Late Fees

The Cable Television Consumer Protection and Competition Act of 1992 established procedures for regulating cable television rates. Pursuant to 1992 Cable Act's rate regulation requirements, the Federal Communications Commission (FCC) established a system to ensure that basic service tier (BST) and cable programming service tier (CPST) rates do not exceed rates that would be charged in a competitive environment, the benchmark formula. The FCC further recognized that while a traditional public utility cost-of-service showing would impose a heavy burden on regulators and regulated companies, it nonetheless recognized that the benchmark formula may be inadequate in some circumstances and therefore allowed regulated companies to submit a cost-of-service showing supporting higher rates. The FCC further established a procedure where cable operators may adjust the BST and CPST rates quarterly for inflation, changes in external costs and changes in the number of regulated channels carried. This so-called price cap approach was streamlined to an annual filing and allowed the operators to file on the basis of actual and projected costs, in recognition that cable operator may experience regulatory lag in recovering costs. The FCC went even further in recognizing the costs that could be passed through, by also allowing the operator to pass through to subscribers, increases in costs that are specifically required by franchise agreements. The process currently in place recognizes these cost increases on a tier specific basis, only costs specifically associated with the BST and CPST will be reflected in these individual rates.

The 1992 Cable Act as implemented by the FCC went further and required that a cable operator shall establish rates based on actual costs for remote control units, converter boxes, other customer equipment, installation and additional connections separate from basic tier service. The FCC further determined that the rates for the equipment, installations and connections be unbundled from one from the other. These unbundled costs were effectively removed from consideration in determining BST and CPST rates and utilized in determining "cost based" rates for equipment, installations and connections. The cable operator was directed to establish an "Equipment Basket", which included all costs associated with providing customer equipment, installations and connections, including system allocated operating costs, depreciation, franchise fees, and a reasonable profit (11.25% rate of return on investment).

The 1992 Cable Act established a procedure that, after initial rate setting, is designed to allow the cable operator to pass on certain actual and projected cost increases to the subscriber tier that incurred those costs. Also, the 1992 Cable Act directed the cable operator to segregate certain equipment, installation and connection costs in "Equipment Baskets" so that cost recovery rates could be established and charged to those subscribers that caused or gave rise to the specific costs. In essence the 1992 Cable Act moved the cable industry towards elimination of cross subsidization between the various levels of service(s). The cable operator should historically adopt and implement similar practices and procedures when it comes to extraordinary cost items, such as Late Fees. A properly developed Late Fee should be designed to prevent subscriber cross-subsidization and place the actual cost burden on the subscriber who caused the cost to be incurred by the operator. The methodology then employed by the cable operator in relation to these charges will be identical to what the 1992 Cable Act dictated in relation to equipment rates, installation and connection charges, and consistent with traditional public utility rate setting doctrine. Those who cause the cost must pay the cost.

Approach

The cable operator in determining Late Fees should review the costs associated with these charges annually to determine the reasonableness of the charges. The costs included in these "Cost Baskets" should include all direct and indirect material and labor costs, including system allocated operating costs, depreciation, franchise fees, and a reasonable profit (11.25% rate of return on investment). In determining the actual direct costs attributable to each of the extraordinary fees or charges, the guiding principle should be whether or not the costs would normally be incurred if the specific circumstance did not exist. For example, what costs would be eliminated if every subscriber paid his or her monthly bill on time. In determining the indirect costs attributable to a specific extraordinary fee or charge, the analyst must recognize that we do not operate in a utopian environment where each department or employee of a cable system operator concerns his or her self with only their specific function. In recognition of this duality in functions, the FCC and traditional public utility rate setting bodies have established a standard of reasonableness in allowing these costs to be included in the determination of rates and charges. The allocations must be based on observed or substantiated occurrences for reasonable test periods or patterns and represent a reasonable estimate of the time or costs devoted to the specific function, i.e.: collection efforts over the course of the year in question. The goal is to arrive at a cost based charge that produces a fair and reasonable result, and to the best of the operators ability, will eliminate or at least minimize any cross subsidization.

Results

The determination of the Late Fee Charge for a particular year entails the development of a detailed analysis of the direct costs and a reasonable determination of the indirect costs attributable to the charge. The analysis should incorporate not only an economic development of the allocated costs but include observed occurrences and interviews with the operator staff. The purpose being to develop the reasonableness of the assumptions utilized.

Conclusion