The FCC yesterday ordered cable TV operators to immediately freeze subscriber rates and said it would roll back prices where appropriate to competitive levels.

In a historic action mandated by Congress in the 1990 Cable Act, the Federal Communications Commission took what it termed a modest first step toward requiring reasonable rates from cable companies.

It does so under a complicated plan that would reduce rates by roughly 10% and save the nation’s cable subscribers roughly $ 1 billion. Further reductions could be ordered if necessary, the FCC said.

This is the first time the FCC has ordered the industry to freeze or reduce rates.

The plan would affect cable companies not subjected to “effective competition” as defined by the new law. Excluded are systems serving less than 30% of cable households and those with at least one multichannel competitor.

Between two-thirds and three-fourths of cable systems and subscribers would be affected by the regs, which were deemed by acting FCC chairman James Quello as “the largest new assignment I have seen in my 19 years at the FCC.”

The formula was frantically hashed out by agency officials during a late night session preceding the meeting. It will take a major infusion of cash and personnel to accomplish.

The plan includes four basic elements:

o It rolls back unwarranted rate increases levied by systems since Sept. 30, 1992.

o It establishes competitive benchmarks upon which permissible rates will be based. Operators whose prices are less than 10% above the benchmark will not be required to roll back the full amount. Those exceeding that level could experience deeper cuts.

o It begins a process for dealing with systems that, despite ordered rollbacks and cuts, remain above competitive benchmarks. The plan will determine whether the rates of these “outlier” systems result from higher costs or abuse of market power, and will order further rollbacks accordingly.

o It limits future rate increases. They will be subject to scrutiny from local franchise authorities anxious to ensure that they don’t exceed cost-of-living levels.

The order to freeze cable rates was issued separately. It freezes for 120 days all cable rates in effect on April 5, other than rates for premium and pay-per-view program services and equipment.

The initiative will not roll back prices automatically but will do so later this year during proceedings with local franchise authorities overseen by the agency.

The rollbacks are pegged at 10% because that figure represents the average difference between competitive and non-competitive rates in an agency rate survey last fall. However, the commission did not rule out further cuts.

Mixed reviews

Immediate reaction to the decision was mixed. James Mooney, prez of the National Cable Television Assn., said the rules appear to “make it very difficult for us to satisfy the expectations of our subscribers for quality programming and service.”

Gene Kimmelman, legislative director of Consumer Federation of America, called the regs a “slap on the wrist” to cable systems, claiming that prevailing cable rates are at least 30% higher than they should be. While he applauded the agency for its historic action, he said his group would seek stiffer cuts.

On Capitol Hill, House telecommunications subcommittee chairman Ed Markey (D-Mass.) said the regs represent a “dramatic change for consumers.” Markey said he would have preferred stiffer rollbacks, but “communities that have faced the most outrageous rate hikes will have the ability to petition the FCC to bring their rates down.”

Higher praise came from Rep. John Dingell (D-Mich.), chairman of the House Energy & Commerce Committee: “Let’s remember that the commission’s decision is just a first step. In my view, (it) did a good job implementing Congress’ intent of protecting cable subscribers.”

Cornerstone of the proceeding is the benchmark formula yet to be devised by the commission. It will be used by cable systems and franchise authorities to determine whether systems charge uncompetitive prices, and by how much.

Agency officials said each benchmark rate will be determined individually from a formula that factors in the number of channels offered by a system under a rate-per-channel scheme, the number of subscribers and the number of cable satellite services on the system. “It will be figured on a graph like the wind-chill index,” said Roy Stewart, chief of the FCC’s mass media bureau.

The benchmark formula will be released to the industry within 30 days, he said.

Key elements

Two other elements will be key in adjusting local cable rates: Franchise authorities will determine and approve rates with FCC oversight; and cable subscribers must start the process by complaining to the government about unfair cable rates.

“The FCC has no affirmative rate regulation authority under the Cable Act,” Stewart said. “We can only respond to complaints.”

The agency does not anticipate a shortage of complaints.

Once a public complaint has been filed with the commission, the cable operator and franchise authority will be notified. The authority, after first winning certification from the FCC to regulate basic rates, will be permitted under a strict agency formula to do so.

Operators will bear the burden of showing that their rates are not unreasonable. However, cities have an obligation to approve reasonable rates and must do so within 30 days of a request from an operator.

Importantly, the new rule will permit cable systems to win rate increases and should not affect their ability to obtain financing, Stewart said.

The new ruling also restricts re-tiering by cable operators. The rollback to Sept. 30 prices will render re-tiering an ineffective tool for evasion purposes, the agency figures.

Yet to be determined is how cable systems will be permitted to pass through costs of retransmission consent under the Cable Act.

At a press conference following the vote, an agency official said pass-through of retransmission consent fees would not be permitted. However, industry insiders viewed the statement as unrealistic.

Another provision of the reg targets the profit stream afforded cable operators from leasing equipment. It said that any equipment used to receive the basic tier is subject to the rule. Equipment charges must be “unbundled” from other rates and charged separately, it said.

Finally, the new rule will afford special scrutiny of rates charged by so-called outlier systems — those identified by subscribers as charging rates substantially above the competitive benchmark. If their rates are not cost-justified, they could be ordered to reduce them to “appropriate” levels, even if those levels are below the benchmark.

The commission also said it would issue a further notice of rulemaking to determine whether there is a legal basis for excluding systems with low penetration from the reg.

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