The latest controversy at the Federal Communications Commission involves cable TV competition and rate regulation, and it could end with cable companies facing fewer price restrictions in cities and towns.

Local franchise authorities may regulate the rates cable TV providers charge for "basic" cable service and equipment, but only if the local cable company does not face what's known as "effective competition." Today, the burden of proof is on cable companies to show that they face effective competition, but the FCC is considering a change that would shift the burden of proof to local authorities by adopting a "rebuttable presumption" that cable operators face effective competition.

While cable companies have cheered the proposal, the FCC's own Intergovernmental Advisory Committee (IAC) last week said that such a move "is contrary to the public interest." Besides limiting rate regulation—which is already rare—the proposal would eliminate other consumer protections, the IAC said.

The FCC floated the idea in a Notice of Proposed Rulemaking (NPRM) two months ago.

"In 1993, the Commission adopted a presumption that cable operators are not subject to effective competition, absent a cable operator’s demonstration to the contrary," the FCC wrote. "Given the changes to the video marketplace that have occurred since 1993, including in particular the widespread availability of Direct Broadcast Satellite ('DBS') service, we now seek comment on whether to reverse our presumption and instead presume that cable operators are subject to effective competition. Such an approach would reflect the fact that today, based on application of the effective competition test in the current market, the Commission grants nearly all requests for a finding of effective competition. If the Commission were to presume that cable operators are subject to effective competition, a franchising authority would be required to demonstrate to the Commission that one or more cable operators in its franchise area is not subject to effective competition if it wishes to regulate cable service rates."

NPRMs are by no means final. The FCC's net neutrality rules were changed dramatically between the NPRM and final vote.

IAC Chairman Gary Resnick, the mayor of Wilton Manors, Florida, urged the FCC to change course in his committee's official recommendation on Friday:

There can be no doubt that cable services as a practical matter are not subject to effective competition, despite the language of the statute and tests established pursuant to federal law. Cable rates have risen at rates substantially higher than inflation and consumer satisfaction with cable services has consistently been a significant issue, even in areas found by the Commission to be subject to effective competition. If there were truly effective competition in the true sense of the term, rates would decrease and consumer satisfaction would increase. ... The state of the video industry indicates that there is less competition, not more. The IAC submits that it may be appropriate to create a rebuttable presumption that the entire country is subject to video competition if there were numerous cable, satellite, and other providers competing aggressively throughout the nation. However, quite the opposite is the case. As the Commission has noted on numerous occasions, in many situations there is only one dominant franchised cable provider. At most, residents may have the option to subscribe to video service by a direct broadcast satellite company or potentially from a local exchange carrier. However, the vast majority of households do not have such options.

While FCC Chairman Tom Wheeler has decried a lack of competition for broadband service, this proceeding focuses only on TV service.

There’s more than just rate regulation at stake

The FCC proposal came in response to a new directive from Congress, but the IAC said Congress left the FCC plenty of leeway.

"The nationwide presumption contemplated by the NPRM is not consistent with Congress’ request to the Commission," Resnick wrote. "As has been explained to the IAC, Congress asked for the FCC to consider ways to streamline the process to declare effective competition in the case of small cable operators. Federal law did not ask the FCC to consider creating a nationwide presumption that the entire country is subject to effective competition."

Rate regulation is not the IAC's primary concern here, according to Resnick. Very few cities and towns have implemented rate regulation, but "there are important consumer protections in federal law that cable operators claim disappear when there is a finding of effective competition," Resnick wrote.

"When the Commission grants a Petition for Effective Competition the authority to cap the price of the basic tier and equipment not only is removed, but all cable consumers lose the protection of a uniform rate structure," he wrote. "In addition, cable operators may require subscribers to purchase any number of programming tiers before they may order premium and pay per view offerings. Significantly, a finding of effective competition also removes the prohibition against negative option billing [charges for services or equipment that a 'subscriber has not affirmatively requested by name']... Further, there remains a question whether public educational and government (PEG) channels must still be carried on a basic tier, if such a tier is offered, where there has been a determination of effective competition."

The FCC determines whether a cable operator faces effective competition using several criteria, including whether the system serves fewer than 30 percent of local households and whether there are at least two pay TV operators serving at least 50 percent of households in the franchise area.

While the FCC grants most requests for findings of effective competition, Resnick said that's due in part to a failed process. Bad data has led the FCC to grant "obviously erroneous petitions," he wrote. Local authorities often lack the expertise and resources to successfully oppose petitions for effective competition findings, he wrote.

Over the years, the commission has determined that more than 10,000 communities are subject to effective competition, leaving 23,500 without such a finding.

The American Cable Association, which represents small and mid-sized cable companies, urged the FCC to find in the cable operators' favor.

"Unlike two decades ago, cable operators today face strong competition from two national satellite TV providers and in some cases up to three more terrestrial multichannel video programming distributors (MVPDs)," the ACA wrote. "Competitive forces have reduced cable's market share nationally to 55 percent, with competing MVPDs serving at least 15 percent of pay-TV subscribers in each of the country's 210 local TV markets."

Small cable operators are exempt from rate regulation in franchise areas where they serve fewer than 50,000 subscribers, as long as they also serve fewer than one percent of all subscribers nationwide and do not have annual revenue exceeding $250 million.