Cable Regulation
(from Maine Townsman, August 1993)
By Dr. Richard H. Silkman

Congress renews municipal authority to regulate cable providers, but not without a confusing law and volumes of regulation.

Few industries have experienced such remarkable successes as the cable industry. In a very short period of time, the industry has extended its reach to approximately 56 million households or roughly 60% of all households in the United States with television, and has become according to Congressional findings "a dominant nationwide video medium." While this growth has served to increase the programming offerings to the public, it has also created an industry with significant market power. The industry has not been reluctant to exploit this market power, and in fact has been aided by Congress in its efforts, through the passage of the Cable Communications Policy Act of 1984.

According to Congressional findings,

"Pursuant to the Cable Communications Act of 1984, rates for cable television services have been deregulated in approximately 97% of all franchises since December 29, 1986. Since rate deregulation, monthly rates for the lowest priced basic cable service have increased by 40% or more for 28% of cable television subscribers. . .The average monthly cable rate has increased almost 3 times as much as the Consumer Price Index since rate deregulation."

This fact, as well as a growing concern that the industry has become too vertically integrated, led Congress to pass, in October 1992, the Cable Television Consumer Protection and Competition Act of 1992, providing then President Bush with the only veto override of his four years in office. This Act has changed the landscape for cable television considerably and has thrust local franchising authorities back into the cable regulation arena. Interestingly, however, it has done so while recognizing Congressional intent to "rely on the marketplace, to the maximum extent feasible." The result is that the scope and terms of regulation permissible by a local franchising authority are significantly different from those available prior to deregulation, and the Cable Act of 1992 has left municipalities and other local franchising authorities uncertain of their new roles and responsibilities in this arena.

This article attempts to provide answers to some of the most commonly asked questions by municipal officials as they try to understand the 1992 Act.

Q. Can local governments now regulate cable television?

A. Yes. The 1992 Act specifically authorizes local franchising authorities to regulate cable television rates, once they are certified by the Federal Communications Commission (FCC). At the same time, however, the Act limits the scope of such authority to what is defined as the "basic service tier." This includes at a minimum the "must carry" channels of local network affiliates (such as Channel 6 in Portland or Channel 2 in Bangor) (see sidebar) and the Public, Educational, and Government (PEG) channels required by the franchising authority. In addition, the local franchising authority may regulate any and all equipment required to receive the basic service tier. What is explicitly excluded from rate regulation at the local level are any programming services beyond the basic service tier, including all premium channels (such as Disney or HBO) and all pay-per-view channels.

Q. How does a local franchising authority become certified to regulate cable services?

A. To be certified to regulate cable services, a local franchising authority must certify through an application process with the FCC that:

 It will adopt rate regulations within 120 days of becoming certified which will be consistent with FCC regulations.

 It has the legal authority to adopt, and the personnel to administer, rate regulations.

 Its procedural rules provide an opportunity for consideration of the views of interested parties.

Such application is made by filing FCC FORM 328. (As of this writing, FCC FORM 328 was not available for distribution. Once it becomes available, local franchising authorities may obtain it from the FCC or from the MMA). Unless challenged by the local cable operator or unless the application is found to be incomplete, certification is granted 30 days after receipt of the application. The FCC has recently changed twice the effective date of its cable service rate regulations, first to October 1, 1993, and more recently has moved this date up to September 1, 1993, and has indicated that it will not accept applications for certification from local franchising authorities until September 1, 1993.

Q. If the FCC has delayed implementation of local regulation, how can we be assured that cable operators will not increase rates prior to the beginning of regulation?

A. This problem was anticipated by the FCC. There are two provisions which prevent cable operators from jacking-up rates prior to local regulation. First, the FCC, in deferring implementation also extended the existing freeze of cable rates from August 4, 1993 to November 15, 1993. Second, as will be described more fully below, the standard for measuring the reasonableness of local rates is defined based upon rates in existence on September 1, 1992, inflated by the cost of living. Thus, any extraordinary rate increases since that time will be disallowed and, in fact, are subject to refund by the local cable operator.

Q. Are local franchising authorities required to regulate cable services?

A. Jurisdiction for regulation of cable services resides ultimately with the FCC, however provision has been made for the FCC to vest such authority in either state or local franchising authorities ("local franchising authority") which seek to exercise such authority and which meet the established standards described above. Should the local franchising authority fail to meet certification standards or otherwise not submit application for certification, the FCC will assert jurisdiction over the regulation of local cable operators until that time at which certification is secured. If, however, the local franchising authority requests the FCC to regulate citing a lack of financial resources, the FCC has indicated that it will deny such a request based on the presumption that franchising authorities receive franchise fees and thus have the necessary resources to regulate. Finally, should the local franchising authority indicate to the FCC that it does not seek to regulate rates, then the FCC has indicated it would be reluctant to override such a decision.

Q. If regulation by local franchising authorities is not mandatory, why should they seek certification to regulate rates?

A. In order to answer this question, it is important to understand first, that the FCC did not support the 1992 Cable Act and second that there are literally tens of thousands of local franchising authorities across the country. As a result, those municipalities which seek to rely upon the FCC to regulate rates are likely to find themselves at the end of a very long queue, and to the extent that they receive services from the FCC, those services will be provided by a reluctant federal agency. While not the strict legal consequence, the probable practical implication of not seeking certification is the grandfathering of local cable rates at their September 1, 1993 levels.

In addition, there are a couple of more subtle consequences. First, any rates filed by a local cable operator pursuant become effective within 90 or 150 days unless overruled by the regulatory body (see discussion below). With so many local franchising authorities, it is not at all clear that the FCC can provide timely review of all such filings, and it may be that approval by default becomes standard operating procedure. Not only could this lead to higher than necessary rates, it may also result in refunds not being required. Second, should the FCC undertake to regulate local cable rates, that process will be a more remote and far less accessible process for local citizens. Further, to the extent that local citizens are dissatisfied with the outcome of that process, all appeals will have to be made to the FCC through a complicated legal filing.

Q. Is it necessary for local franchising authorities to file applications for certification on September 1, 1993?

A. No. The FCC will accept applications from local franchising authorities at any time after that date. There is, however, some advantage to seeking certification earlier rather than later. At the present time, local rates have been frozen at their April 5, 1993 levels. As noted above, this freeze extends through November 15, 1993. Thus, for those local franchising authorities which obtain early certification, the rates filed by local cable operators will be those in existence under the rate freeze. This is a more relevant concern in those situations in which current rates are below the applicable benchmark levels, since once the freeze is lifted, a local cable operator may raise local rates up to that benchmark level and that higher rate will be presumed reasonable.

Q. How are rates for basic tier services to be determined?

A. The FCC has developed a set of "benchmark" rates based upon those rates found for cable systems facing effective competition in various jurisdictions throughout the United States as of September 1, 1992. These benchmark rates establish a level of rates defined by the FCC to be a "reasonable" cost per channel. The benchmark rates vary by formula depending upon the number of subscribers in the franchise area and the number of channels and the number of satellite channels (e.g., CNN, TBS, etc.) provided in the basic service tier.

Q. What happens if local rates are at or below the benchmark rates?

A. If local rates are found to be at or below the applicable benchmark, they may go into effect within 30 days, as they are presumed to be reasonable.

Q. What about rates which are above the benchmark rates?

A. If rates are found to be above the benchmark, the local franchising authority may order an immediate reduction of either 10% or to the benchmark level, whichever is less. (The 10% provision is included because the FCC found that, on average, rates for those systems which faced effective competition were 10% below those which did not.)

Q. After the initial rates are established by the franchising authority, are future rates determined by the same benchmark approach?

A. No, not directly. Once initial rates have been determined, future rates are permitted to increase no faster than the rate of inflation. The FCC anticipates that this "price cap" mechanism will reduce the need for future rate investigations and streamline the regulatory process.

Q. Are there time limits imposed on the local franchising authority with regard to its regulation of basic tier services?

A. Yes, there are a few relevant time limitations. Generally, after receiving all of the necessary information from the local cable operator, the local franchising authority may take up to 90 days (150 days if a cost-of-service showing is provided by the local cable operator - see below) to ensure that the rate level meets the benchmark levels. If no action is taken within the established time frames, the existing rates go into effect subject to subsequent refunds if any part of the rates is later disallowed. In no case, however, can refunds be granted for a period beyond one year.

Q. Are there circumstances under which local rates can exceed benchmark levels?

A. FCC regulations permit local rates to exceed benchmark rates in two general situations. First, the regulations define "external" costs, including taxes and franchise fees, which may be added to the benchmark rates if it can be demonstrated that these costs were not included in the derivation of benchmark rates and are not factored into the price index used to determine future rates. (Interestingly, retransmission consent costs are defined as external costs only after October 6, 1994. Unfortunately, the FCC has agreed to permit pass through to subscribers of increases in programming costs, except those attributed to affiliated organizations. Increases in these costs will be capped at the rate of inflation.) Second, the local cable operator may seek to justify higher rates through a "cost-of-service" showing, the procedures for which are currently under development by the FCC.

Q. What is meant by a "cost-of-service" showing?

A. As discussed above, rates for the basic service tier are established relative to benchmark rates, unless the local operator can demonstrate that it should be permitted to receive higher rates. The burden of proof is thus placed on the cable operator, which must present information to the local franchising authority justifying a rate higher than the applicable benchmark. At the present time, however, the FCC has not yet adopted standards for performing and reviewing cost-of-service studies done by local cable operators, but anticipates initiating a Second Further Notice of Proposed Rulemaking to adopt cost-of-service standards. In the meantime, should any cable operator seek to set rates for the basic service tier in excess of the benchmark rates and justify those rates through a cost showing, the local franchise authority is permitted to prescribe a rate justified by the cost showing, based upon general cost-of-service regulatory principles.

Q. Can local cable operators pass along the recent increase in pole attachment rates?

A. It is unclear, and depends upon whether the increase is viewed as a government imposed "tax" or simply a cost of doing business. The specific language in the FCC regulations is that "taxes imposed on the provision of cable television service, franchise fees, and the costs of satisfying franchise requirements for local, public, educational and governmental access channels" should be excluded from the cap and thus treated as external costs. Thus, the cable operator must argue that the pole attachment rate increase is a form of governmentally imposed "tax" on the provision of cable television services in order to receive external cost treatment under the FCC regulations.

Q. Can local franchising authorities set different basic service tier rates for different classes of subscribers?

A. Generally, no. In fact the Act is quite clear in this regard. Rates must be uniform throughout the franchise area. There are, however, a couple of exceptions. The FCC regulations allow for reasonable discounts to be offered to senior citizens or economically disadvantaged individuals who are on federal, state, or local welfare assistance.

Q. Does the local franchising authority have regulatory jurisdiction over cable equipment?

A. To the extent that such equipment is necessary to receive the basic service tier, its price is subject to local regulation. This equipment includes such items as converter boxes, remote control units, connections for additional television receivers, and wiring that includes other inside cabling. Unlike the basic service tier which is regulated based on benchmark rates, related cable equipment is regulated based on an actual cost standard. The procedure for doing this is fairly complicated as it requires the definition of an "equipment basket" to which is assigned the direct costs of installation, additional outlets, and leasing and repairing equipment, each computed according to guidelines issued by the FCC. Further, the FCC requires that separate charges be established for each significantly different type of equipment and installation, and that these charges must be listed separately from the rates for the basic service tier.

Q. What steps must a municipality take to begin to regulate rates?

A. As noted above, the FCC has deferred its implementation of the local rate regulation aspects of the 1992 Act until September 1, 1993. Beginning on that date, the FCC will accept applications for certification from local franchising authorities which seek to regulate basic service tier cable rates. Once certification is secured, the local franchising authority must promulgate regulations that are consistent with those issued by the FCC; it must adopt procedural rules which provide an opportunity for open and fair hearings for all parties involved; and it must ensure that it has both the technical and legal personnel to perform the anticipated regulatory functions. In addition, it must notify the local cable operator when it has been certified by the FCC. This notification triggers a requirement for the cable operator to file its schedule of rates for the basic service tier and accompanying equipment within 30 days. The local franchising authority must then review this filing against the applicable benchmark and take appropriate action as discussed above. In those situations in which the local franchising authority disapproves in whole or in part, or approves over the objection of a participating party the proposed rates for the basic service tier and accompanying equipment, it must issue a written decision, including a justification of its actions.

Q. Can the decisions of the local franchising authority be appealed?

A. Yes. Decisions may be appealed by any party. Such appeal is made directly to the FCC, which has preempted all state appeals processes in matters regarding the 1992 Cable Act.

Q. Will regulation lead to a decrease in cable rates in Maine?

A. It is difficult to say without initiating the actual regulatory proceedings. What can be said at this time is that the FCC anticipates that its new regulatory structure will result in an average rate reduction of a little less than 10% nationwide, inclusive of refunds of overcharges during the past year.

Clearly, Congress and many consumer groups anticipate that the implementation of the 1992 Cable Act will result in significant benefits to cable subscribers across the country. The legal door has been opened for municipalities in Maine to begin to re-regulate local cable operators, beginning this September. In view of the substantial financial stakes involved and the overall level of frustration that was built up with ever increasing cable rates, municipalities will be expected to act expeditiously and aggressively to secure for their citizens the most favorable rate treatment permissible under the new federal law.


Dr Richard H. Silkman served as Director of the Maine State Planning Office from 1987 until October, 1992. He is now the head of Richard Silkman Associates, an independent consulting firm specializing in economic and related issues.

Sidebar:

Battle Between Broadcasters and Cable Operators

Many Maine towns and cities have recently been receiving communications from local broadcasters (local NBC, CBS & ABC affiliates), cable operators, and possibly even consumers regarding the so called "must carry" provisions of the new Cable Act. Essentially, the law gave local broadcasters the choice of either insisting that their signal be carried on a local system, or negotiating with the cable system for consent to retransmit their signal. To our knowledge, all local broadcasters in Maine have chosen to negotiate, hoping to receive some compensation for retransmission. In response, virtually all cable operators have been taking a tough bargaining position regarding compensation, and are threatening to drop the local stations.

Since Maine towns and cities are the local franchising authorities for cable systems, you may be asked to become involved in this dispute. However, MMA Legal Services strongly advises that you not become involved. This is essentially a commercial negotiation which is taking place on a national scale and Maine towns and cities have no legal role to play in it. If consumers are concerned about the possible loss of a favorite local station, they should be advised to express their opinions directly to the negotiating parties.

Over the next few months MMA hopes to establish a "clearing house" for CATV materials such as franchise agreements, forms and sample regulations. To this end, if you have any local CATV ordinances or regulations which you feel are especially good and wish to share them with other communities, please send them to us. We are also co-sponsoring two regional workshops (September 9th and 14th) which will focus on CATV regulation (see the "Municipal Bulletin Board"for more information).