FCC 90-4 12 Federal Communications Commission Record 6 FCC Red No. 2 signals is no longer valid. Thus, this Further Notice of Before the Proposed Rule Making (Further Notice) proposes alterna- Federal Communications Commission tive tests for effective competition. and seeks comment on Washington, D.C. 20554 specific aspects of the proposals for changing the effective competition standard and standards for rate• regulation. MM Docket No. 90-4 II. BACKGROUND - 2. The Cable Communications Policy Act of 1984 (Ca- In the Matter of ble Act) set forth a national policy to ehcourage the growth and development of cable television services.2 To Reexamination of the Effective further this policy, Section 623 of the Cable Act permits. but does not require, local franchising authorities to regu- Competition Standard for the late basic service rates -only in those situations-where. the Regulation of Cable Television cable system is not subject to "effective competition.t' Basic Service Rates The Cable Act directed •the Commission to define the circumstances in which a cable system is not subject to effective competition and to establish standards for the FURTHER NOTICE OF PROPOSED RULE MAKING regulation of basic cable rates by local franchising authorities in such cases.4 Adopted: December 13, 1990; Released: December 31, 1990 3. Under existing Commission rules, promulgated in 1985 and amended in 1988, a cable system is deemed By the Commission: Commissioners Quello and subject to effective competition if at least three Duggan issuing separate statements. unduplicated broadcast television signals are available over the entire cable community.5 The existing standard counts a broadcast signal as available based on predicted TABLE OF CONTENTS Grade B coverage or "significantly viewed" status in the cable community.b The Commission also has established Paragraph procedural requirements for those franchising authorities that choose to regulate basic cable rates, although the INTRODUCTION 1 specific rate-setting methodology used to set the basic service rate is left to the local franchising authorities. BACKGROUND 2 4. Section 623 of the Cable Act also requires that the Commission periodically review its regulations, taking into account developments in technology.7 On January 5 DISCUSSION 11, 1990, the Commission initiated this proceeding to undertake such a review in light of changed circum- A. Effective competition 5 stances in the video marketplace since the three signal B. Standards for rate regulation 37 standard was adopted. The Notice sought comment on C. Implementation of the rules 46 whether the three signal standard remains valid, and, if D. Other Matters 54 not, what would constitute a more appropriate standard. It also requested comment on proposals to amend the regulation by local franchising 33 standards for rate CONCLUSION authorities in cable communities not subject to effective competition.8 ADMiNISTRATIVE MATTERS 56 Appendix A: Commenters III. DISCUSSION Appendix B: Initial Regulatory Flexibility Act Analysis Appendix C: Proposed Rules A. Effective Competition Appendix D: Recommended Cable Industry Customer 5. In the Notice, we indicated our belief that the three Service Standards signal standard may no longer be an appropriate measure of effective competition because changes in the cable in- dustry appeared -to have altered the nature of basic cable I. INTRODUCTION service.9 The fundamental change we observed was that mainly of 1. In the Notice of Proposed Rule Making (Notice) that the basic service tier, which consisted opened this proceeding. the Commission indicated its be- retransmitted local broadcast television signals when we lief that changed circumstances in the video marketplace adopted the effective competition standard, now includes warranted reexamination of the "three signal standard" a full range of programming services, including distant for determining whether a cable system was subject to broadcast signals, cable networks, superstations and locally effective competition and thus exempt from local fran- originated programming, beyond local broadcast sta- chising authority rate regulation.1 The Notice sought com- tions.'0 Thus, while over-the-air broadcast signals once ment on a wide variety of options for a revised definition may have been a good substitute for basic cable service, of effective competition and rate regulation standards. The this maV not he the case today given the expanded basic resulting record leads us to believe that an effective com- tier offerings.t1 As further evidence of the possible need to petition. standard based on three over-the-air broadcast revise the definition of effective competition. we noted in 208 -- . 6 FCC Red No.2 Federal Communications Commission Record FCC 90-412 the Notice that, under the existing standard, rates for basic senting franchising authorities attribute these rate in- cable service have increased while subscribership has also creases to a lack of competition.2° They also contend that jncrased, a result that might suggest that competitive basic cable rates have risen at a time when penetration alternatives to basic service are limited. Moreover, an rates continue to grow because there are no good sub- update of the staff study that was used in part to develop stitutes for cable service, which offers subscribers an array the three signal standard appeared to indicate that with of programming and services (i.e., local and distant broad- changes in viewing patterns the current standard is no cast stations, locally originated programming, satellite-de- longer appropriate for determining when a cable operator livered services and specialty channels) in one convenient is subject to effective competition. 12 package. 6. The Notice requested comment on whether the three 10. Analysis. We believe that our initial determination signal standard remains valid, or whether some alternate regarding the need to. redefine effective competition is standard would provide a more accurate determination of correct because the three over-the-air signal standard no effective competition. Commenters favoring a revised stan- longer provides a correct measure of effectivecompetition dard were asked to consider a number of alternatives to the full range of cable service. The evidence indicates incl,ding: that consumers subscribe to basic cable service for the large number and wide variety of programming services it (1) an increased complement of over-the-air signals; delivers directly to the home. Since 1985, the number of (2) the availability of a second competitive cable channels included in basic service has increased.2' Based system or alternative video delivery provider, such upon the FCC/GAO data, we also find that the most widely subscribed-to tier of service on average has ex- as multichannel, multipoint distribution systems panded to include significant amounts of programmin (MMDS),'3 satellite master antenna systems (SMATVs), direct broadcast satellite systems (DBS) beyond the retransmission of local broadcast signals.2 or home satellite dishes (HSD5); (3) a measure of Moreover, audience statistics indicate that nonbroadcast cable penetration; (4) the offering of cable services cable programming has attracted an increasing share of on a per-channel or unbundled basis; and (5) some the audience in cable homes. For example, during the 1985/1986 television season, basic cable programming at- combination of factors. tracted a 19 share of all day audience in cable homes. During the 1988/1989 season, the all day audience share 1. Three Signal Standard for basic cable programming rose to 28.23 7. çonts. There is a consensus among commenters, 11. Furthermore, an analysis of the services provided by including government parties and cable interests, that the cable television systems indicates that such services can be three signal standard is no longer a viable measure of divided into four general categories and that different effective competition because it does not reflect today's media, to varying degrees, provide competition for dif- video marlcetplace.'4 While the National Telecommunica- ferent components of cable service.24 First, because cable tions and Information Administration (NTIA) and cable can offer a high level of signal quality, it serves as an interests generally argue that the existing three signal "antenna service," delivering quality reception of standard has performed as intended,'5 they concede that retransmitted local broadcast signals. The availability of an lnreased number of signals are now needed to con- comparable off-air broadcast television service is a good stitute effective competition in today's marketplace. Re- substitute for cable's "antenna service" function. Second, jecting our belief Set forth in the Notice that basic cable cable offers "premium" programming, such as recent service has fundamentally changed over this period, they movies, usually without• commercial interruption. The arue that cable service remains a combination of local substantial penetration of YCRs and the ubiquity of tape broadcast signals, regional and distant signals and a variety rental stores provides a good substitute for commercial- of cable programming services. They observe that in 1985 free movie channels.25 Third, cable offers general interest the Commission considered comments that indicated that channels, such as USA Network and TurnerNetwork basic service consisted of a mixture of local over-the-air Television (TNT). Broadcast signals offer some degree of signals