FCC Releases Text of Leased Access Order

Note: The rules described herein were stayed by order of the United States Court of Appeals for the Sixth Circuit on May 22, 2008 pending appeal by the cable industry. The Court subsequently granted the FCC's motion to hold the appeal itself in abeyance while the FCC determines how to resolve a July 10, 2008 OMB decision disapproving information collection requirements imposed by the rules. As a result, the revised CLA rules are not currently in effect and it is unclear if they ever will go into effect.

The FCC has now released the text of the Commercial Leased Access ("CLA") Report and Order it adopted in late November. The Order drastically reduces the rates cable operators may charge for the lease of channel capacity. It establishes a 10 cent per subscriber per month cap on CLA rates, but also creates a complicated formula likely to produce actual CLA rates well below that amount.

In addition to radically reducing the amounts cable operators may charge for valuable channel capacity, the Order adopts new rules that tightly prescribe the process by which the terms and conditions of leased carriage are established; imposes onerous requirements upon operators responding to requests for information; expands discovery in complaint proceedings; and imposes new annual reporting requirements on cable operators.

The new rate regulations will become effective no sooner than: (1) approval of certain rule changes by the White House's Office of Management and Budget (OMB); and (2) 90 days from publication of the new rules in the Federal Register. At the time OMB approval is secured, the FCC will publish a document establishing the precise effective date of the new rate rules. The other new information-related requirements imposed on operators under this Order do not become effective until approved by the OMB and a specific effective date is published in the Federal Register. These "other" information related requirements do not appear to be subject to the 90-day delay.

In his statement accompanying the Order, Commissioner Jonathan Adelstein stated that the 90-day delay in the effective date of the new rate rules was necessary to afford parties an opportunity to file petitions for reconsideration. Given the dramatic and sweeping reforms mandated by the new rules, it is highly likely that cable operators and programmers will seek reconsideration and/or judicial review.

At least for now, the reduced rates do not apply to a la carte channels, and channels that consist "predominantly" of shopping or program length infomercials. The FCC released the text of a Further Notice of Proposed Rulemaking ("NPRM"), however, asking whether it should extend the modified rate formula to programmers that predominantly transmit sales presentations and program length commercials. Comments filed in response to the NPRM are due within 30 days of publication of the NPRM in the Federal Register, and reply comments are due 15 days later.

Background

Under the Communications Act, cable operators are generally required to set aside 15 percent of their channel capacity for lease by unaffiliated programmers. In 1992, Congress charged the FCC with establishing the rates, terms and conditions for leased access use. At the same time however, Congress acknowledged that leased access might not be economically viable stating in the legislative history that "cable has a sound argument in claiming that the economics of leased access are not conducive to its use." Accordingly, the statute expressly provides that "the prices, terms and conditions" of use must be "at least sufficient to assure that such use will not adversely affect the operation, financial condition, or market development of the cable system." 47 U.S.C. § 532. The statute therefore clearly contemplates that leased access users will pay for access.

Pursuant to Congress' directive, the FCC long ago established a formula for calculating rates that operators could charge CLA users. The FCC's "average implicit fee" formula was intended to compensate the operator for the value of the lost channel capacity and was based on the profit the channel would theoretically generate if it were occupied by non-CLA programming.

The average implicit fee was calculated by determining the total amount the operator received in subscriber revenue per month for the programming on all tiers with 50 percent penetration and subtracting the total programming costs for such tiers. A weighting scheme that accounts for differences in the number of subscribers and channels on all such tiers was then used to derive the monthly rate for that tier, and that tier rate was divided by the total number of channels on the tier to derive the per channel CLA fee. At that time, the FCC also promulgated rules governing certain terms and conditions of carriage, including rules governing channel placement, part-time use, technical support, responses to leased access information requests, and procedures for expedited resolution of leased access complaints.

Rates: the FCC's new "Marginal Implicit Fee"

The FCC's new Order concludes that the "average implicit fee" overcompensates cable operators, because it reflects the average value of a channel on the tier instead of the value of the channel that is most likely to be replaced. To this end, the FCC's new "marginal implicit fee" is premised on the notion that CLA channels will replace the least profitable (or "marginal") channels included in a particular service tier and uses the implicit fee for these channels as the basis for the CLA rate.

Under this new approach, an operator first calculates its tier "mark-up" by comparing tier revenue to tier programming costs. Once the overall mark-up ratio is established for the tier, the FCC simply assumes, without any support, that a consistent mark-up ratio exists across all channels included in the tier. The new formula applies that consistent ratio to each channel's affiliation fees, so as to derive each channel's implicit fee. The higher the affiliation fee, the higher the resulting mark-up. It follows, therefore, that a programming channel that does not charge affiliation fees, or has a very small affiliation fee, will have a negligible mark-up and a very modest implicit fee. The FCC failed to recognize that, in reality, low cost channels might be of significant value in retaining customers, might be priced artificially low as part of a channel launch or multi-service package, and might be contractually protected from being deleted in favor of a CLA channel.

Under the FCC's approach, the "marginal" channels on each tier are the channels used to calculate the CLA rate for that tier. For example, if an operator were obligated to set aside 15 percent of its channels for CLA, it would multiply the number of channels on a particular tier by 15 percent to determine the number of marginal channels. On a 40-channel tier, this 15 percent set-aside would be equivalent to six channels. The operator would then calculate the mean of the implicit fee for these six channels. The result would be the operator's new CLA rate.

Our current sense is that, because of certain artificial FCC assumptions, the new formula will typically produce rates that are well below the 10 cent per subscriber cap. Indeed, in the example provided by the FCC in the Order, the rate produced is just 27 cents per subscriber. Where operators voluntarily carry multiple channels free of charge (perhaps during an initial launch period), the CLA rates produced using the formula could actually be zero.

The FCC's Order does not explain its presumption that the tier markup should be distributed uniformly across all channels on the tier nor does it explain how it arrived at the 10-cent cap. The Order does not meaningfully address how the new CLA rates can be reconciled with the statutory charge that CLA not have an adverse financial consequence on cable operators. The Order also fails to consider whether the new CLA rates might adversely impact various fledgling and niche services currently carried on a voluntary basis.

As discussed above, the FCC declined to adopt the marginal implicit fee formula or cap for calculating what operators may charge for lease of a la carte channels, retaining instead the highest implicit fee formula for those channels. And, for now, the FCC has retained the average implicit fee formula calculating CLA rates for programmers that predominantly transmit sales presentations and program length commercials (i.e., shopping channels) but it has released an NPRM asking whether rates for sales programming should also be modified. If those rates were reduced, cable operators would likely be deluged by CLA requests from shopping and infomercial channels.

Responding to requests for leased access information

Most operators previously were allowed 15 days to respond to a request for leased access information and were required to provide only general information about available channel capacity, rates and a sample contract, if requested.¹ Now, within a dramatically reduced time frame—three business days of a request for information—most cable system operators must provide substantially more information to any entity requesting it, regardless of whether it has a bona fide intent to seek carriage. The information that must be provided includes, but is not limited to:

• A complete schedule of the operator's statutory maximum full-time and part-time leased access rates. The schedule must be accompanied by an exhibit showing how those rates were calculated.
  
  
• The specific channel numbers, tier locations and time periods available for lease, as well as the number of subscribers receiving each such channel. A programmer may continue to demand that it be placed on a tier that is 50 percent penetrated. However, if a requested channel or tier placement is denied, the operator must now provide an explanation and justification of its policy regarding placement of leased access programmers, as well as an explanation and justification for the cable operator's policy for relocating leased access channels.
  
  
• The geographic and subscriber levels of service, such as a single community or area served by a system headend, that is technically available for the transmission of leased access programming. While the FCC rejected leased access programmers' requests to require operators to provide geographic distribution below the headend level in every instance, the FCC stated that operators must offer the same level of geographic distribution made available to non-CLA programmers. The FCC did not clarify whether such non-CLA programmers would include all other programmers or be limited to those similarly situated with the CLA programmer.
  
  
• Electronic programming guide information, including the format in which the leased access programming must be provided, the content requirements for such information, the time by which such information must be provided to the operator, and the additional cost associated with such carriage in the program guide, if any. (The FCC concluded, however, that operators cannot charge for inclusion in the guide if they do not charge non-CLA programmers for similar listings.)
  
  
• All acceptable, standard methods for delivering CLA programming to the cable operator and detailed instructions for the timing and place of delivery, as well as the employee responsible for receiving delivery; all technical requirements and obligations imposed on the programmer, and the total cost involved with each method of delivery. The FCC imposed a duty on cable operators to give reasonable consideration to the programmer's proposed delivery method and put the burden of proof on the operator, in a complaint proceeding, to prove that a denial was reasonable given the unique circumstances of its cable system.
  
  
• A comprehensive sample leased access contract that includes uniform terms and conditions, such as tier and channel placement, contract terms and conditions, insurance requirements, length of contract, termination provisions and electronic guide availability, along with an explanation and justification, including a cost breakdown, for any terms and conditions that require the payment or deposit of funds, including insurance and deposit requirements, as well as for non-cost based terms and conditions, such as any limitations on the geographic scope of carriage. While the FCC declined to adopt a model template or to dictate specific reasonable terms and conditions, it reserves the right to supplant the operator's terms and conditions in the event they are challenged.
  
  
• A list of any fees associated with technical and studio costs along with an explanation of such fees and how they were calculated. The FCC declined to prescribe an hourly rate for technical support, opting instead to monitor the issue.
  
  
• An explanation of the process for requesting a channel lease, as well information for prospective launch dates for the programming.

Failure to provide any of the required information within three business days will subject the operator to forfeitures in the amount of $500 per day. It is anticipated that the reduced rates adopted in the Order will significantly increase the number of inquires cable operators receive concerning commercial leased access, at least initially. Given the likelihood of increased inquiries, the stiff penalties for non-compliance and the very short time frame for responding to requests, operators should consider developing a response package over the course of the next several months before the new rules become effective.

New substantive requirements

Besides increasing the information that must be provided to commercial leased access programmers, the FCC also imposed several new substantive requirements on operators. Specifically, the new rules require operators to:

• Maintain on their websites an explanation of the leased access statute, as well as the contact name, telephone number and email address of the person designated to respond to leased access requests;
  
  
• Launch a commercial leased access program within 35-60 days after negotiations are finalized, unless otherwise agreed to by the parties;
  
  
• Fully explain and justify any decision to deny or limit carriage for technical reasons;
  
  
• Fully explain and justify any decision denying a request for a specific tier or channel location; and
  
  
• Provide detailed information about leased access programming in the electronic program guide where the operator does so for non-CLA programmers, time permits, and the leased access programming information is submitted as reasonably required by the cable operators. Significantly, the program guide requirements mean that operators, which typically list leased access programming in their guides as "paid programming," must now list specific information about the leased access programming in the program guide.

Additionally, the FCC's Order imposes a highly condensed schedule for carriage negotiations. Once a programmer submits a " bona fide carriage request," the operator must accept or reject the proposal within 10 days. A bona fide request is one that includes a written proposal for carriage including the programmer's preferences for the contract term, tier placement, channel placement, time slot, commencement date, nature of programming, geographic and subscriber level of distribution, and proposed changes to sample contract.² This 10-day limit also applies (to the cable operator) for any subsequent exchange of proposals until the negotiation is concluded. If negotiations fail, and the FCC is involved in a dispute, it may require the parties to file their best and final offer proposals for the prices, terms or conditions in dispute. The FCC may accept one of these proposals or fashion its own terms and conditions.

The Order also adopts significant forfeitures for non-compliance with the prescribed response time frames. Under the new rules, any failure to timely provide detailed information in response to a request for information or a bona fide carriage request could result in a notice of apparent liability in the amount of $500 per day. No formal complaint is necessary to trigger the forfeitures. The programmer may simply notify the FCC either orally or in writing, without notice to the operator.

Changes to the complaint process including expanded discovery

The Order effectively amends the FCC's requirement that a CLA complaint be filed within 60 days of an alleged violation. While that is still generally the rule, the programmer may now obtain an extension of the filing deadline in order to pursue active negotiations if it files a notice and the operator agrees to the extension. The operator's obligation to respond to any complaint within 30 days is retained. The FCC imposes a new requirement upon itself that it resolve complaints within 90 days. Significantly, the Order eliminates the requirement that a complainant first obtain the determination of an independent accountant that the operator's rates comply with the rules. The elimination of this prerequisite is likely to result in a significant increase in the number of unjustified complaints filed at the FCC.

The Order also greatly expands the discovery available during the leased access complaint process. The changes to the discovery process track similar changes recently made in the context of the FCC's program access rules. The new rules require operators to attach copies of any documents that they intend to rely upon in responding to a complaint. The rules retain the ability of the FCC to order production of documents and other discovery, but also allow parties to a leased access complaint to serve requests for discovery directly on opposing parties. Respondents may object on grounds that the information is not within their control or is not relevant, and objections will be heard by the FCC.

The rules do provide for confidential treatment of confidential and competitively sensitive information pursuant to a Protective Order. Under the Protective Order, an authorized representative of the party seeking the confidential information must sign a declaration that he is not involved in competitive decision making, and will not share the information with those who are. The FCC says it will vigorously enforce the confidentiality treatment and notes its ability to suspend or disbar attorneys from practice before the FCC for violations of this requirement. The failure of either an operator or programmer to respond to a discovery request may result in the party being deemed in default.

Annual reporting requirements

The Order also imposes new annual reporting requirements on cable operators. On April 30 of each year, operators must submit detailed information to the FCC pertaining to, among other things, leased access rates, usage, channel placement, and complaints. The FCC's stated intent is to monitor cable operator efforts to impede leased access use. The new rules also invite, but do not require, programmers to file annual comments, including the extent of leased access carriage, denials, responsiveness of operators, and any complaints that were filed.

The FCC's Order will require the immediate action of cable operators seeking either to challenge or comply with these sweeping and onerous requirements. Please contact us if you would like to further discuss these requirements or have any additional questions.

Footnotes

1 The exception to the 15-day time frame was for small system operators which continue to have 30 days to respond to requests for information.
2 A bona fide request to a small operator may be even more abbreviated, but the small operator retains the 30-day response period.