FCC’s Cable Rate Survey Does Not Appear to Provide a Reliable Source of Information on the Cost Factors Underlying Cable Rate Increases

FCC’s annual cable rate survey seeks information on cable franchises’ cost  changes that may underlie changes in cable rates during the preceding  year. Our preliminary observations indicate that there are two causes for the  resulting variation: (1) there were insufficient instructions or examples on  how the form was supposed to be completed, leading to confusion among  cable operators regarding what to include for the different cost factors and  how to calculate each of them; and (2) the requirement that the cost and  non-cost factors sum to the reported annual rate increase caused many  cable operators to adjust one or more of the cost factors, thereby resulting  in data that might not provide an accurate assessment of the cost factors  underlying cable rate increases. Table 1 provides information on the approaches  cable franchises used to complete the portion of the survey pertaining to  cost and non-cost factors underlying rate changes. However, based on our findings, it appears that  this may not have been clearly communicated to cable franchises. FCC’s Process for Updating and Revising its Classification of the Competitive Status of Cable Franchises May Lead to Classifications that are No Longer Accurate

The 1992 Cable Act established three conditions for a finding of effective  competition, and a fourth was added in the 1996 Act. Specifically, a finding  of effective competition in a franchise area requires that FCC has found  one of the following conditions to exist:    Fewer than 30 percent of the households in the franchise area subscribe to  cable service (low-penetration test). It is possible that such an  inconsistency could occur because cable companies incorrectly completed  FCC’s survey in some fashion. Although the survey form asks the cable franchise whether they face  effective competition in the franchise area, those responses are not always  consistent with information maintained by FCC regarding whether there  has been an official finding of effective competition. We found that FCC staff overrode the  survey responses on effective competition for 24 percent of all franchises  in its 2002 survey. Some franchises that face competition may not have  filed a petition, and therefore are not classified as facing effective  competition.
Why GAO Did This Study

Over 65 percent of American households currently subscribe to cable television service. There has been increasing concern that cable television rates have been rising aster than the rate of inflation for the last few years. As required, on a yearly basis, FCC prepares a report on cable rates in areas that face and those that do not face effective competition--a term defined by statute. For information used in this report, FCC maintains information on the competitive status of cable franchises and annually surveys a sample of cable franchises. GAO examined (1) the reliability of information that cable companies provided to FCC in its annual survey regarding cost factors underlying cable rate increases and (2) FCC's process for updating and revising cable franchise classifications as to whether they face effective competition.

What GAO Found

Based on interviews with 100 randomly sampled cable franchises that completed FCC's 2002 survey, GAO's preliminary analysis indicates that FCC's survey may not be a reliable source of information on the cost factors underlying cable rate increases. Because of the following problems, GAO found that there are inconsistencies in how companies completed the survey. FCC provided minimal instructions or examples on how the portion of the survey covering the cost factors underlying rate increases should be completed. It appears that cable companies made varying assumptions on how to complete the survey. FCC's survey required that cable companies fully allocate their reported annual rate increase to various cost and non-cost factors. Our preliminary findings indicate that there was inadequate guidance on how to achieve this requisite balance, and cable companies approached the question in varying ways. Based on preliminary work, GAO found that FCC's classification of cable franchises as to whether they face effective competition might not accurately reflect current conditions. GAO found instances where information in the survey responses of some franchises would suggest that the criteria for an effective competition finding that was made in the past might no longer be present. However, a finding of effective competition is only changed if a formal process is instituted. GAO found only two instances where a petition was filed that resulted in a reversal of an effective competition finding.