10 FCC Red No. 5 Federal Communications Commission Record DA 94-1554

basic service, and by the Commission, in the case of cable Before the programming services.2 A stated policy of the 1992 Cable Federal Communications Commission Act is to ensure that "consumer interests are protected in Washington, D.C. 20554 the receipt of cable service." 3 3. The 1992 Cable Act requires cable operators to offer subscribers a basic tier that must contain at least all quali In the Matter of fied local broadcast signals and, unless otherwise specified by the local franchising authority, public, educational, and Vision Cable LOI 93-32 governmental channels.4 The Commission was charged by Television Co., Inc., the 1992 Cable Act with creating regulations that ensure that the rates for the basic service tier are reasonable.5 The Fort Lee, New Jersey 1992 Cable Act directs that "[sjuch regulations shall be designed to achieve the goal of protecting subscribers of Letter of Inquiry 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 MEMORANDUM OPINION AND ORDER cable system were subject to effective competition."6 Under the 1992 Cable Act, operators may offer other channels in a cable programming service tier or tiers.7 The 1992 Cable Adopted: December 19, 1994; Released: December 22, 1994 Act orders the Commission to create regulations for the cable programming service tiers that allow it to identify By the Chief. Cable Services Bureau: individual cases of unreasonable rates.8 The 1992 Cable Act thus protects consumers© interests in continuing to receive the basic service tier and cable programming service tiers I. INTRODUCTION at reasonable rates. 1. The Commission received a Form 329 Complaint on 4. The 1992 Cable Act requires the Commission to adopt October 26, 1993. concerning the reasonableness of the standards and guidelines to prevent evasions, "including rates charged for cable programming services by Vision evasions that result from retiering."9 The 1992 Cable Act©s Cable Television Co., Inc., in Fort Lee, New Jersey ("Vi legislative history states that the Commission should scru sion Cable"). In response to this complaint, the Commis tinize offerings of non-traditional stand-alone services to sion issued Letter of Inquiry 93-32 ("LOI") to Vision Cable "prevent repricing, retiering, or other alterations of rate on December 13, 1993.© The LOI asked Vision Cable to structures" that could have the effect of evading the pur provide information concerning its compliance with the poses of rate regulation. 10 This provision in the 1992 Cable Commission©s rules governing evasion in the offering of Act is intended to give the Commission the authority to packages which allegedly are not rate-regulated. Vision Ca address changes in the cable industry©s business practices ble responded to our LOI on January 12, 1994. that would thwart the intent of rate regulation." 5. In the Rate Order the Commission defined evasion as "any practice or action which avoids the rate regulation II. BACKGROUND provisions of the Cable Act or Commission rules contrary 2. In the Cable Television Consumer Protection and to the intent of the Act or its underlying policies." 12 We Competition Act of 1992 ("the 1992 Cable Act"). Congress must scrutinize a particular operator©s marketing or pricing created a regulatory scheme giving the Commission and practices to determine whether those practices have the local franchising authorities jurisdiction over the cable pro effect of avoiding the requirements of our rate regulations, gramming and equipment rates of non-competitive cable contrary to the intent of the 1992 Cable Act and our rules. systems. The 1992 Cable Act provides that the rates of cable systems not subject to effective competition may be regulated by local franchising authorities, in the case of

1 Letter from Roy J. Stewart, Chief. Mass Media Bureau. FCC. I t 157-161 (1993) ("Rate Order") (franchising authorities may to Vision Cable. Palisades Park, New Jersey, LOI-93-32 (Decem require operators to carry PEG channels on tiers other than ber 13, 1993). Copies of the Letter of Inquiry and Response are basic). available to the public in the FCC©s Cable Reference Center, 5 Communications Act of 1934 § 623 (b)(l), 47 U.S.C. § 543 2033 M Street, N.W., Room 333. Washington, D.C. We also note that there is a pending rate complaint proceeding involving Id. Vision Cable. Our decisions made herein will be made a part of 7 Communications Act of 1934 § 623(1)(2), 47 U.S.C. § 543(1)(2) that proceeding. (1992). 2 Communications Act of 1934. as amended, § 623 (a)(2), 47 * Communications Act of 1934 § 623 (c)(l)(A), 47 U.S.C. § 543 U.S.C. § 543 (a)(2) (1992). (cXU(A) (1992). Identification of individual cases of unreason 3 Pub. L. No. 102-385 § 2 (b) (4), 106 Stat. 1460 (1992); see also able rates is achieved by a process in which the Commission H.R. Rep. No. 628. 102d Cong., 2d Sess. at 34 (1992). assumes jurisdiction over systems where a complaint about a 4 Communications Act of 1934 § 623 (b)(7)(A)(ii-iii), 47 U.S.C. cable programming service tier rate is filed. § 543 (b)(7)(A)(ii-iii) (1992); Implementation of Sections of the 9 Communications Act of 1934 § 623(h), 47 U.S.C. § 543(h) Cable Television Consumer Protection and Competition Act of (1992). 1992: Rate Regulation, MM Docket 92-266, Report and Order © H.R. Rep. No. 628 at 79. and Further Notice of Proposed Rulemaking, 8 FCC Red 5631 at 11 S. Rep. No. 92, 102d Cong.. 2d Sess. at 77 (1992). 12 Rate Order^, 451.

2207 DA 94-1554 Federal Communications Commission Record 10 FCC Red No. 5

III. FACTS 11. Vision Cable argues, inter alia, that it began offering 6. Before September 1, 1993, Vision Cable©s services its Preferred Service channels individually, as well as included a 15 channel basic tier, called Broadcast Basic, for WTBS, ESPN2, TNT, and the Discovery Channel, individ $1.00 per month, a 22 channel cable programming service ually and through its SuperStation Package, in order to tier, called Cable Service, for $20.20 per month, and an implement Congress© intent to maximize consumer choice. additional 4 channel cable programming service tier, called However, based on this record, very few consumers elected Preferred Service for $4.40 per month. to exercise that choice. Vision Cable©s response provides a 7. The following chart summarizes Vision Cable©s service breakdown of its subscribers who chose the packages and tier offerings prior to September 1, 1993: the individual channels. As of January 10, 1994, 46,196 subscribers elected to take the SuperStation Package, while Offering Channels Price the numbers of subscribers taking the individual channels comprising that package are as follows: WTBS-279; 1. Broadcast Basic IS $ 1.00 ESPN2-216; TNT-150; Discovery-106. With respect to the 2. Cable Service 22 $20.20 Preferred Service package, as of January 10, 1994, 12,921 3. Preferred Service 4 $ 4.40 TOTAL 41 $25.60 subscribers elected to take the entire package, while 479 took SportsChannel; 296 took the Sci-Fi Channel; 133 took 8. On September 1, 1993, the date our rate regulations Court TV; 123 took TNN; and 0 took BET. 16 became effective, Vision Cable restructured its service offerings. Vision Cable©s restructured service offerings in cluded a 15 channel Basic Service tier for $ 9.18 per IV. DISCUSSION month, and a 19 channel cable programming service tier 12. The 1992 Cable Act requires the Commission to called Cable Service for $11.63 per month. Vision Cable adopt standards and guidelines to prevent evasions, "in also created two programming packages, SuperStation cluding evasions that result from retiering." 17 An evasion, Package and a package called Preferred Service, with the as defined by the Commission, is an act or practice that channels also offered on an individual basis. "avoids the rate regulation provisions of the [Cable] Act or 9. The first package, SuperStation Package, included four our rules contrary to the intent of the Act or its underlying channels (two channels, WTBS and WSBK,13 originally policies." 18 In the Rate Order, we stated that "retiering offered in Vision Cable©s Broadcast Basic tier, and two otherwise permitted under our rules will not be deemed an channels, TNT and The Discovery Channel, originally of evasion." 1* First, we examine whether Vision Cable©s re fered in Vision Cable©s Cable Service tier). The channels sponse to the LOI shows that its restructuring of its could be purchased individually for $.75 per month, or as offerings had the effect of evading rate regulation for the a package for $2.00 per month. The second package, Pre channels that Congress intended to be rate-regulated. ferred Service, included the same four channels originally 13. Vision Cable©s restructuring involved (1) its offering offered on the Preferred Service tier (SportsChannel, Sci-Fi of two channels previously offered on its Broadcast Basic Channel, Court TV, and the Nashville Network (TNN)), tier plus two channels previously offered on its Cable plus Black Entertainment Television (BET), which was not Service tier on an individual and package basis, and (2) its previously available on the system. 14 SportsChannel could movement of four channels, previously offered on its Pre be purchased individually for $2.00 per month and the ferred Service tier and the addition of one new channel, to other four channels could be purchased individually for create the packages that it alleges are not rate-regulated. $1.25 per month. All five of the Preferred Service channels Thus, with respect to the SuperStation Package, Vision could be purchased as a package for $4.00 per month. In Cable removed channels from otherwise rate-regulated tiers addition, Vision Cable stated that it automatically sub to create a new package of channels. As to the Preferred scribed its Broadcast Basic customers to WTBS and WSBK Service package. Vision Cable©s offering of the component at the a la carte rate of $.75 per month each. channels on an individual basis (and adding a new chan LO. The following chart summarizes Vision Cable©s ser nel) purportedly removed the Preferred Service tier from vice tier options as of the date of its response to our LOI: 15 rate regulation. Vision Cable fundamentally changed its service to subscribers by removing 8 channels from rate Offering Channels Price regulation and by eliminating an entire cable programming service tier. In so doing, Vision Cable avoided the applica 1. Basic 15 $ 9.18 tion to eight channels of our rate regulations which gen 2. Cable Service 19 Sll.b3 erally required cable operators to reduce rates by about 10 3. SuperStation Package 4 S 2.00 percent. That is, if Vision Cable had not restructured on 4. Preferred Service 5 $ 4.00 September I, 1993. it would have been required to recalcu TOTAL 43 S26.81 (if purchased late its rates in accordance with the Rate Order we released both packages) on May 3. 1993, which generally required cable operators

13 WSBK was replaced by ESPN2 in the SuperStation Package mission in separate proceedings. on January 1, 1994. ESPN2 was not previously offered by the 16 As discussed above, BET was added to the system only two Vision Cable. days before Vision Cable prepared its response. 14 Black Entertainment Television (BET) was added to the 17 Communications Act of 1934 § 623(h), 47 U.S.C. § 543(h) system©s Preferred Service tier on January 10, 1994. (1992). ©* This order does not evaluate Vision Cable©s rates for its 18 Rate Order 1 451. basic and cable programming service tiers. These rates are sub " Id. at 1453. ject to review by the local franchising authority and the Com

2208 10 FCC Red No. 5 Federal Communications Commission Record DA 94-1554 to reduce their rates. Moreover, customers that were receiv them discounts on packages of per-channel or per-program ing the Broadcast Basic tier continued to receive WTBS services and by limiting subscriber access to a greater quan and WSBK after the restructuring, and it appears that tity of premium programming."21 Thus, we envisioned that customers who were receiving the Preferred Service tier cable operators, for the most part, would offer channels continued to receive the same four channels as part of the that previously had been offered a la carte in discounted Preferred Service package after the restructuring. packages, and concluded that it would be better for con 14. We believe that Vision Cable has not provided a sumers if we construed the 1992 Cable Act to permit such sufficient justification for this change to overcome our discounting.22 This is not the type of offering that Vision finding that there is an evasion of rate regulation. Few Cable and others have provided their subscribers. Specifi subscribers actually subscribed to individual channels in cally, these operators did not offer a discounted package of stead of either of the packages offered; at most, only 1.6 channels that previously had been offered a la carte to percent of Vision Cable subscribers who took any part of subscribers, but instead removed channels from a tier that the SuperStation Package took the individual channels, would be subject to our rate regulations. while only approximately 8 percent of subscribers who 18. Moreover, in the Rate Order, the Commission deter took any part of the Preferred Service took individual mined that a la carte packages would be exempt from rate channels at the time of Vision Cable©s LOI response. Other regulation, i.e., would be deemed not to fall within the than an attempt to evade rate regulation, there appears to definition of "cable programming service," if two con be no sufficient justification for this restructuring. ditions were met: (1) the price for the combined package 15. Other factors corroborate our finding that Vision must not exceed the sum of the individual charges for each Cable©s restructuring had the effect of evading rate regula component service; and (2) the cable operator must con tion. First, it made all of the Preferred Service channels tinue to provide the component parts of the package to available individually and on a package basis, thereby en subscribers separately in addition to the package. The Com tirely eliminating an entire cable programming service tier mission said that the second condition would be satisfied and it also offered the SuperStation Package, all on the eve only when "the per channel offering provides consumers of regulation. Second, it appears that Vision Cable auto with a realistic service choice."23 matically subscribed its Preferred Service customers to the 19. Under the two-part test that we set forth in the Rate Preferred Package and its Broadcast Basic customers to two Order, it is clear, first, that the prices for the two combined of the channels in the SuperStation Package on an a la packages do not exceed the sum of the individual channel carte basis. In light of these facts, we find that Vision charges, becausePwith respect to the SuperStation Package, Cable©s restructuring of its offerings constituted an evasion subscribers may purchase each channel for $ .75, or the of our rate regulation rules. four-channel package for $2.00, and with respect to the 16. Because Vision Cable©s restructuring is a purported Preferred Service package, subscribers may purchase collective offering of a la carte channels, we also must SportsChannel for $2.00 and each of the other four chan determine whether the offering met the Commission©s re nels for $1.25, or the package for $4.00. The second part of quirements for a permissible collective offering of a la carte the test is whether the separate parts of the package con channels. If the offering met the Commission©s require stitute a "realistic service offering." The results of our ments for a permissible collective offering of a la carte review of Vision Cable©s submission reveal that more than channels, then Vision Cable would not have evaded our 98 percent of Vision Cable©s subscribers who take any part rate regulations because it would not be required to reduce of the SuperStation Package, and 92 percent who take any its price for the collective a la carte package.20 part of the Preferred Service package, take the whole pack 17. In our Rate Order, the Commission recognized that age rather than any of the individual channels.24 This fact, "a la carte packages" appear to be "cable programming together with the other factors present in this case,©5 tends services," but said that "interpreting the statute in such a to show that the per-channel offering, in this instance, does literal fashion could disadvantage consumers by denying not constitute a realistic service offering.

20 In our Going Forward Order, we have reconsidered our Act of 1992: Rate Regulation, MM Docket No. 92-266, Second regulatory treatment of collective offerings of a la carte chan Order on Reconsideration, Fourth Report & Order, and Fifth nels. Implementation of Sections of the Cable Television Con Notice of Proposed Rulemaking, 9 FCC Red 4119 (1994) sumer Protection and Competition Act of 1992: Sixth Order on ("Second Reconsideration Order"), the Commission affirmed its Reconsideration. Fifth Report and Order, and Seventh Notice of prior view. It said that "we continue to believe that the public Proposed Rulemaking, MM Docket Nos. 92-266 and 93-215, FCC interest will be served by generally permitting non-regulated 94-286 (adopted November 10, 1994) ("Going Forward Order"). treatment of collective offerings of ©a la carte© channels if the Specifically, we have determined that such packages are cable offering enhances consumer choice and does not constitute an programming service tiers within the meaning of Section 3(1)(2) evasion of rate regulation." Id. at 1 194. In this regard, we of the 1992 Cable Act and therefore will be subject to our retained the two-part test contained in the Rate Order for general rate regulation rules. Id. at t 46. However, in order to determining when we would refrain from regulating "a la carte determine whether Vision Cable evaded rate regulation when it packages." In addition, the Commission set out 15 interpretive restructured its offering, we must evaluate its a la carte package guidelines to enable operators to better determine what under the rules that were in effect when it restructured. collective offerings of "a la carte" channels will be considered 21 Rate Order 1 329. "realistic service offerings." Id. at H 195. 22 See, e.g., Rate Order at t 453 n.U61 ("There is no evidence 24 This analyzes the facts most favorably to Vision Cable that operators would or, as a business matter, could shift pro because we assume that each subscription to an individual gramming previously offered as part of a tier to ©a la carte© channel represents one consumer. status, i.e., a per-channel or per-program offering, to©avoid the 25 See 11 13-14, supra. rate regulation applicable to tiers"). 23 Id. at 1 H 327-28 & n.8()8. In the Implementation of Sections of the Cable Television Consumer Protection and Competition

2209 DA 94-1554 Federal Communications Commission Record 10 FCC Red No. 5

20. Even if we were to apply the 15 interpretive guide regulated tiers from which they came or offer the channels lines set forth in our Second Reconsideration Order, we collectively as a separate rate-regulated tier or tiers of cable still conclude that Vision Cable©s offering does not con programming service.34 We further conclude that these stitute a realistic service offering. Vision Cable©s submission packages are rate-regulated offerings as of September 1, reveals additional evidence weighing against a finding that 1993, and that the channels composing them must be its individual a la carte channels constitute a realistic ser counted as rate-regulated channels for purposes of rate vice offering. The most important factor, of course, is that justification as of that date. "an entire regulated tier has been eliminated and turned into an ©a la carte© package."2 © Moreover, a "significant percentage" of the channels offered in the two a la carte V. ORDERING CLAUSES packages (89 percent) was removed from regulated tiers/8 24. Accordingly, IT IS ORDERED that Vision Cable©s which would "weigh against unregulated treatment."29 packages are subject to rate regulation as of September 1, 21. In our recently adopted Going Forward Order, we 1993. and the channels composing them must be counted have reconsidered our rules relating to a la carte packages by Vision Cable as rate-regulated channels for purposes of and concluded that such packages are cable programming rate justification, as of that date. service tiers within the meaning of Section 3(l)(2) of the 25. IT IS FURTHER ORDERED that, effective 90 days 1992 Cable Act. For that reason, the package at issue is from the release date of this Order, Vision Cable must subject to rate regulation and cannot continue to be treated either offer these channels as part of the respective rate- as an unregulated package of channels. In reaching this regulated tiers from which they came or offer the channels conclusion in the Going Forward Order, we acknowledged collectively as a separate rate-regulated tier or tiers of cable that, as applied to many fact patterns, we did not provide a programming service. clear test in the Rate Order and the Second Reconsideration 26. IT IS FURTHER ORDERED that this Order is Order for determining whether an a la carte package was EFFECTIVE upon release. permissible. 30 22. We do not believe, however, that our a la carte rules FEDERAL COMMUNICATIONS COMMISSION are unclear as applied to the fact pattern at issue in this case. In the Rate Order we stated that a cable operator could not escape rate regulation simply by catling what otherwise would be a rate-regulated tier an a la carte package.31 We reiterated this admonition in the Second Reconsideration Order when we warned against eliminating Meredith J. Jones "an entire regulated tier" and "turning [it] into an a la Chief, Cable Services Bureau carte package."32 This, however, is exactly what Vision Cable did by moving a total of eight channels to allegedly unregulated packages, and in the process, eliminating an entire cable programming service tier. While we have ac knowledged that aspects of our evaluation of a la carte packages were unclear,33 as applied to these particular facts, this prong of the test is clear and requires no additional guidance or explanation from the Commission. In light of the fact that it is clear that elimination of an entire regu lated tier and transformation of that tier into an a la carte package is an evasion of rate regulation, we find that Vision Cable©s retiering in fact clearly constitutes just such an evasion. 23. We find that Vision Cable©s SuperStation and Pre ferred Service packages, as the offering existed in Fort Lee, New Jersey, on December 13, 1993, the date of our LOI, must be treated as a rate-regulated cable programming service tiers. As a result, effective 90 days from the release date of this Order, Vision Cable must either offer the channels in these packages as part of the respective rate-

2h Second Reconsideration Order f 1%. ered an evasion of rate regulation. See Going Forward Order U 27 Id. 40. 28 Vision Cable removed four of the five channels in the " Rate Order f 328 n.808. Preferred Service package and all four of the channels in the u Second Reconsideration Order f 196. SuperStation Package from regulated tiers. 33 See Warner Cable Communications, Milwaukee, Wisconsin, 29 Second Reconsideration Order 1 196. LOI-93-14. DA 94-1276 (released November 18, 1994). 30 In adopting the 15 interpretive guidelines in the Second 34 To provide 90 days gives Vision Cable ample time to comply Reconsideration Order to supplement the Rate Order©s two- with the 30 day notice provisions of our regulations for rate and prong test, we hoped to enable operators to better determine programming changes. See 47 C.F.R. «§ 76.309(c)(3)(i)(B), what collective offerings of a la carte channels would be consid 76.932 and 76.964. Vision Cable, of course, may continue to offer any channels as single channel offerings consistent with the 1992 Cable Act and our rules.

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