Federal Communications Commission staff has rejected a cable-industry proposal designed to trigger rate deregulation across the country and allow cable systems to set basic-cable and equipment rates without local approval, FCC sources said this week.
The proposal, floated by the National Cable & Telecommunications Association nearly four years ago, called for total cable-rate deregulation in at least 41 states unless state regulators assigned lawyers to prove to the FCC that deregulation was unjustified in thousands of discrete communities.
FCC sources said the five commissioners are reviewing the staff recommendation, but it was unclear whether the agency will adopt the proposal unchanged or modify it to appease cable before chairman Michael Powell leaves the agency in March.
Under current FCC rules, cable systems are presumed to be monopolies unless the cable operator files a petition with the agency demonstrating that the franchise area served is subject to effective competition.
To gain deregulation, a cable system must provide evidence that competing pay TV providers -- mainly direct-broadcast satellite providers DirecTV Inc. and EchoStar Communications Corp. -- serve more than 15% of households in the franchise area.
The FCC adopted the current standard in 1993 before cable faced serious pay TV competition. Now that DirecTV and EchoStar are two of the three top multichannel-video programming providers in the country, the commission should adopt a new standard, NCTA senior vice president for law and regulatory policy Daniel Brenner said.
“Given the dramatic sea change in the competitive environment, it’s outdated to continue with the presumption that the cable operator doesn’t face effective competition,” Brenner said. “It doesn’t stand to reason that the assumptions of 1993 apply in 2005.”
Under the 15% test, dozens of cable communities have been deregulated, including many densely populated suburbs and a few big cities like Boston. Comcast Corp. has a deregulation petition pending for 136,000 subscribers in Dallas, the country’s No. 7 TV market.
When the FCC grants a cable petition, the local government is no longer permitted to regulate basic-tier-programming rates or the price of set-top boxes and remote controls.
All cable customers must buy basic. Cable has 73 million basic customers.
Congress lifted FCC price controls on expanded basic, an optional purchase, in early 1999.
In 2001, the NCTA filed comments with the FCC asking the agency to eliminate the monopoly presumption based on satellite penetration in excess of 20% nationally and to declare the existence of effective competition in every franchise area in any state with 15% or more DBS penetration.
According to the NCTA, DBS currently has at least 15% TV household penetration in 41 states and at least 15% penetration of pay TV households in 45 states.
In response to the FCC rulemaking launched in 2002, the NCTA modified its original proposal that called for blanket deregulation in any state with more than 15% DBS penetration.
Recognizing that “there may be states in which DBS penetration is especially high in some areas and low in others,” the NCTA said cable operators should be required to file with the FCC a petition listing all franchise areas that have more than 15% DBS penetration in those states with more than 15% DBS penetration.
The trade group conceded that although local governments should have the right to challenge the cable company’s listing, “the burden should be on the [local government] to demonstrate that effective competition does not exist.”
Brenner said cable companies wouldn’t get deregulation by default. “The cable operator still has to step forward and say that in the franchise community that it’s seeking deregulation in, it, in fact, faces effective competition,” he added. “It’s not an automatic statewide deregulation.”
But deregulation by default is possible if cities don't engage lawyers and spend money on data collection to rebut a cable company’s FCC filing, said Frederick Ellrod, an attorney with Miller & Van Eaton P.L.L.C. who represents the National Association of Telecommunications Officers and Advisors, an opponent of the NCTA’s plan.
According to FCC sources, agency staff acknowledged the NCTA’s point that cable systems, when they file for deregulation, should not have to compile elaborate evidence that DBS is widely available in their markets and that satellite offers channel lineups just as robust as cable’s.
The staff also proposed acting on cable petitions more quickly. In the past, cable requests for deregulation have lingered for months, sometime even several years. The agency, for example, took about four years to act on the Boston petition originally filed by Cablevision Systems Corp.
But FCC staff declined to accede to cable’s demand that effective competition should be presumed in 41 or 45 states and that local governments should incur the cost of showing where the 15% test had not been met.
An FCC source indicated that shifting the burden of proof to local governments was problematic because cities and towns do not have convenient and affordable access to cable- and DBS-subscriber data in their communities.
“The cost burden, I think, is the primary thing. The cost is prohibitive,” Ellrod said.
He added that it was easier for the industry to furnish subscriber data than for cities to prove “a negative,” meaning the absence of effective competition.
Brenner argued that cities “can go to the same resources that the cable operator does today and make the showing if it turns out the presumption doesn’t apply.”
But the cable industry itself has complained to the FCC about the cost burdens of obtaining DBS-subscriber data from the Satellite Broadcasting & Communications Association, DirecTV’s and EchoStar’s trade group in Washington, D.C.
Last September, the NCTA said the SBCA charges $15 for DBS-subscriber totals within each five-digit ZIP code and another 25 cents for each ZIP+4 unit.
The trade group added that a cable-deregulation petition for 20,000 households that included four ZIP codes and 6,200 ZIP+4 units would cost about $1,600.
“The cost of obtaining this information is excessive, particularly when the request to the SBCA concerns ZIP+4 data,” NCTA lawyer Diane Burstein told the FCC.
Brenner and Burstein met with Powell’s top cable adviser Jan. 18 to reiterate the trade group’s support for a new deregulation test.
Opposition to the NCTA is also coming from EchoStar, which told the FCC that deregulation of cable was unjustified on antitrust grounds if cable had 85% market share and the two satellite carriers divided the remaining 15%.
“In such a circumstance, it would be perverse and unwise to establish an opposite presumption as to the existence of ‘effective competition’ for cable, especially when the result of such a presumption would be the relaxation of cable-rate regulation at a time when cable rates have been rising faster than inflation,” EchoStar said in a letter to the FCC last December.
EchoStar’s concerns about cable rates came one month before the company hiked its rates 6.6%, from $29.99 per month to $31.99, for its “America’s Top 60” package, including local TV stations.