Before the FEDERAL COMMUNICATIONS COMMISSION FCC 94-254 Washington, D.C. 20554 In the Matter of ) ) Implementation of Sections of ) the Cable Television Consumer ) MM Docket No. 92-266 Protection and Competition Act ) of 1992: Rate Regulation ) FOURTH ORDER ON RECONSIDERATION Adopted: September 30, 1994 Released: October 5, 1994 By the Commission: I. Introduction 1. In this Fourth Order on Reconsideration, we consider whether to amend our price cap rules governing regulated cable service rates to permit cable operators to revise rates for regulated cable services to reflect changes in franchise fees without receiving prior franchising authority or Commission approval. We also consider whether to amend our rules to permit external cost treatment of Commission regulatory fees applicable to cable operators and to permit these fees to be passed through to subscribers under the same procedures as changes in franchise fees. II. Franchise Fees A. Background 2. Under the Commission's price cap rules, a cable operator is permitted to adjust its maximum monthly charge for regulated service tiers to reflect changes in certain categories of external costs, including franchise fees. If an operator's basic service tier is being regulated in a particular franchise area by the franchising authority or by the Commission, the operator generally is not allowed under our rules to increase its rates for the basic service tier or related equipment and installations without first submitting the proposed increase to the franchising authority or the Commission, as the case may be, for review. Under our rules, a franchising authority reviewing a proposed increase in basic rates has an initial 30 day period to make its decision. The franchising authority may extend this period for an additional 90 days in a non-cost-of-service case or 150 days in a cost-of-service case. During this period, the operator's proposed increase is not in effect. When the Commission is regulating basic rates, filings regarding rate increases must be made 30 days prior to the proposed effective date and such rate increases are effective on the date proposed unless the Commission issues an order deferring the effective date or denying the rate proposal. With respect to cable programming service (CPS) rates, an operator must file rate increases for prior review by the Commission if the Commission has ordered the operator to reduce its CPS rates within the prior 12 months or some other period specified by the Commission in a particular case. In addition, when a CPS complaint against the operator is pending before the Commission, an operator must give the Commission 30 days' notice of changes in any rates, including increases in rates attributable to increases in franchise fees. B. Discussion 3. On reconsideration, we determine that we should permit adjustments to capped rates to reflect increases in franchise fees without prior regulatory approval. These fees are generally set by the franchising authority itself. Thus, the fees are set by a government entity which is aware of and sensitive to the fees' impact upon consumers. Since it is the franchising authority which has set the franchise fee, prior regulatory review appears less necessary from a consumer protection standpoint than it is for other categories of external costs. 4. Accordingly, as of the effective date of this Order, where the franchising authority is regulating basic rates, increases in basic rates attributable to increases in franchise fees will not be subject to the prior approval requirements for proposed rate increases set forth in Section 76.933(a)-(c) of our rules. However, operators will continue to be required to give subscribers and the franchising authority 30 days' advance notice of any rate change, as required by our rules. When the operator provides the 30 days' notice to the franchising authority, it must also provide documentation that demonstrates that the rate increase has been properly calculated. 5. As under existing rules, where the Commission is regulating basic service tier rates, operators must give the Commission 30 days' advance notice of any such increase attributable to franchise fee increases. Operators must also give subscribers and franchising authorities 30 days' advance notice of changes in basic rates attributable to increases in franchise fees as required by our rules. In addition, where the Commission is regulating basic service rates, the operator should submit with its filing to the Commission the same documentation which it would need to submit if the franchising authority were regulating basic service rates as outlined above in paragraph 4. The Commission will review such filings according to its existing rules. 6. The franchising authority or the Commission, as appropriate, may then review the pass-through of increases in franchise fees and may order a prospective rate reduction and refunds in accordance with our rules in the event the operator has increased its basic service rates by more than the increase in franchise fees properly allocable to the basic tier. The burden of demonstrating that any such increases are proper shall remain on the operator as with any other rate adjustments. 7. Operators that have had cable programming service rates deemed unreasonable within the prior 12 months, or some other period specified by the Commission in a particular case, must submit increases in CPS rates attributable to an increase in franchise fees to the Commission for its review. Rate justifications relating to franchise fee-related increases in CPS tier rates will be reviewed by the Commission according to existing rules for Commission review of basic service tier rates. 8. These rule revisions do not change our rules governing rate adjustments attributable to decreases in external costs, including franchise fees. Decreases in franchise fees allocable to either the basic service or a CPS tier will continue to be treated as external cost decreases under our existing rules. Such decreases must be passed through to subscribers within the periods set forth in our rules for passing through decreases in external costs. The operator must provide 30 days' notice to subscribers, the local franchising authority and the Commission, as appropriate. As with franchise fee increases, operators must provide documentation for the amount of the decrease. III. Regulatory Fees A. Background 9. Section 9 of the Communications Act of 1934, as amended, requires the Commission to collect cable system regulatory fees of $370 per 1,000 subscribers from cable television systems on an annual basis. The purpose of requiring cable systems to pay regulatory fees to the Commission is to permit the Commission to recover the annual cost of its various regulatory activities. In a Report and Order released June 8, 1994, in MD Docket No. 94-19, the Commission adopted implementing rules providing for the payment of regulatory fees in fiscal year 1994 and thereafter. In that Report and Order, we decided to assess the cable system regulatory fee on an exact per subscriber basis (i.e., $0.37 per subscriber per year or approximately $0.03 per subscriber per month). We provided that regulatory fees be paid on this basis so that cable systems serving less than 1,000 subscribers would not pay a disproportionately high regulatory fee. The first cable system regulatory fee payments for fiscal year 1994 were due on August 12, 1994. 10. Cable operators in MD Docket No. 94-19 urged the Commission to permit cable systems to pass regulatory fees through to subscribers as external costs. In that Report and Order, we concluded that the pass-through issue was not within the scope of the docket and should, therefore, be addressed separately. B. Discussion 11. Cable system regulatory fees are mandated by Congress, collected by the Commission, and are intended to reimburse the Commission for administering its regulatory responsibilities under the Communications Act of 1934. As such, they are exceptional, newly imposed, governmentally-assessed fees that further the purposes of the Communications Act. These fees are also beyond the control of the cable operator. Furthermore, the fees are easily measurable in amount. Consistent with the Commission's prior decision to determine on a case-by-case basis whether categories of costs should be accorded external cost treatment, we determine that Commission regulatory fees should be accorded external cost treatment under our price cap rules governing cable service rates. 12. We further determine that cable system regulatory fees should be directly assigned to the basic service tier. Direct assignment to the basic service tier is appropriate because the cable system regulatory fees are assessed on a per subscriber basis and all subscribers receive the basic service tier. The Commission's regulatory fees order defines a "subscriber" in a manner consistent with this method of assignment as "a member of the general public who receives broadcast programming distributed by a cable television system...." (emphasis added). Broadcast programming is required to be offered on the basic service tier. In addition, if we were to permit cable systems to assign all of the regulatory fee to the CPS tiers, then basic-only subscribers would not pay any of the regulatory fee even though the fee is assessed on a per subscriber basis and is intended to reimburse the agency for more than CPS tier regulation. And, if we were to allow cable systems to allocate the fee among basic and CPS tiers on a weighted or other basis, then some subscribers would pay more than three cents a month and other subscribers would pay less. Assignment to the basic service tier is also consistent with the fact that regulatory fees are intended to reimburse the Commission for the costs of regulating cable service, including Commission oversight of the basic service tier and other regulatory activities such as rulemaking, the direct regulation of some systems' basic tier rates and review of local franchising authorities' decisions. We find, therefore, that the most equitable means of permitting cable systems to pass through to subscribers regulatory fees is by requiring cable systems to directly assign the fee entirely to the basic service tier. 13. We believe that cable operators should be permitted to adjust rates on account of the regulatory fees without prior regulatory approval, subject to our requirements for 30 days' advance notice. Thus, operators may adjust rates to reflect the newly imposed regulatory fees, and any subsequent increases in the fees, in the same manner that rates may be adjusted for increases in franchise fees, as discussed above. Decreases in Commission regulatory fees will continue to be treated as external cost decreases under our existing rules and must be passed through to subscribers in accordance with those rules. 14. Operators shall recover the annual regulatory fee according to the following schedule. Regulatory fees of $0.37 per subscriber that were due on August 12, 1994 and/or September 9, 1994 for fiscal year 1994 (October 1, 1993 - September 30, 1994) shall be recovered from subscribers over a ten month period beginning in December of 1994 and ending in September of 1995. For the first three months of this ten month period (December 1994 -February 1995), operators shall recover $0.03 per month per subscriber. For the remaining seven months (March 1995 - September 1995), operators shall recover $0.04 per month per subscriber. Operators may provide notice of the entire fiscal year's regulatory fee pass-through in a single notice so long as that notice states that the fee pass-through will increase from $0.03 in February 1995 to $0.04 in March 1995. Regulatory fees that are assessed for subsequent fiscal years shall be recovered in twelve monthly installments during the fiscal year following the fiscal year for which the payment was imposed. For example, operators may begin recovering regulatory fees paid for fiscal year 1995 during the 12 month period from October 1995 through September 1996. Payments shall be collected in equal monthly installments, except that for so many months as may be necessary to avoid fractional payments, an additional $0.01 payment per month may be collected. All such additional payments shall be collected in the last month or months of the fiscal year, so that once collections of such payments begin there shall be no month remaining in the year in which the operator is not entitled to such an additional payment. Recovery of regulatory fees paid for fiscal year 1995 and subsequent fiscal years is, of course, subject to the notice requirements contained in this Order. We recognize that operators will not recover the regulatory fee until after they have paid it. However, operators may not assess interest on the amount charged to subscribers for regulatory fees in order to avoid the substantial administrative burdens on operators and regulators in determining and reviewing interest calculations. IV. Regulatory Flexibility Act Analysis Final Analysis for the Fourth Order on Reconsideration 15. Pursuant to the Regulatory Flexibility Act of 1980, 5 U.S.C.  601-612, the Commission's final analysis with respect to the Fourth Order on Reconsideration is as follows: 16. Need and purpose of this action. The Commission, in compliance with  3 of the Cable Television Consumer Protection and Competition Act of 1992, 47 U.S.C.  543 (1992) pertaining to rate regulation, adopts revised rules and procedures intended to ensure cable subscribers of reasonable rates for cable services with minimum regulatory and administrative burden on cable entities. 17. Summary of issues raised by the public in response to the Initial Regulatory Flexibility Analysis. There were no comments submitted in response to the Initial Regulatory Flexibility Analysis. The Chief Counsel for Advocacy of the United States Small Business Administration (SBA) filed comments in the original rulemaking order. The Commission addressed the concerns raised by the Office of Advocacy in the Rate Order. 18. Significant alternatives considered and rejected. Petitioners representing cable interests and franchising authorities submitted several alternatives aimed at minimizing administrative burdens. The Commission responded to these comments in previous Orders in this docket. Although the Commission is issuing this Order on its own motion, the Commission has attempted to accommodate commenters' concerns and to reduce administrative burdens by providing an expedited method to pass through franchise fees and Commission regulatory fees. V. Ordering Clauses 19. Accordingly, IT IS ORDERED that, pursuant to Sections 4(i), 303(r), and 623 of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 303(r), and 543, that, Sections 76.922, 76.924, and 76.933 of the Commission's rules, 47 C.F.R. Sections 76.922, 76.924, and 76.933 ARE AMENDED as set forth in the attached Appendix. 20. IT IS FURTHER ORDERED that, this Fourth Order on Reconsideration IS EFFECTIVE 30 days after the date of publication in the Federal Register. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary APPENDIX Part 76 of Chapter I of Title 47 of the Code of Federal Regulations is amended as follows: PART 76 - CABLE TELEVISION SERVICE 1. The authority citation for Part 76 continues to read as follows: Authority: Secs. 2, 3, 4, 301, 303, 307, 308, 309, 48 Stat., as amended, 1064, 1065, 1066, 1081, 1082, 1083, 1084, 1085, 1101; 47 U.S.C. Secs. 152, 153, 154, 301, 303, 307, 308, 309, 532, 533, 535, 542, 543, 552, as amended, 106 Stat. 1460. 2. Section 76.922(d)(3)(iv) is amended to add section (F) to read as follows:  76.922 Rates for the basic service tier and cable programming services tiers. (d)(3)(iv) External costs shall consist of costs in the following categories: (A) State and local taxes applicable to the provision of cable television service; (B) Franchise fees; (C) Costs of complying with franchise requirements, including costs of providing public, educational, and governmental access channels as required by the franchising authority; (D) Retransmission consent fees and copyright fees incurred for the carriage of broadcast signals; (E) Other programming costs; and (F) Commission cable television system regulatory fees imposed pursuant to 47 U.S.C  159. 3. Section 76.924 is amended to add a new paragraph (f)(5) to read as follows and to redesignate existing paragraphs (5) and (6) as paragraphs (6) and (7):  76.924 Cost accounting and cost allocation requirements. (f)(5) Commission cable television system regulatory fees imposed pursuant to 47 U.S.C.  159 shall be directly assigned to the basic service tier. 4. Section 76.933 is amended to add paragraphs (e) and (f) to read as follows:  76.933 Franchising authority review of basic cable rates and equipment costs. (e) Notwithstanding the foregoing, when the franchising authority is regulating basic service tier rates, a cable operator may increase its rates for basic service to reflect the imposition of, or increase in, franchise fees or Commission cable television system regulatory fees imposed pursuant to 47 U.S.C.  159, upon 30 days' notice to subscribers and the franchising authority and, where required by Section 76.958, to the Commission. For the purposes of paragraphs (a) - (c) of this Section 76.933, the increased rate attributable to Commission regulatory fees or franchise fees shall be treated as an "existing rate," subject to subsequent review and refund if the franchising authority determines that the increase in basic tier rates exceeds the increase in regulatory fees or in franchise fees allocable to the basic tier. This determination shall be appealable to the Commission pursuant to Section 76.944 of these rules. When the Commission is regulating basic service tier rates pursuant to Section 76.945 of these rules or cable programming service rates pursuant to Section 76.960 of these rules, an increase in those rates resulting from franchise fees or Commission regulatory fees shall be reviewed by the Commission pursuant to the mechanisms set forth in Section 76.945 of these rules. A cable operator must adjust its rates to reflect decreases in franchise fees or Commission regulatory fees within the periods set forth in Section 76.922(d)(3)(i),(iii) of these rules. (f) Cable television system regulatory fees assessed by the Commission pursuant to 47 U.S.C.  159 shall be recovered in monthly installments during the fiscal year following the fiscal year for which the payment was imposed. Payments shall be collected in equal monthly installments, except that for so many months as may be necessary to avoid fractional payments, an additional $0.01 payment per month may be collected. All such additional payments shall be collected in the last month or months of the fiscal year, so that once collections of such payments begin there shall be no month remaining in the year in which the operator is not entitled to such an additional payment. Operators may not assess interest. Operators may provide notice of the entire fiscal year's regulatory fee pass-through in a single notice.