Return to the FCLJ, Vol 46, No. 1 Table of Contents
Introduction
"The Case of the Missing Cable Rate Cuts" is a perplexing
whodunit playing to standing room only crowds in hearing rooms near
you. Accusations fly and suspects abound one year after Congress
passed a sweeping law(note 1) to clamp
down on cable rates, with news headlines trumpeting the increasing
cost of basic cable service and the perception in many quarters
that cable prices are not dropping. Did Congress devote years to
develop legislation intended to curb monopoly prices only to write
a law that actually does the opposite? Did the Federal
Communications Commission (FCC or Commission) work around the clock
for months promulgating rate regulations(note 2) that unintentionally frustrate the
statutory mandate? Are powerful cable multisystem conglomerates
gaming a regulatory structure they helped design? Are factions in
the industry mounting a public relations campaign and a hardball,
grass-roots political effort designed to kill the new law in its
crib? Are many local cable operators evading the law? Are news
accounts focusing on anomalies and overlooking the overall savings
that consumers are already enjoying? Or, like the solution to
Agatha Christie's most famous mystery, did all the suspects have a
hand in the deed?(note 3)
The impetus of the current controversy is all the more curious in that, as far as can be determined at the time of this writing, the pattern in recent years of cable prices increasing at multiples of the Consumer Price Index has been broken. At this early stage of rate regulation, it is difficult to get a clear picture of the details of rate trends, and none of the controversial rate changes have been reviewed formally, much less approved by any regulator. To date, equipment prices appear to be dropping significantly. Price cuts on the rates of basic service, however, range from modest to negligible and many systems have announced large increases in parts of consumers' overall monthly bills along with new charges for items not previously billed to customers. Across the country there remain pockets of potential abuse with which, if illegality is established, the FCC is equipped to deal. These mild, if not mixed, results have nevertheless fueled sharp criticism of cable rate regulation and intense scrutiny of the new regulatory system even before it is fully operational.(note 4)
After concluding a fractious, long struggle over the federal budget, the members of the 103d Congress welcomed their delayed 1993 summer recess and a chance to finally turn to critical policy issues such as implementation of the North American Free Trade Agreement and the historic debate on health care reform. Perhaps the last thing legislators expected upon returning to their districts was "man bites dog" news stories suggesting that the 1992 Cable Act was causing cable rate increases and sharp inquiries from local authorities and consumers pressing them for an explanation.(note 5) Having seemingly just completed years of work on landmark legislation by voting overwhelmingly to enact the 1992 Cable Act over President Bush's veto, this was, after all, an issue members of Congress might not be faulted for believing was at least in remission if not cured.(note 6) Opponents of rate regulation have not been entirely bashful about capitalizing on the regulators' predicament.(note 7) Indeed, the bemusement in some quarters is akin to the glee of the sophomoric prankster who unwraps a Baby Ruth candy bar and throws it in the shallow end of a swimming pool.(note 8) Even false alarms can cause a lot of thrashing and gnashing. Determining whether a false alarm has been signaled on the issue of cable prices, or whether there is a more serious problem requiring further measures to assure the intended cost savings to consumers, is once again a priority of the congressional architects of the Act and the FCC.(note 9)
This Article briefly surveys post-enactment developments by describing the timetable for phasing in rate regulation and summarizing the preliminary results of the FCC's effort to implement the Act. The Article also evaluates the prospects for successful rate regulation by starting at the beginning: analyzing the statutory rate provisions contained in Section 3 of the Act(note 10) and the FCC's implementing regulations.(note 11) In this regard the Article focuses on (1) the methodology that has been established to determine whether regulated cable rates are reasonable, (2) the shared responsibility of the FCC and local franchise authorities for regulating rates, and (3) the complexity of the FCC's approach to rate regulation. The Article concludes that the resulting regulatory framework is workable, albeit imperfect, and can be improved. Over time, regulations should achieve the statutory objective of restraining cable prices until the advent of competition.
The market and the public are experiencing an initial, and understandably confusing, period of adjustment. Short term price reductions, which had been oversold, are significant but not dramatic. Soon, regulatory price caps will help to assure that over the long term rate increases are reasonable. The results of the effort to regulate cable will largely be determined by the compliance and conduct of the cable industry, which ultimately has the greatest stake in helping to demonstrate that its pricing practices are reasonable. Should it be determined that the initial attempt to moderate cable rates is falling short, turning back the clock to an era of unbridled monopoly prices is as politically implausible as it is, in practical terms, unlikely.(note 12) Accordingly, the Article will also discuss some of the options that exist for fine tuning rate regulation, including further rate freezes, adjusting the current rate benchmarks to require lower prices, as well as other steps that might still be taken if necessary to afford consumers the full benefits of reasonable prices until the advent of competition in the multichannel subscription television marketplace.
I. Regulatory Timetable and Initial Results: Cable Rates a Year
Later
A. Phased-In Relief
At this writing, not one of the rate increases sparking the
present controversy has yet been reviewed formally, much less
approved, by either the FCC or a local authority under rate
regulations established by the 1992 Cable Act. In order to evaluate
the impact of the new law, it is essential to understand the
timetable for phased-in rate regulation established both by the Act
and its implementing regulations. When the Act became law on
October 5, 1992, Congress gave the FCC six months to devise a
comprehensive regulatory system for a virtually unregulated
industry by requiring the Commission to issue rules for (1) the
regulation primarily by local authorities of the basic tier of
service and related equipment charges,(note 13) (2) the regulation of other "cable
programming services"essentially nonbasic premium tiers of
programming not offered on a per channel or per program basisupon
complaints by subscribers and local authorities,(note 14) and (3) the prevention of cable systems
not subject to effective competition from evading the requirements
of the Act.(note 15) The FCC met
this deadline by issuing a massive set of regulations on April 1,
1993.(note 16)
The effective date of the FCC's rate regulation was September 1, 1993.(note 17) This date actually only starts the clock on the steps eventually leading to regulation of the basic and premium services. For example, beginning on September 1, local authorities were able to begin filing with the FCC for the approval required by the Act for local authorities to regulate basic service.(note 18) Under the Act, the application for approval is deemed approved unless disapproved by the Commission within thirty days.(note 19) However, local authorities are not able to begin regulating basic rates until they have adopted regulations consistent with the FCC regulations and have procedures in place to provide interested parties an opportunity to comment.(note 20) The local authority has 120 days to satisfy these requirements and then must notify the cable operator in its jurisdiction before it can begin to regulate rates and, if necessary, order refunds.(note 21) The cable operator, for its part, may seek a stay of rate regulation either in a petition for reconsideration within thirty days after the local authority has initially qualified, or at any time thereafter in a petition for revocation.(note 22) Consequently, many if not most local authorities will not commence enforcement of the 1992 Cable Act until several months after the September 1, 1993, effective date of the regulations and perhaps not until 1994.(note 23)
The timetable for regulating other nonbasic programming servicesloosely described as premium servicesis different. The Act provides that rate regulation of such nonbasic cable programming services and related equipment charges will only occur in response to specific complaints filed with the FCC alleging that a particular operator's rates are unreasonable. The FCC started to accept such complaints on September 1, 1993. The premium service regulations apply prospectively to rates paid on or after this date.(note 24) The Act also creates a statute of limitations for complaints about existing rates. Complaints about the rates charged on September 1, 1993, must be filed within 180 days of the effective date.(note 25) With regard to rate increases for premium services, complaints must be filed "within a reasonable period of time following a change in rates initiated after the effective date,"(note 26) which the FCC has set at forty-five days from the time subscribers receive a bill that reflects the rate increase.(note 27)
Upon receipt of a complaint, the Commission will review the complaint to determine whether it meets the minimum showing needed to permit the complaint to go forward. The operator must respond to a complaint within thirty days of service of the complaint, unless the Commission notifies the operator that the complaint is invalid.(note 28) The Commission can order both prospective rate reductions and refunds of excess charges calculated from the date the complaint was filed until the date the rate was reduced to the appropriate level.(note 29) In sum, the separate regulations for nonbasic cable services and related equipment charges will not be, like the regulations for basic services, fully operational until several months after the September 1, 1993, effective date. It will be hardly possible to fairly judge their results at least until 1994.
A fair question is to ask why there has been an outcry over the consequences of the Act if the implementing regulations have only just begun to take effect. In part, and only in part, the answer lies in widespread confusion over the nature of actions intended by the FCC to take account of the long delay before the onset of rate regulation in order to protect subscribers in the interim.(note 30) The first was a temporary rate freeze ordered by the Commission that went into effect when it issued its Rate Order in April 1993 and, although initially scheduled to expire six months later in November, has been extended until February 1994.(note 31)
The freeze is actually a "slurpee." Chilled, perhaps, but not frozen solid, individual rate components of monthly bills are free to move. Charges for basic service, nonbasic service, and equipment can change up or down so long as the average subscriber bill maintains the same level.(note 32) After all, the rate increases fueling the current debate over the Act all occurred during the purported rate freeze.(note 33)
The freeze order, which in reality is closer to a revenue freeze than a rate freeze,(note 34) applied to all cable rates not subject to effective competition other than rates for per channel or pay-per-view program services and related equipment.(note 35) During the freeze, the average monthly subscriber bill for regulated services and equipment could not increase above the average monthly subscriber bill for such services and equipment under rates in effect on April 5, 1993. The freeze did not preclude operators from adding subscribers, retiering services, unbundling services and equipment, or providing additional services and equipment, so long as the FCC did not find that the cable operator intended to evade the freeze and the average monthly subscriber bill did not increase over the April 5, 1993, level. Moreover, cable operators were able to increase or decrease the charge for a tier or for equipment related services, again so long as the average monthly rate did not increase.(note 36)
The second source of some confusion has been popularly heralded and perhaps oversold as a rate "rollback" to levels existing as of September 30, 1992. Semantical somersaults yes, rollback no: the so-called rollback is in reality a calculation of what reasonable rates would have been at the time the Act became law and then a determination to use this price level in calculating prospectively, with adjustments for inflation, what reasonable rates would be once rate regulations began.(note 37) As far as can be determined, the FCC has not yet rolled back and does not plan simply to roll back current rates to the pre-enactment levels of September 30, 1992, notwithstanding passages in the Rate Order and the accompanying press releases to the contrary.(note 38)
In the NPRM the FCC sought comment on whether the Act reflects a congressional intent that its regulations yield rates generally lower than those in effect when the Cable Act was enacted, or "rather a congressional intent that our rules serve primarily as a check on prospective rate increases."(note 39) In the Rate Order the FCC then concluded that the "initial effort to regulate rates for Cable service should provide for reductions from current rates of regulated cable systems with rates above competitive levels. Thus, [the] initial implementation of rate regulation of cable service will generally lead to significant reductions from current rate levels for most cable systems."(note 40) The approach adopted by the Commission to accomplish this goal is complicated.
Before issuing its Rate Order the Commission conducted a survey of cable system rates as of September 30, 1992. It found that on average, rates of systems not subject to effective competition are approximately 10 percent higher than rates of comparable systems subject to effective competition, as that term is defined by the Act.(note 41) The FCC neither ordered a rollback of cable prices to 1992 levels, nor did it order an immediate 10 percent cut. Nor did the FCC order rates to fall back to benchmarks it found represented competitive rates. Instead, its approach was to enable, once rate regulation became effective,
local franchise authorities to require rates for the basic tier, and the Commission to require rates for cable programming services on the basis of individual complaints, to fall approximately 10 percent, unless the operator is already charging rates that are at the "competitive" benchmark level or it can justify a higher rate from September 30, 1992 levels, based on costs.(note 42)
The rate formula determines, in individual cases, the initial permitted level of rates once a cable operator becomes subject to rate regulation.(note 43) After September 1, 1993, when a cable operator is charging rates that are below the adjusted 1992 benchmark for that system, the initial permitted regulated rate for that system is the rate in effect on the date the system becomes subject to regulation, regardless of the amount that the rate is below the competitive benchmark.(note 44) After September 1, 1993, rates exceeding the applicable adjusted benchmark are deemed presumptively unreasonable.(note 45) The average rate for such systems can be reduced up to 10 percent, but no lower than the adjusted benchmark.(note 46)
The FCC also expressly declined to require all systems to "now reduce rates to benchmark levels"that is, to rollback the rates.(note 47) Indeed, systems were left free to further adjust their rates to reflect inflation occurring since September 1992 and to make further adjustments if the number of subscribers or channels on the system changed between September 1992 and the time of regulation.(note 48)
B. Initial Results
The FCC has predicted that overall rates would be reduced for
between two-thirds and three-quarters of American households
receiving cable television.(note 49)
In September 1993 it ordered an expedited survey of the twenty-five
largest cable multisystem operators to determine whether this
forecast was likely to be correct.(note
50) Legislators and regulators have generally agreed that no
regulatory modification should be made at least until the FCC has
this data in hand.(note 51)
The results of the FCC's survey of the twenty-five largest cable MSOs are mixed and inconclusive.(note 52) The survey directed each of these MSOs to report on rates from the ten largest systems within the MSO that are expected to be subject to rate regulation.(note 53) The FCC survey sought to compare the average per subscriber revenues in effect in September 1993. Operators were also required to provide rate cards and channel line-ups for these two time periods. This information was used to confirm and, "in a number of cases, correct the data" submitted by the cable MSOs.(note 54)
The FCC found that eleven of the twenty-five surveyed MSOs have restructured services in anticipation of rate regulation to offer purportedly unregulated packages of per channel ("a la carte") offerings. Accordingly, pending further analysis of the data from the eleven MSOs that introduced a la carte packages, the FCC initially released results only on the fourteen reporting MSOs that did not choose to offer extensive new a la carte services.(note 55) Analysis of the survey results for the eleven MSOs that introduced a la carte packages will be included in a final report to be released in November 1993.
With respect to the fourteen MSOs that did not introduce a la carte offerings, the FCC reported that approximately 68 percent of subscribers to systems owned by these operators experienced rate reductions for their regulated services (including equipment).(note 56) The average bill for regulated services declined approximately 8 percent while subscribers received, on average, approximately 6 percent more channels.(note 57) The FCC found that the average bill for regulated services offered by these fourteen MSOs declined by about $2, and the number of regulated channels received by subscribers increased by more than two channels.(note 58) The preliminary survey findings also show that equipment charges for subscribers have declined significantly. The monthly charges for remote controls dropped nearly 90 percent, on average, and additional outlet charges dropped approximately 95 percent, on average.(note 59) However, according to the FCC's calculations, about one-third (or approximately 31 percent) of subscribers to these systems experienced an overall rate increase.(note 60)
The 25 MSOs surveyed provide service to approximately 75 percent of the country's 58 million cable subscribers. The 245 systems for which operators reported data provide cable service to approximately 14 million, or roughly one-quarter, of all subscribers. The fourteen MSOs for which preliminary results are being reported [by the FCC] today serve 23.9 million cable subscribers, and the data they provided covers roughly 8 million of the 14 million subscribers encompassed by the survey.(note 61)
These results are only partially satisfying to the FCC and have prompted the Chairman of the House telecommunications subcommittee to ask for the General Accounting Office (GAO) to conduct an independent survey.(note 62) While the results provide the FCC and the regulated industry with some basis for arguing that the rate regulation is working and that no drastic overhaul is necessary, several serious concerns remain to be addressed.
First, it will be necessary to examine and determine how it can possibly be consistent with the intent of the Act for at least a third of subscribers surveyed to experience rate increases. Second, the reported results indicating average rate reductions for a large majority of subscribers will bear closer scrutiny to determine whether the savings are genuine and consistent with the Act, or rather a somewhat illusory consequence of the FCC's methodology. One of the questions that should be examined is simply: Are you better off today than you were before regulation? In other words, the FCC should attempt to determine what the charge was for a certain package of programming before April 1993 and then determine what it would cost a consumer to obtain the same programming today. The FCC should also attempt to inquire about new billing practices that may add charges to subscriber bills that offset or surpass rate reduction. In addition, the FCC should monitor what subscribers are being told by cable companies in order to explain and justify changes in billing practices. Obtaining that information would provide the FCC with some basis for correcting the confusion that now exists in the marketplace. In the meantime, based on the facts now available, it is not possible to conclude definitively whether or not the regulations are in all significant respects upholding the 1992 Act.
II. Congressional Mandate
Above all else, Congress passed the 1992 Cable Act to respond
to genuine grass-roots concerns about rising cable television
prices compiled in a massive legislative record over several
years.(note 63) While various
statutory provisions in this complex Act may be subject to
differing interpretations, the intent of Congress to protect
consumers from monopoly prices is clear.(note 64) Viewed in the context of the whole Act,
the approach Congress took demonstrates a strong preference for
competition and a reluctance to dictate prices.(note 65) Recognizing that competition would only
develop over time, Congress authorized an interim system of rate
regulation for the basic tier of programming and for other cable
programming approximating what might result from a competitive
market.
A. Background
When Congress enacted the 1992 Cable Act, it repealed the
deregulatory provisions of the Cable Communications Policy Act of
1984(note 66) (1984 Cable Act or
1984 Act) and directed the FCC to reinvent rate regulation. The
1984 Cable Act embodied the first comprehensive federal policy for
cable television. Prior to its enactment, cable television was
regulated principally at the local level through the franchise
process. The 1984 Act prohibited local authorities from regulating
the basic service rates of cable systems that faced "effective
competition," as defined by the FCC.(note 67) After deregulation took effect on
December 29, 1986, over 97 percent of all cable systems across the
country were free from any form of government rate regulation.(note 68) The objective of deregulation
was to "enable the cable industry to prosper, benefiting both
consumers and industry participants alike."(note 69) A balance was sought between relying on
the local franchising process as the primary means of regulation
and encouraging the growth of a new industry by leaving it
relatively free to set its own rates. Congress expected that the
availability of competing programming services would keep rates at
reasonable levels and that local franchise authorities would ensure
that cable authorities responded to the needs of the community.(note 70)
The 1984 Cable Act achieved many of its objectives. Since that time cable television has grown rapidly and provided consumers a wide array of extremely popular, diverse, and often innovative programming. Cable penetration of 37 percent of households in 1985 grew to 61 percent in 1992.(note 71) Monthly revenue earned by cable operators grew from $18.94 per subscriber in 1984 to $28.02 in 1992.(note 72) Total industry gross revenues (subscriber services plus advertising) grew from $8.3 billion in 1984 to over $24 billion in 1992,(note 73) while total advertising revenues increased almost six-fold from less than $600 million in 1984 to approximately $3.4 billion in 1992.(note 74)
While the cable industry thrived in this era, rapid expansion into a regulatory void was not checked by any significant competition from comparable providers of multichannel subscription television. The competition Congress anticipated during consideration of the 1984 Act, from wireless cable and private cable operators, from the home satellite dish market and direct broadcast satellite, and from cable overbuilders, simply failed to materialize as an adequate counterweight. Cable's competitors now serve, in the aggregate, fewer than 6 percent of American households.(note 75)
The Chairman of the House Subcommittee on Telecommunications
and Finance, Representative Edward J. Markey (D-Mass.), initiated
a series of GAO surveys of cable rates released in 1989,(note 76) 1990,(note 77) and 1991.(note 78) Overall, the GAO found that during the
first four years of deregulation (November 1986 to April 1991), the
monthly charge for the lowest-priced service increased by 56
percent and for the most popular basic service by 61
percentamounting to increases of more than three times the rate of
inflation.(note 79) In a 1990 report
to Congress, the FCC, like the GAO, also concluded that cable rates
rose appreciably.(note 80) The FCC
found that between 1986 and 1989, monthly rates for the lowest-
priced tier of service increased by 36 percent and for the most
popular tier of service by 38 percent.(note 81)
While these studies were not definitive, they nevertheless
were found to provide substantial evidence of rate increases at
unacceptable levels.(note 82) The
House Energy and Commerce Committee concluded:
[R]ate increases imposed by some cable operators are not justified
economically and . . . a minority of cable operators have abused
their deregulated status and their market power and have
unreasonably raised the rates they charge subscribers. The
Committee believes that it is necessary to protect consumers from
unreasonable cable rates.(note
83)
Similarly, according to the Senate Commerce Committee, the record
of historical and projected rate increases provided "significant
and legitimate reasons to be greatly concerned that subscribers, in
a deregulated marketplace, are at the mercy of cable operators'
market power."(note 84)
The legislative record contains other significant evidence
bolstering the conclusions that congressional action was warranted.
First, legislators received numerous complaints about particular
rate increases that eclipsed, by far, the average increases
reported by the GAO and the FCC surveys.(note 85) Several other sources indicated that
cable prices are generally about 20 to 30 percent cheaper in the
few communities where a cable system faces head-to-head competition
than they are where cable systems face no competition.(note 86) Additionally, the Department of Justice
calculated that at least 45 to 50 percent of the price increases
since deregulation were due to market power rather than to
increases in programming costs.(note
87) Finally, there was strong evidence that the price trend
would continue to turn up sharply, spurred relentlessly by the
imperative of enormous debt service obligations borne by cable
operators.(note 88) In the 1980s
cable systems sold for rapidly increasing amountsover $3000 per
subscriber in many instancesin transactions typically involving
very large ratios of debt to equity.(note 89) The future cash flow necessary to
service the debt indicated to legislators that basic rates might
well, if left unchecked, double to over $50 per subscriber, by the
end of the 1990s.(note 90) This then
was the case for finding ways to promote competition and, if
necessary, to reregulate cable television rates.
The Act establishes the primary, overriding responsibility of
the FCC to assure that subscriber rates for basic service are
reasonable:
COMMISSION OBLIGATION TO SUBSCRIBERS.The Commission shall, by
regulation, ensure that the rates for the basic service tier are
reasonable. Such regulations shall be designed to achieve the goal
of protecting subscribers of any cable system that is not subject
to effective competition from rates for the basic service tier that
exceed the rates that would be charged for the basic service tier
if such cable system were subject to effective competition.(note 97)
Pursuant to the regulations that the FCC was required to
promulgate in order to meet this obligation, basic service rates
are to be determined in the first instance by qualified local
franchising authorities.(note 98)
Local authorities wishing to regulate basic service and equipment
rates must certify in writing to the Commission that (1) it will
adopt rules consistent with the FCC's rate regulations; (2) it has
the legal authority and the personnel necessary to regulate rates;
and (3) its procedures provide interested parties reasonable
opportunity to participate in rate regulation.(note 99) Once filed, the certification becomes
automatically effective thirty days after filing unless the FCC
finds, after notice and reasonable opportunity to comment, that the
franchising authority has not met one of the three criteria.(note 100)
If the Commission disapproves or revokes a certification, it
must step into the shoes of the local franchising authority and
exercise regulatory jurisdiction until the unsuccessful applicant
for certification becomes qualified.(note 101) In contrast to such situations
involving disapproved or revoked certifications for which the FCC
lacks discretion and must directly regulate basic rates, the FCC
presumably has the discretionary authority to determine whether or
not other circumstances warrant FCC direct regulation. The 1992
Cable Act grants the FCC this discretion in order for the
Commission to uphold its statutory obligation to "ensure that rates
for the basic service tier are reasonable" and "to achieve the goal
of protecting subscribers of any cable system that is not
subject to effective competition from rates for basic service . .
. ."(note 102) This broad
authority, for example, would enable the FCC to regulate rates in
appropriate circumstances even where franchising authorities had
not first sought certification from the Commission.(note 103)
The Act provides the FCC considerable latitude in fashioning
the regulations for basic service. Again, the FCC is generally
directed to protect subscribers from paying more for basic service
than they would if their local cable system were subject to
effective competition.(note 104)
To meet this obligation, the Act requires the FCC, first, to strive
to "reduce the administrative burdens on subscribers, cable
operators, franchising authorities, and the Commission."(note 105) Second, the FCC may adopt
formulas or other mechanisms and procedures in order to comply with
the directive to reduce administrative burdens.(note 106) Finally, the FCC's rate regulations
must take into account several factors for gauging the
reasonableness of rates, but the comparative weight, if any, and
the method for balancing these factors are not specified on the
face of the statute.(note 107)
These factors include: (1) the rates for cable systems, if any,
that are subject to effective competition;(note 108) (2) certain specified cost factors;(note 109) (3) advertising revenues
derived from basic service;(note
110) and (4) a reasonable profit.(note 111)
The statute establishes a separate and much more
straightforward standard for regulating equipment charges relating
to basic service. It directs the Commission to establish standards
for setting, on the basis of actual cost, the rates for
installation and lease of equipment used by subscribers to receive
the basic service tier, and installation and lease of monthly
connections for additional television receivers.(note 112) The costs of converter boxes, remote
control units, and cable home wiring are included in the actual
cost calculations.(note 113)
Finally, the statute directs the FCC to establish standards,
guidelines, and procedures for implementing and enforcing the basic
service rate regulations.(note
114) Other than exhorting the FCC to assure expeditious dispute
resolution, to prevent unreasonable charges for changes in a
subscriber's selection of services or equipment, and to provide
notice to subscribers about the availability of basic service, the
FCC is granted virtually unbridled discretion to design a
regulatory procedural regime.(note
115)
The Act requires the FCC to establish criteria for
identifying, in individual cases, unreasonable rates for nonbasic
services.(note 119) In
establishing such criteria the FCC must consider the following
factors: (1) rates for similarly situated systems taking into
account similarities in costs and other relevant factors; (2) rates
of systems subject to effective competition; (3) the history of
rates for the system including their relationship to changes in
general consumer prices; (4) the system's rates as a whole for all
cable programming, cable equipment, and cable services provided by
the system, other than programming provided on a per channel or per
program basis; (5) capital and operating costs of the system; and
(6) advertising revenues.(note
120) The Act permits the FCC to consider other relevant factors
for determining what constitutes reasonable rates for nonbasic
services.(note 121) The FCC has
flexibility in establishing criteria for reasonable nonbasic
service rates because the Act neither specifies a particular way
that the FCC is to evaluate the enumerated factors nor prescribes
the relative weight the FCC is to accord each factor.(note 122)
The Act directs the Commission to adopt rules establishing
"fair and expeditious procedures" for receiving, considering, and
resolving complaints from "any subscriber, franchising authority,
or other relevant State or local government" entity alleging that
rates for cable programming services are unreasonable.(note 123) The subscribers and local
authorities are given standing to file a complaint based upon a
"minimum showing."(note 124)
Significantly, complaints may be filed against existing premium
service rates and need not await a rate increase, but such
complaints about existing rates may only be filed within 180 days
of the effective date of rate regulation.(note 125) In contrast, complaints about rate
increases must be filed within "a reasonable period of time"
following a change in rates, including a change in rates resulting
from a retiering charge.(note
126)
The rationale for the first alternative prong of the statutory
definition is not obvious. It is neither intuitively apparent nor
logically possible to deduce how effective competition, under any
fair understanding of what that term might mean, can exist when
fewer than 30 percent of the households in a franchise area
subscribe to cable and there is no other distributor providing a
competitive service.(note 130) It
helps a bit when analyzing the language to realize that statutes
often invoke a suspension of the common meaning of words, and this
is a good example of a statutory purpose taking precedence over
Webster's preferred usage.(note
131) That is, the definition of effective competition merely
describes situations for which Congress on policy grounds does not
believe that rate regulation is appropriate; the definition as it
evolved in the legislative process reflected the consensus about
when regulation should be triggered rather than the views of
Congress on the etymology of the term "effective competition."(note 132) In fact, there are two
policy rationales for the first part of the effective competition
definition. First, this provision creates a "safe harbor" from rate
regulation in order to encourage the extension of cable into as yet
unwired areas and to encourage the rapid expansion of cable service
within a franchise area. Without this exemption, arguably the
burdens and limitations of rate regulations might discourage the
expansion of cable service to previously unserved households.(note 133) Presumably, the authors of
the Act did not want to risk creating new impediments that would
further delay cable service for those Americans in largely rural
areas who have been the last to enjoy the benefits of cable
television. Second, in a franchise area with fewer than 30 percent
of the households subscribing, the local cable operator arguably
has only limited ability to exert monopoly power. In such
situations rate regulation is presumably unnecessary to protect the
public.(note 134) It would be a
bizarre result of the low penetration definition if cable systems
with over 30 percent penetration were able to avoid regulation by
reducing their penetration. Attempts to do so through either
raising prices or underreporting would, at a minimum, be
addressable through the FCC's authority to prevent evasions.(note 135)
The scope of the rate regulation rulemaking in itself is
daunting. After issuing the Notice of Proposed Rule Making
in December 1992, running over one hundred typewritten pages and
twenty pages in the Federal Register, the FCC received extensive
comments from 176 parties, and reply comments from 121 parties.(note 139) The April 1993 Rate
Order and its accompanying materials were 521 typewritten pages
and over one hundred pages in the Federal Register. In this effort
the FCC has kept to an almost impossible statutory timetable. One
cannot review the record of these proceedings without being
impressed by the Commission's painstakingly conscientious
consideration of the plethora of public comments and myriad of
issues they raise. The long hours, the dedication, the
professionalism of the individuals involved in this effort should
give pause to even the most vigorous critics of the federal
bureaucracy and in the view of at least this observer, the
responsible FCC staff are hardly overpaid. Perhaps most significant
about this track record is what it indicates about the
determination and ability of the FCC to follow through, and, if
there prove to be unintended consequences of its regulations, to
make changes as needed to achieve the statutory objectives.
The Act directed the FCC to adopt standards that produced
rates reflecting prices consumers would pay in a competitive
marketplace.(note 143) The FCC did
not have data on cable costs or the rates charged by competitive
systems that would be necessary to determine reasonable rates, and
it faced statutory time limits, which limited its ability to
collect this data.
Shortly after enactment of the 1992 Cable Act, even before
issuing the Notice of Proposed Rulemaking, the FCC conducted
a survey of a sample of cable systems.(note 144) The Commission surveyed 748 cable
systems and received 708 responses, a 94.6 percent response rate,
of which 687, or 91.8 percent were deemed to be usable.(note 145) Of this data baseout of a
universe of over eleven thousand franchise systems with cable and
about thirty thousand different cable community units served by
those systemsthere were 141 systems found to meet the statutory
definition of systems subject to effective competition: seventy-
nine fit the first statutory category (franchise areas with less
than 30 percent cable penetration), forty-six fit the second
category (at least 50 percent of households passed by both
competitors and more than 15 percent subscribing to the smaller
competitor), and sixteen fit the third category (municipally-owned
cable systems or municipal overbuilds passing at least 50 percent
of households).(note 146)
When data from all the systems in the survey were compiled,
including the seventy-nine systems with less than 30 percent
penetration, the competitive differential was calculated at
approximately 10 percent.(note
147) However, when data from systems with less than 30 percent
penetration were excluded from the analysis, a competitive rate
differential of approximately 28 percent was calculated. This
result occurs because many of the low penetration systems in the
first category of the defined instances of effective competition
reported rates that were significantly higher than the rates of
other systems in the survey.(note
148)
The issue that has arisen and been debated with some vigor is
whether the FCC went astray by including the low penetration,
noncompetitive systems in its calculations. The debate has largely
focused on whether the FCC could lawfully exclude the data from its
calculations, given the 1992 Cable Act's explicit inclusion of such
systems in its definition of effective competition, and thereby
increase its finding of the competitive differential from 10
percent to almost 30 percent. The case for excluding the data from
such systems, for including the data and discounting it, or even
for recollecting and reexamining the data is compelling. The
Commission set out on a regulatory snipe hunt, searching for
chimerical competitive rates that do not exist, at least not
according to legislative history. If competitive rates did exist to
any significant degree, the statute would never have been enacted.
The Commission's difficult statutory challenge is to determine how
best to measure the nonexistent.
The mandatory trigger in the Act for rate regulation is the
statutory three-prong definition of effective competition. Cable
systems that fall within this definition, including low penetration
systems, are exempt from regulation. In contrast, the Act grants
the FCC considerable latitude to fashion regulatory standards for
most cable systems that will achieve basic tier rates that
approximate competitive rates and premium tier rates that are
reasonable.(note 149)
Congress left to the Commission the task of determining how to
accomplish these objectives. It did not specify any particular
methodology nor did it establish any particular test that the FCC
was required to apply to measure competitive and reasonable rates.
Instead, the Act requires that regulations be designed that "take
into account" seven enumerated statutory factors, one
of which is "the rates for cable systems, if any, that are
subject to effective competition."(note 150) Nothing in the text of the Act or the
legislative history instructs the FCC to place more or less weight
on any of the enumerated factors in fashioning regulations. Indeed,
nothing in the language of the Act mandates that all the factors,
much less every element of one factorsystems facing effective
competitionbe weighted equally as the Commission implements its
rate setting requirements.(note
151) Accordingly, the FCC concluded correctly that
our regulations will satisfy the standard established in the
statute (1) if they establish a measure of reasonableness that
takes each factor, including the rates of systems subject to
effective competition, into account and (2) if, overall, they are
designed to "protect" subscribers from paying rates for their cable
service that are higher than if the service were subject to
effective competition.(note
152)
The Commission had several options regarding how to take
competitive prices into account, none of them satisfying. First,
because instances of competition are so rare, and any attempt to
measure actual competition so problematic, the Commission could
have examined cost data and determined from the data what
competitive rates would be. Another option, not required,
suggested, or foreclosed by the Act is to review prior regulated
rates, those allowed prior to deregulation under the 1984 Act, and
project forward, allowing for inflation, and other factors to
determine what a current competitive price would look like.
Ultimately, the Commission determined that it should rely upon
current rate data as a starting point to calculate benchmarks for
both competitive and reasonable prices.(note 153) This was, at best, an elusive task.
Without becoming too scientific about sampling sizes, it is
nevertheless possible to recognize that the instances of
competitive services are so few and far between as to provide a
survey that cannot in itself be definitive. Certainly, each of the
relatively few situations where competition has arisen must be
somewhat idiosyncratic and therefore statistically suspect.(note 154)
The Act does not require the FCC to survey the rates of low
penetration systems. After having done so, the Act can hardly be
read as constraining the Commission's responsibility to evaluate
the data and determine its weight, if any, in calculating
reasonable rates. The Commission has already exercised its
expertise in this manner in several ways, which belies the pretense
that it lacks the statutory discretion to discount the survey rates
of the low penetration systems. For example, the FCC determined how
many and which communities to survey, and elected not to consider
many responses that it found were unusable.(note 155) The FCC also has not, for obvious
reasons, included in its calculations any factor for completely
unwired areas that also fit the definition of low penetration
systems.(note 156) The FCC might
have just as plausibly concluded that the data from the seventy-
nine low penetration systems it surveyed were unrepresentative of
the vast majority of low penetration systems where there is no
cable service, and declined to use it on that basis. Put another
way, the FCC would have been well within the zone of statutory
compliance by examining the low penetration systems and concluding,
based on the record, that there was no reliable basis for
calculating a competitive price level in those situations.(note 157)
The controversy and attendant publicity over the 10 percent
calculation has obscured the fact that there are several separate
steps in the FCC's determination of initially permitted regulated
rates. Each of these steps needs to be carefully scrutinized in
order to determine whether in practice it is causing or
exacerbating unintended consequences. Fine-tuning the rate
regulation may well involve more than adjusting the level of the 10
percent differential.
Two twists in the FCC's benchmark system act as brakes on rate
reductions. First, rates at or below the benchmark level are
presumed to be reasonable, and no reductions are required for such
below-benchmark rates at the time the system becomes subject to
regulation, even if the rates have increased since enactment.(note 162) The higher the benchmarks,
the fewer the number of situations where either a rate reduction
will be required or the cable operator will need to try to qualify
for a cost-of-service exception. Also, the higher the benchmark,
the larger the rate increase that can be charged by a regulated
system without triggering a mandatory reduction.
Second, with respect to rates that exceed a cable system's
comparable competitive benchmark, the required reduction for these
presumptively unreasonable rates is to be only to the benchmarkand
no more. This approach compounds any miscalculation that might have
been made in determining the competitive differential (10 percent),
which is the maximum amount of reduction that will be required.(note 163) Subscribers of regulated
systems might receive a 10 percent reduction, but they could
receive less or none if the benchmarks are set too high.
For the sake of analysis, the essence of the required
calculation can be summarized in three equations:
Current rate = (monthly revenues)/(number of channels)
per channel
Monthly revenues = (programming) + (equipment) -
(recovered franchise fees)
Number of channels = total number of basic + premium
channels(note 165)
The cable operator divides the total monthly revenues by the total
number of channels on both basic and cable programming tiers.(note 166) To compute total revenues,
equipment revenues are added to programming revenues, because they
are to be compared to benchmarks, which are based on the survey
data base that included equipment revenues.(note 167) Revenues collected to offset franchise
fees are subtracted out because the benchmark survey data did not
include franchise fees.(note 168)
The resulting per channel rate is then compared to the appropriate
competitive benchmark.
The rate per channel calculation is intended to be tier
neutral in that it is an average across all channels on all tiers.
However, it is apparent that the per channel rate can be reduced
without lowering or raising rates by increasing the number of
channels, to the extent a cable system has additional unused
channel capacity. It will be important to determine whether or not
this is occurring, and to assess whether the additional channels
are an enhancement of the programming offering or merely what some
colorfully describe as extra "fireplace networks," channels nobody
wants to watch, like one showing burning logs twenty-four hours a
day.(note 169)
This result is hardly required by the Act. In fact a powerful
case can be made that Congress intended above all else that all
rates charged would approximate competitive ratesthat unreasonable
basic rates be reduced to reasonable levels and equipment
charges be reduced to levels reflecting actual cost. The FCC is
required to determine and attribute equipment charges that relate
to the use of basic service as distinguished from equipment charges
that relate to the use of premium service.(note 172) However, nothing in the Act requires
the FCC to calculate per channel rates, much less to do so in a
manner that factors in equipment charges when calculating any
required reductions for either basic or premium programming. This
issue should, and no doubt will, be a priority for the FCC as it
examines ways to adjust the regulations to assure greater fairness
and to uphold the objectives of the Act.(note 173)
The FCC concluded that it will initiate regulation of basic
service in certain circumstances when the local franchising
authority does not itself assert regulatory jurisdiction over basic
service.(note 179) The Commission
took this action in order to fulfill its overriding obligation "to
protect subscribers of any cable system that is not subject to
effective competition,"(note 180)
and because it concluded that Congress did not intend to create a
regulatory vacuum in cases where a local authority was unable to
obtain certification.(note 181)
The FCC has stressed that local authorities are to be the
primary regulators of basic rates. The FCC will not, therefore,
assume jurisdiction in all cases where a local franchising
authority does not apply for certification. It will not, for
example, step in or override a local decision not to regulate rates
if the local authority affirmatively opposes rate regulation. On
the other hand, where a local authority cannot meet the
certification standards, particularly when it does not have the
resources to administer rate legislation or the legal authority to
do so, the FCC will regulate. The FCC has struck a reasoned and
careful balance. It will presume that local authorities receiving
franchise fees have the resources to regulate. Any such authority
requesting the FCC to regulate in its stead is required to rebut
this presumption by demonstrating why the franchise fees it obtains
cannot be used to cover the cost of rate regulation.(note 182) The FCC also will not regulate basic
rates where a local authority voluntarily chooses not to seek
certification because it is satisfied with the rates charged by the
local cable operator.(note 183)
Those decisions about how to share regulatory responsibility
could have a major impact on determining how many communities and
how quickly local rates are regulated. The decisions will help to
assure that the regulatory vacuum created by the 1984 Act now can
be filled, even in instances where for a variety of reasons local
governments are unable or slow to initiate regulation. It will take
time for local franchising authorities to master the complexities
of the regulatory regimes and to determine whether they can legally
exercise jurisdiction over their local rates. Ultimately, however,
the success of rate regulation will depend on a great deal of the
work being performed at the local level. Commissioner Duggan drove
this point home in a recent speech before the National Association
of Telecommunications Officers and Advisors:
The statute, we need to remember, gives you the prerogative of
declining to regulate rates locally. If you choose to exercise that
prerogative, I would caution you not to expect the Commission to do
the job for you. We will be busy regulating the services over which
we have exclusive jurisdiction. I would urge you, therefore, to
think carefully about the implications of forbearing from
regulation locally.(note 184)
While the tandem arrangement in the statute for regulatory
responsibility may have some practical advantages, it further
complicates the intricacies of the new rate regulation system. At
a minimum, a significant period of adjustment and experience will
be necessary to determine whether the regime implemented by the FCC
under the 1992 Cable Act can be made more workable and will yield
regulated rates that approximate rates in a competitive
marketplace.
At a time when the Clinton Administration is holding Rose
Garden press conferences about putting government regulation on a
diet,(note 187) the FCC should be
understandably sensitive about issuing cable regulations that
require their own forklift. The Act is also quite explicit about
simplification. The very first, and one of the only, guidelines in
the statute for the content of the regulations for basic rates is
that the FCC "shall seek to reduce the administrative burdens on
subscribers, cable operators, franchising authorities, and the
Commission."(note 188) This
language should be taken as an ongoing proscription, not completely
discharged upon issuance of the regulations.
The rulemaking record suggests two factors that have
contributed, with some irony, to the complexity of the regulations.
The first is a strong aversion to a cost-of-service type of
ratemaking. The second is the attempt to keep local authorities on
a tight rein, enforcing a degree of uniformity by specifying great
detail in the regulations and thereby narrowing the discretion of
local franchise authorities.
The cable industry vigorously advanced these regulatory
principles during rulemaking. Many of the twists, turns, and sharp
points in the resulting regulatory briar patch respond to these
concerns. The resulting thicket is one in which the industry, at
least the larger players, are quite comfortable, notwithstanding
complaints about unnecessarily burdensome regulation to the
contrary.(note 189)
The FCC's apparent interpretation of the statutory directive
to reduce administrative burdens is that it must not, to the extent
possible, engage in cost-of-service ratemaking. At the outset of
the Rate Order, the FCC pointedly noted that the
Communications Act continues to provide, as it has since 1984, that
cable systems "shall not be subject to regulation as a common
carrier or utility by reason of providing any cable service."(note 190) This theme is repeated
throughout the Order in many different ways. The FCC adopted
its benchmark and price caps mechanism as the primary method for
regulating rates, with cost-of-service procedures invoked only
secondarily if cable operators seek to justify a higher rate.(note 191) The FCC also refused to
allow local authorities to use cost-of-service regulation if they
chose.(note 192) In specifying the
initial price cuts that will be required for systems with current
rates above the benchmark, the FCC declined to require reductions
for all such systems down to the applicable benchmark, but instead
only by 10 percent if that were lower.(note 193) The stated reason is revealing:
"[requiring reductions to the benchmarks] would ignore the
possibility that some systems' high rate may be based at least in
part on higher costs, thus encouraging unweildy [sic] and expensive
cost-of-service showings."(note
194)
While the disadvantages of cost-of-service regulation are
discussed throughout the record, the problem cited most prominently
by the FCC is "it imposes heavy burdens upon regulators and
regulatees because of the significant administrative and compliance
costs associated with the regulatory model."(note 195) One cannot help but wonder the extent
to which this motive colored many different decisions within the
Commission during the rulemaking, including the decision to set the
competitive differential at 10 percent. With initial reductions of
only no more than 10 percent, resulting in many cases with
regulated rates still above the benchmarks, the number of cost-of-
service proceedings would be far fewer than if the required
reduction was in the 20 to 30 percent range, which other sources
indicate more accurately represents the differential between
monopoly and competitive prices.
Another source of regulatory complexity is the amount of
specific direction the FCC provides about how the local authorities
must regulate rates. The 1984 Act responded to the cable industry's
concerns that uneven, unnecessary, and often excessive local
regulation curtailed its growth and vitality.(note 196) The Commission seems intent not to
reinvent regulation that returns to those problems.(note 197) Consequently, the regulations provide
fairly precise marching orders to the local franchise authorities
concerning how to proceed. The good news is that the regulations
are very detailedthe local authorities need not fashion rules out
of whole cloth. The bad news is that the regulations are very
detailedlocal authorities will need, at least initially, to work
hard to absorb and learn the mechanics of the new system.
Competition in the markets of voice, data, and video is
the preferred way to stimulate economic growth and to provide
consumers with reasonable prices and choices. However, in many of
the relevant markets, including cable video programming sales to
consumers, interim regulation is necessary both to constrain
monopoly pricing and practices, and also to nurture the development
of competitive markets.(note
202)
Communications policy should promote universal access to
affordable and fairly priced communications services. The private
sector should be encouraged to accomplish this objective through
investment in creating an advanced broadband communications network
built upon the existing infrastructure of coaxial cable, fiber-
optic cable, copperwire, as well as satellite and wireless
technology. This network will promote economic growth and permit
the universal delivery of many commercial and noncommercial
services such as health care, training, and education
opportunities. The new advanced network should reach all Americans
and the service should be at affordable prices.(note 203)
In light of accelerating change and dramatic convergence
in the marketplace, policy should be flexible and comprehensive.
Technologically specific regulation and ad hoc reactive decisions
will neither keep abreast of market developments nor promote a
breakthrough to a new model of competition among traditionally
discrete communications technologies. Such a breakthrough would
probably require further legislation.
The FCC also now has the means to push competition from other
multichannel video distributors, such as wireless cable and the
imminent arrival of direct broadcast satellite television. This can
be accomplished through vigorous and efficient enforcement by the
FCC of the 1992 Cable Act provisions assuring fair access to
programming. Simply put, these provisions are designed to assure
that competitors have something to sell.(note 208) The FCC has given programmers until
November 15, 1993, to bring their programming contracts into
compliance.(note 209) Informal
reports seem to indicate that programmers are doing just that, and
that the need to resort to the new programming complaint process at
the FCC will be atypical. The FCC provides competitors with a
simplified and less costly alternative to litigation for the
resolution of disputes over the availability and the price of
programming. Because the prohibitions in the Act are clear, and
because it appears that the FCC will provide swift and certain
enforcement of these provisions, the fair access regulations could
well become self-enforcing as parties assess the risks and bring
their conduct into compliance with the law.
Antitrust enforcement by the Department of Justice, and, as
appropriate, exercise of antitrust authority by the FCC under
Sections 314 and 315 of the Communications Act of 1934,(note 210) can police serious
instances of anticompetitive conduct and provide a useful backstop
to the program access provision of the 1992 Cable Act. Finally, the
FCC also has authority to prevent evasion of the rate regulations,
which enables it to investigate and respond to practices in
individual cases that are unreasonable.(note 211) Recently the FCC has begun to exercise
this anti-evasion authority by issuing investigative letters of
inquiry to certain cable companies.(note 212)
First, the FCC should periodically review and adjust as
necessary its benchmarks that delineate reasonable rates. The
statute requires the FCC to report yearly on rates.(note 213) This data will permit the Commission
on an ongoing basis to revise the benchmarks to more accurately
reflect truly competitive rates. There is also ample reason for the
FCC to believe that its initial benchmarks are inaccurate and every
effort should be made to seek appropriate corrections as soon as
possible. Second, the FCC should carefully examine its inclusion of
equipment fees and its use of a per channel rate standard to
compute current rates. At a minimum the FCC should devise a way to
remove equipment rates from the computation in order to get a
better measure of reasonable programming rates. In addition, the
FCC should consider how to eliminate the potential for manipulation
of its use of a per channel standard. Systems are able to increase
the number of channels, thus enabling large rate increases without
exceeding the benchmark. Attempting to define and enforce a
"quality standard" as a check on increasing the number of channels
to avoid rate regulation may prove both difficult and futile.
Finally, the FCC should continue to encourage and assist state
and local authorities in fulfilling their primary role of
regulating basic service rates. This will ultimately go a long way
toward easing the Commission's burden of overseeing rate regulation
in almost thirty thousand communities. One consultant to state and
local regulators reports:
The benefits of state ratemaking go beyond the conservation of
resources by the FCC. State commissions are closer to the facts of
an individual system and inherently more capable for making
judgments of financial exigency that provide the only basis to
relax traditional accounting principles. By contrast, the FCC
necessarily deals with policy decisions whose potential
consequences must be "averaged" across the broad range of disparate
companies. State [and local] commissions can provide a company
specific review as needed.
Although state and local jurisdiction is limited to the basic
tier, there are issues of rate design where the local commissioner
can credibly claim to determine preferences that may vary from
state to state. It would be appropriate, for example, to give state
commissions authority to veto moving specific channels from the
basic tier to a federally regulated tier, provided that they
allowed the company to flow through any exogenous changes in
programming cost.(note 214)
The report concludes that:
[S]tate commissions increase the perception and reality of
democratic accountability. Where [local authorities] are willing to
assume responsibility for rate regulation, they are closer to the
consumer. The perception of increased accountability is
particularly valuable given the extent to which the complexity and
number of cable companies forces the FCC to rely on [state and
local authorities].(note 215)
In practice it will be a great challenge for the FCC to strike
a workable balance with local franchise authorities.
The FCC's report card should read: Good Start. Full marks for
effort. Room for improvement. The new regulations and the process
of rate regulation are very much a work in progress. The Commission
has kicked off a process of change, and like Horatius at the
bridge, must now continue to hold off excessive rate increases
until competition arrives. The regulated industry will respond,
with energy and ingenuity, and the market is hardly static; thus,
in order to enforce the Act, the FCC must regulate in an equally
fluid and dynamic fashion. Priorities of the Commission should be,
first, to reduce the complexity and the murkiness of the
regulations and, second, to find ways to encourage and support the
state and local authorities in fulfilling their primary role for
regulating basic service rates.
The authors of the Act also deserve a good midterm grade. In
hindsight, blessed by short-term memory loss of the tremendous
political struggle involved in enacting the legislation, it might
be said that the provisions could have been better drafted. But in
that case, there might well have been no legislation. Faced with a
choice between perfection and pragmatism, a common legislative
dilemma, Congress opted to try to do something about unregulated
monopoly prices. The features of the Act designed to promote
competition and to regulate rates fit hand in glove together. This
interrelationship is fundamentally the most positive feature of the
Act. One of the best-kept secrets of the new law is how well it is
working to assure that competitors have something to sell. Every
indication is that programmers are making their product available
to competitors and that contracts are being adjusted to offer
nondiscriminatory prices. Use of the new complaint procedures at
the FCC for unfair programming practices might prove to be the
exception to the rule. Rate regulation should reinforce this trend.
When monopoly prices cannot be maintained, it does not make sense
to restrict output. Programmers have every incentive to find more
outlets to sell more products and to make their programming more
universally available at affordable prices. And as competition
emerges, the rate regulation will expire, with no one likely to
mourn its passing.
The experience with reinventing rate regulation for cable
television has significance beyond this sector of the economy. As
the Administration is poised to pursue health care reform, the new
cable regulations are the most recent experiment with attempting to
impose government price controls on a wholly unregulated industry.
The most vivid lesson is that competition is far preferable to the
difficulty, cost, and elusive results of rate regulation. Rate
regulation is at best a last resort and the justification must be
very clear. As compared to regulating cable rates, it would seem
that the problems with imposing price controls on the health care
industry would be exponentially more complex.
Recently, the Chairman of the House Subcommittee on
Telecommunications and Finance noted "the tendency to proceed with
debate and deliberation about telecommunications issues as if
history began in 1984, with the breakup of AT&T and the passage of
the first Cable Act."(note 216)
Recent events, the passage of the 1992 Act, the trend toward
technological convergence and innovation, and the launch of efforts
to build an advanced communications network reaching all Americans,
may soon wipe that slate clean. It is once again a beginning, a
time to look forward to the telecommunications sector reaching its
full potential for stimulating economic growth, generating highly
productive jobs, and providing an array of affordable, advanced
services to all Americans.
--------
The views expressed in this Article are those of Mr. Allard
alone and do not necessarily reflect those of his clients or of
other parties.
The Author is indebted to law librarians Robert K. Oaks and
Scott R. Wales, legislative specialist J.O. Wallace, and to
Constance C. LaChance of Latham & Watkins for their invaluable
assistance.Return to text
Controversy over implementation of the 1992 Cable Act is
neither unexpected nor unique to the rate regulation provisions.
For example, as many as 1.5 million viewers were affected by
decisions to drop C-SPAN, which local cable operators indicate is
necessary to free up channel space needed to comply with the so-
called "must carry" provisions of the Act that require cable
Five lawsuits challenging the constitutionality of 14
different sections of the Act were filed within days of the bill's
enactment and are now awaiting argument in the Supreme Court.
See Discovery Comm., Inc. v. United States, No. 92-2558
(D.D.C. Nov. 5, 1992) (challenging 3, 9, and 19 of the 1992 Cable
Act); National Cable TV Ass'n, Inc. v. United States, No. 92-2495
(D.D.C. Nov. 5,
(b) The average monthly subscriber bill shall be calculated by
determining for a monthly billing cycle the sum of all billed
monthly charges for all cable services subject to regulation under
Section 623 of the Communications Act and dividing that sum by the
number of subscribers receiving any of those services. The average
monthly subscriber bill determined under rates in effect on
The legislative history of the Act also includes the floor
debate accompanying the veto override votes. 138 Cong. Rec.
S16,676 (daily ed. Oct. 5, 1992); 138 Cong. Rec. H8687
(daily ed. Sept. 17, 1992). See also 138 Cong. Rec.
S16,652-77 and H11,477-88 (daily ed. Oct. 5, 1992); the
presidential veto message, Message to the Senate Returning Without
Approval the Cable Television Consumer Protection and Competition
Act of 1992, 28 Weekly Comp. of Pres. Doc. 1860 (Oct. 3,
1992); the floor debates accompanying consideration and passage of
Conference Report 862 in the Senate, 138 Cong. Rec.
S14,222-51 (daily ed. Sept. 22, 1992) and in the House, 138
Cong. Rec. H8671-87 (daily ed. Sept. 17, 1992); and the
floor debates accompanying consideration and passage of the House
bill, H.R. 4850, 138 Cong. Rec. H6531-44 (daily ed. July 23,
1992), as well as the Senate bill, S. 12, 138 Cong. Rec.
S400-33 (daily ed. Jan. 27, 1992), 138 Cong. Rec. S561-611
(daily ed. Jan. 29, 1992), 138 Cong. Rec. S635-97 (daily ed.
Jan. 30, 1992).
The full extent of the legislative history, including related
legislative materials and events over several years, is discussed
in Nicholas W. Allard, The 1992 Cable Act: Just the
Beginning, 15 Hastings Comm/Ent L.J. 305, 307-11
(1993).in Maryland claiming Cable Act did not allow it to offer
discounts to senior citizens, when in fact Act specifically does
so. Id.
The FCC Regulatory Report projected prices falling 20% from
monopoly to competitive levels. These various reports have
generally been supported by post-enactment studies. See
Rate Order, supra note 2, app. E para. 31; see
also Aerie Group, supra note 80
If you have more than 50 percent penetration it may be simply as a
result of providing good service, offering a good programming
Id. at 193-94.
In contrast, the present debate does not concern altering or
reinterpreting the statutory definition of effective competition.
Once the FCC determines that regulation is required by the
statutory definition, the lawfulness of the FCC's calculation of
competitive rates hinges on whether its methodology and the weight
it gives to various factors is reasonable, is based on substantial
evidence, and can withstand a challenge asserting that the results
According to Chairman Markey:
My overarching policy objective has been to create jobs and
choices for the American people. For this reason I have
consistently opposed monopolies and worked to rein in monopoly
power and abuses wherever they arise. Why? Because monopolies limit
choices. Monopolies retard technological development. Monopolies do
not avail consumers of the lowest prices and highest quality.
Competition has consistently been the preferred vehicle toward
bringing affordable and high quality telecommunications
technologies to the American consumer.
. . . .
One of the things people don't realize is that you first have
to create the marketplace. Congress and the courts and the FCC
created the long distance marketplace through the antitrust
case and a series of public policy decisions designed to promote
the viability of competitors to AT&T. Congress and the FCC created
the cellular industry by giving it the necessary breathing room on
the airwaves. Congress had to force telephone companies to give the
cable industry access to telephone poles by passing a law.
Congress, with the passage of the Cable Act of last year which
banned exclusive franchises and gave potential competitors access
to video programming, will essentially create the Direct Broadcast
Satellite industry. And the bill that John Dingell, chairman of the
full committee, and I recently passed to reallocate 200 Megahertz
of radio frequency spectrum will help to create the PCS industry
and promote competition between PCS and cellulartwo byproducts of
government intervention to create markets and industries.
Markey, USTA Statement, supra note 12, at 1-3.[hereinafter
NII]; see also Bill Clinton & Al Gore,
Putting People First (1992). See also the agenda espoused by
House Subcommittee on Telecommunications and Finance Chairman
Markey in his speech to the United States Telephone Association's
Annual Convention. Markey, USTA Statement, supra note
12.
B. Deregulated Cable Rates1986-92
In the absence of either local rate regulation or meaningful
competition, municipalities, consumer groups, and subscribers urged
Congress with increasing intensity to do something about
unreasonable price increases in the cost of cable service.C. Congress Acts
The complexity of the rate regulation provisions of the 1992
Act reflects not so much political compromise as it demonstrates an
attempt to accomplish a great deal: to preserve the accomplishments
of cable television, which delivers diverse programming to over 56
million subscribers; to rely on the marketplace to the extent
possible to regulate already competitive markets; and to secure
reasonable rates that are fair to consumers without destroying the
vitality of the cable industry.(note
91) The congressional preference for competition is stated at
the outset of the rate regulation provisions: "If the Commission
finds that a cable system is subject to effective competition, the
rates for the provision of cable service for such system shall not
be subject to regulation by the Commission or by a State or
franchising authority . . . ."(note
92)D. Basic Service and Related Equipment Rates
Under the Act, basic service consists of a separately
available service tier that subscribers must purchase to have
access to any other tier of service.(note 93) At a minimum, this basic tier, usually
the least expensive tier of service, must include (1) "must carry"
channels, the signals of local broadcast stations, whose carriage
is now required by law; (2) public, educational, and government
access channelsthe so-called "PEG" channels; and (3) any other
broadcast television signal distributed by the cable operator
except for "superstations" such as WTBS, WGN, WPIX, and WORdistant
broadcast signals retransmitted by a satellite carrier and carried
by the cable operator.(note 94) A
cable operator may add additional programming to the basic service
tier; however, such additional programming will be subject to the
regulations applicable to basic service.(note 95) To prevent retiering schemes designed to
evade the regulations applicable to basic service, cable operators
are not permitted to require subscription to any other tier of
programming as a condition of access to premium programming sold on
a per channel or per program basis.(note
96)E. Nonbasic Service and Related Equipment Rates
Rates for other enhanced or nonbasic cable programming
services are subject to regulation by the FCC, not by local
authorities if, upon complaint, the Commission determines that such
rates are unreasonable.(note 116)
Such cable programming services are defined broadly to include "any
video programming provided over a cable system, regardless of
service tier, including installation or rental of equipment used
for the receipt of such video programming" other than basic service
or programming offered on a per channel or per program basis.(note 117) Thus, the Act does not
regulate pay channels for which there is a specific per channel or
per program charge.(note 118)F. Effective Competition
An oddly cut cornerstone, the statutory definition of
effective competition,(note 127)
supports the entire regulatory structure of the Act. Section 3 of
the Act provides that a cable system faces "effective competition"
and therefore is not subject to FCC rate regulations(note 128) if (1) fewer than 30 percent of the
households in the franchise area subscribe to the service of a
cable system; (2) the cable system and another unaffiliated
multichannel distributor each offers comparable programming to at
least 50 percent of the households in the franchise area, and 15
percent of the households actually subscribe to multichannel
distributors other than the largest distributor; or (3) the local
franchising authority itself operates a multichannel distributor
that offers programming to at least 50 percent of the households in
the franchise area.(note 129)
Under this definition, most existing cable systems do not face
effective competition and are subject to rate regulation.III. Can the Reinvention Work? A Look Under the Hood
Before turning to a few of the major issues raised by the
FCC's approach to rate regulation and analyzing whether adjustments
might yet be required,(note 136)
it is appropriate to review what has been accomplished. Even
without the new responsibilities of the 1992 Cable Act, the FCC has
a bulging agenda that has included developing video dialtone rules,
considering local exchange carrier reforms, new regulatory
responsibilities for emerging technologies such as personal
communications services,(note 137)
and completely overhauling its licensing procedures by conducting
auctions for spectrum.(note 138)
The Cable Act has added to that list by giving the FCC the
responsibility for twenty-six additional rulemakings, inquiries,
and reports. So far the FCC has issued on schedule almost fifty
separate notices of proposed rulemakings, report and orders, orders
on reconsideration, and other items relating to the 1992 Cable Act.
Only a handful of these deal with rate regulation.A. The Ten Percent Solution
If unregulated monopoly cable rates were only 10 percent
higher than competitive rates, the 1992 Cable Act never would have
become law. The Act was not about charges of twenty-two dollars a
month rather than twenty, or eleven dollars a month rather than
ten. It was a legislative record depicting much greater industry-
wide disparities, as well as persistent reports of overcharges that
propelled Congress to enact rate regulation over tremendous
opposition and to hand President Bush the only veto override of his
presidency. Yet, 10 percent is the difference the FCC has
determined,(note 140) and stuck to
upon reconsideration,(note 141)
that existed between monopoly prices and competitive prices.(note 142)1. Are the Benchmarks too High?
The FCC has decided to rely on a benchmark approach to
implement rate regulation for cable systems not facing effective
competition.(note 158) Regulated
systems are required to use a formula to compare their current
rates to an appropriate benchmark of rates a competitive system
would charge.(note 159) A
regulated system's benchmark is the rate that a cable system facing
competition would charge with the same number of subscribers, same
number of channels, and same number of satellite channels. The
benchmarks are based on the FCC's survey data, which produced 141
responses from cable systems deemed to satisfy the statutory
effective competition definition.(note
160) Given that the benchmark system is the foundation of the
new rate regulatory regime, it is critically important for
subsequent survey data to be examined to test the accuracy of the
benchmarks, and for them to be revised as necessary. Moreover, as
competition grows over time, the reliability of the sample should
improve.(note 161)2. Are the Per Channel Rate Calculations Being
Manipulated?
In order to compare their current rates with
the benchmark rates, cable operators must calculate their current
per channel rate according to a formula detailed by the FCC in
forms and worksheets provided for this purpose.(note 164)3. Should Equipment Charges Be Included in the Rate Per Channel
Computation?
Under the formula for computing current rates,
the numerator is determined by adding equipment charges to charges
for the basic tier. The Act describes a separate method for
determining regulated rates for equipment used by subscribers to
receive the basic tier of service. Unlike the statutory language
pertaining to basic programming, equipment charges must be based on
actual cost.(note 170)
Consequently, under the new rate regulations, in many if not most
situations, current equipment charges will fall dramaticallyfar
more than 10 percent. If these charges are made as they must be,
and the reduced equipment charge is included in the calculation of
current rates, then the computation of the rate per channel will be
reduced relative to the benchmark without reducing the rate for
basic. This in turn may permit significant increases in current
rates for basic programming without exceeding the benchmark. The
April Freeze Order would not preclude such increases because
the calculated average monthly rate would not increase. This
scenario might prove to be the explanation for the recent numerous
reports of rising basic rates. It might also be the cause of the
perception that subscribers with the most lavish contracts
featuring equipment add-ons and multiple sets are enjoying the
largest savings, while those receiving the least expensive service
are experiencing the brunt of price increases.(note 171)4. Is Ten Percent Enough?
Only in the context of all of the foregoing computations is it
possible to get a clear picture of whether a 10 percent reduction
of unreasonable rates that exceed the benchmark is sufficient to
yield rates that approximate competitive rates. The level of the
percentage reduction is in itself especially important because the
FCC has determined that 10 percent will be the maximum reduction
required.(note 174) In many
instances, rates above the benchmark even for the "outlier"
systems, where rates far exceed competitive rates, will have
regulated rates that remain above the benchmark.(note 175) Accordingly, good reasons exist for
determining whether 10 percent is adequate to achieve the statutory
objective and whether there should be different percentages, just
as there are different benchmarks, to meet a variety of different
categories of cable systems. In any event, the need and impact of
such a change cannot be gauged accurately without reference to the
other parts of the formula that has been established to regulate
rates.B. Filling Regulatory Vacuums
When the need to regulate rates is felt at the local level,
rates will be regulated even if the local authority is unable to do
so itself. In many respects, the Act imposes shared
responsibilities on both the FCC and the local franchising
authority for the basic service tier. For example, before the basic
service tier can be regulated locally, the franchising authority
must comply with FCC rules.(note
176) The FCC is explicitly required to regulate basic rates
when a local franchising authority has been disapproved for
certification or, if its certification has been revoked, until the
local authority requalifies.(note
177) The Act, however, is silent as to whether the FCC is to
regulate in the first instance should the local franchising
authority choose not to file for certification.(note 178)C. Getting it Simpler
The rate regulations are too complicated. That is a
description about a work in progress, not a statement of blame. No
doubt if the FCC had longer, it would have been shorter.(note 185) While the docket items
relating to the rulemaking, the NPRM, the Rate Order,
the Orders on Consideration, and related items and comments
are voluminous,(note 186) the
actual regulations and the accompanying forms and worksheets are
not impenetrable. Moreover, the initial phase of rate regulation,
computing the base level of initially permitted rates, should prove
to be the most confusing and most complex stage of regulation. Once
rate caps begin to determine subsequent rate levels, the procedure
should become appreciably more routinized. More work remains to be
done, however, to simplify the process further.IV. Options
Evaluating appropriate regulatory actions as the FCC's rate
regulations begin to have an impact is complicated by the newness
of the rate regulations, a lack of comprehensive data about
regulated rates, and the dizzying pace of technological and
business developments in the marketplace.(note 198) Contrary to early press accounts,
preliminary survey results seem to be indicating that large numbers
of cable subscribersperhaps 70 percentare already enjoying lower
prices, even before price caps take effect.(note 199) Although this evidence would indicate
that the regulations are working, it is unlikely to completely
satisfy Congress, state and local authorities, and consumers. This
is because there apparently are, contrary to the intent of
Congress, rate increases occurring for a significant number of
consumers and complaints are likely to continue. It is also likely
that the regulations are having unintended consequences. For
example, the FCC should determine whether or not subscribers on low
or fixed incomes are bearing the brunt of rate increases of basic
services, while subscribers who can afford luxury high-option
packages are enjoying considerable savings. It is also possible
that cable systems are manipulating the complex formulas adopted by
the FCC in a way that, with restructured service offerings, more "a
la carte" offerings, new kinds of charges, and other devices that,
although perhaps technically legal, minimize the benefits of rate
regulation and frustrate the intent of Congress.(note 200) Determining the best course of future
regulatory action will only be possible through the FCC's cable
bureau keeping abreast of such practices and devising more accurate
ways of measuring cable rate changes.A. Policy Framework
Future decisions about rate regulation should also be
considered in the context of an overall framework for
communications policy, rather than in an isolated and reactive
manner. It is possible to suggest an illustrative set of principles
for communications policy that is both consistent with
congressional intent underlying the Cable Act of 1992 and the
Administration's telecommunications and overall domestic agenda:(note 201)B. Accelerate Competition
Under these principles the most attractive option is to take
steps to accelerate the arrival of competition in the subscription
television market. There is already considerable activity underway
in this direction. First, momentum is building to remove obstacles
that prevent the regional Bell Operating Companies from competing
with cable television. Last year, the FCC issued rules that
telephone companies could act as common carriers of video
programming owned by others.(note
204) Further, in August 1993 a federal district court struck
down the 1984 Cable Act's restriction barring telephone companies
from entering the cable television business in their telephone
service areas.(note 205)
Subsequently, the court ruled that the decision only applied to the
instant case and could not be relied upon by other regional Bell
Operating Companies.(note 206) In
the meantime, momentum is building in Congress to enact telco entry
legislation.(note 207) The Clinton
Administration will soon confront the decision of whether or not to
endorse telco entry, and if so, on what terms such entry will be
permitted. On a parallel fast track are the numerous new
combinations of communications companies, including telco and cable
mega-deals such as the US West/Time Warner deal, NYNEX's $1.2
billion investment in Viacom, Bell Atlantic's acquisition of TCI,
and the BellSouth/PrimeCable transaction. Some observers are
questioning whether this spate of corporate marriages will preempt
any competitive battle between cable and telco, and that just as
Congress acts, oligopoly will emerge rather than competition. On
the other hand, it is just as possible that these new, more
muscular communications entities are even better equipped to
compete amongst themselves and globally. Federal authorities will
need to scrutinize these deals to determine what their impact will
be on competition.C. Regulatory Adjustments
The primary burden to implement the 1992 Cable Act is squarely
on the FCC. Experience may prove that the FCC should modify its
rate regulations. While most attention has been focused on the
appropriateness of the 10 percent reduction required in some cases
for unreasonable rates, and the seductive simplicity of increasing
that figure, there are other elements of the FCC's formula for rate
regulations that should be considered first, should the case be
made that adjustments are necessary.Conclusion
Spinmasters, a species that thrives in our nation's capital,
can call a horse's tail a leg, but a horse still has four legs.
Consumers know what they pay each month for cable television, and
they know whether their monthly bill goes up or down. Whatever
Jesuitical artifice may convince Washington inside-the-beltway
types that cable rates are just fine, whatever other mega-
transactions, lawsuits, landmark court decisions, and new
legislation might divert the attention of official Washington, the
issues of cable rates and quality of service are likely to remain
real for the public.Notes
*Nicholas W. Allard is Government Relations Counsel with the firm
of Latham & Watkins. His legislative and regulatory practice in
Washington, D.C., includes work on behalf of the Wireless Cable
Association and other communications clients involved in
subscription television. The Author is a former minority staff
counsel to the United States Senate Judiciary Committee and
administrative assistant to Senator Daniel Patrick Moynihan (D-
N.Y.). A Rhodes Scholar, with degrees from Princeton, Oxford, and
Yale, Mr. Allard has written numerous articles and is a frequent
speaker on communications issues.
(a) The average monthly subscriber bill for services provided by
cable operators subject to regulation under Section 623 of the
Communications Act shall not increase above the average monthly
subscriber bill determined under rates in effect on April 5, 1993,
for a period of 120 days.
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