channel addition? A8. Paragraph 76 of the Going Forward Order provides that any rate increases pursuant to the revised channel addition rules shall be subject to the notice requirements of the Commission's regulations. See 47 C.F.R.  76.964 (requiring notice to franchising authority and subscribers). Paragraph 76 also provides that operators will be required to send the Commission copies of the notices sent to subscribers. The requirement to send the Commission a copy of the notice sent to subscribers is a new requirement designed to allow the Commission to monitor how well the incentives created by the Going Forward Order are working. The rules appendix inadvertantly failed to include a provision tracking the requirement that the Commission be sent a copy of the notice to subscribers. This oversight will be corrected in an erratum. Independent of the requirement in the Going Forward Order, an operator is required to provide the Commission with thirty days' notice of a pending rate change when a cable programming services complaint is pending before the Commission. 47 C.F.R.  76.958. Q9. When is prior regulatory approval required before an operator may adjust rates to reflect a channel addition under the going forward rules? A9. When a channel is added to a CPST, the Commission's prior approval is required for any rate adjustment if the Commission has ordered a reduction in rates for a CPST within the past year, unless the order requiring the rate reduction specified a different term. See 47 C.F.R.  76.960, Form 1210 instructions at 2. The new going forward rules also permit an operator offering only one tier on May 14, 1994 to take the per channel adjustment of up to 20 cents for each channel added to the BST. A regulated cable operator seeking to raise rates in this manner (like a regulated operator seeking to raise rates for the BST under the existing going forward rules) would be subject to the notice and tolling requirements of Section 76.933 of the Commission's rules. Q10. Under the new going forward rules, may an operator, for example, raise its rates by $1.50 between January 1, 1995 and December 31, 1996 to reflect the addition of five new channels to its CPSTs after May 14, 1994, with a per channel adjustment of 20 cents for each channel added and a total license fee pass- through of 50 cents? May that operator then adjust rates in 1997 to reflect the addition of one or more additional channels? A10. Operators electing to use the new rules may adjust their rates between January 1, 1995 and December 31, 1997, by up to 20 cents, exclusive of license fees, for each new channel added to CPSTs on or after May 15, 1994, subject to the Operator's Cap and the reserve for license fees, described below. They may not, however, raise their prices as a result of channel additions, exclusive of license fee pass-throughs, by more than $1.20 per subscriber per month between January 1, 1995, and December 31, 1996, and by more than $1.40 between January 1, 1995, and December 31, 1997 ("Operator's Cap"). Operators may use any portion of the Operator's Cap to pay for license fees between January 1, 1995 and December 31, 1996 for channels added between May 15, 1994 and December 31, 1996. Moreover, operators may recover an additional amount of not more than 30 cents per subscriber per month for license fees (the "License Fee Reserve") between January 1, 1995 and December 31, 1996 for channels added between May 15, 1994 and December 31, 1996. After December 31, 1996, license fees may be passed through to subscribers pursuant to the Commission's existing rules, except that operators will not be allowed the current 7.5% mark-up on programming costs for channels added on or after May 15, 1994. Thus, an operator may raise its rates by $1.50 between January 1, 1995 and December 31, 1996 to reflect the addition of five new channels to its CPSTs after May 14, 1994, with a per channel adjustment of 20 cents for each channel added and a total license fee pass-through of 50 cents. The per channel adjustment of 20 cents for each of five channels (or a total of $1.00) is consistent with the allowed per channel adjustment of up to 20 cents subject to the Operator's Cap of $1.20. The license fee pass-through of 50 cents is an allowed use of the 30 cents License Fee Reserve plus the unused 20 cents from the $1.20 Operator's Cap. In the example, the Operator's Cap of $1.20 is fully used but not exceeded. In 1997, license fees associated with newly added channels are no longer subject to a cap. Accordingly, in this example, the operator, having used $1.00 of the Operator's Cap on per channel adjustment through December 31, 1996, may pass through an additional 40 cents in per channel adjustment in 1997, when the Operator's Cap rises to $1.40. If the operator takes the maximum 20 cents per channel adjustment, this operator could add two new channels to its CPSTs in 1997. Q11. When does the Commission expect to release a revised version of FCC Form 1210 that reflects the new going forward rules? A11. The Commission has submitted to the Office of Management and Budget ("OMB") for its approval an addendum to the existing Form 1210 instructions to allow adjustments to maximum permitted rates for new programming added between May 15, 1994 and December 31, 1994. The Commission also intends to submit a revised version of Form 1210 to OMB in January 1995. The revised Form 1210 will provide for rate adjustments for deletions of channels and the movement of channels between tiers, as well as for channel additions through calendar year 1997.