The FCC yesterday proposed abolishing the UHF discount – which counts the audience reached by a UHF station as only one-half when computing whether the owner is approaching the 39% cap on nationwide audience that can be reached by one owner. While many FCC rulemaking proposals are very subtle, with many nuances that are important in the debate about the final rules to be adopted, this proposal is actually straightforward – should the discount be abolished or not.  Following the digital transition, which saw many migrate from VHF to UHF, most television stations are now UHF (meaning that they operate on TV channels 14-51). While many stations may continue to identify themselves by their old VHF channel numbers, the vast majority now really operate on UHF channels because of UHF’s technical superiority in a digital world.  Digital allows these stations to identify themselves with a “virtual” number – looking to consumers like they are still on channels 2, 4, 7, 9, etc. - when they are really operating on a UHF channel.  But the actual channel of operation is used for claiming the UHF discount and assessing compliance with the 39% audience cap. In yesterday’s Notice of Proposed Rulemaking, the Commission proposed doing away with that discount, as the impediment that stations used to suffer from being on a UHF channel (worse indoor reception, a more limited coverage area and significantly higher electricity costs) are no longer as severe, and being on UHF actually has become an advantage (as UHF, in a digital world, is less susceptible to interference and needs a smaller antenna, thus being better for mobile operations). While the Commission's proposal is straightforward, and the logic seems simple, the proposal is not without issues.

These issues were identified by Commissioner Pai who yesterday dissented from the proposal for the abolition of the rule. The Commissioner noted that several television groups are already above the cap if the discount is abolished (including Univision), and several others are nearing the 39% cap. He suggested that, if the discount is to be abolished, the Commission should consider lifting the cap above 39% to reflect today’s competitive television marketplace realities, and to not effectively raise the cap on how many stations can be owned. He also suggested that diversity should be part of the consideration, given the impact on Univision. Perhaps the biggest area of debate that he raised is the question of when any rule change would take effect.

The two commissioners who supported the proposal as written have proposed that only combinations of stations that exist as of yesterday, when the formal proposal was released, should be grandfathered, together with those combinations that were proposed in applications that were pending at the FCC before yesterday’s order. Commissioner Pai objected to that tentative decision, suggesting that this prejudges whether the cap will be raised, effectively rendering the rulemaking a nullity. If broadcasters think that they cannot keep stations that are bought now, why would they enter into deals while the NPRM is being considered?  Commissioner Pai argued that the date of the adoption of any rule that results from the NPRM is the proper date for the effectiveness of any such change in the discount rule.

The proposal advanced by the FCC yesterday would also require that broadcasters who are above the cap at the time the rule is adopted be forced to divest themselves of stations should they sell their stations, or have a transfer of control of their company, after the adoption of the rule. The Commission invited comment on that issue.

In a twist, the FCC asked that, as VHF is now the inferior band, should there be a VHF discount - counting stations still operating on VHF channels at some discounted value in assessing national ownership compliance?

Finally, the Commission invited comment on whether they even have the authority to review this issue. The 39% cap was adopted by Congress, and the UHF discount was specifically taken out of any quadrennial review of the FCC’s multiple ownership rules (see our article here on the status of the current quadrennial review). The NPRM issued yesterday states that the FCC believes that they can consider the UHF discount, but that consideration must be outside of the quadrennial review process, and thus it is being considered in this separate proceeding. The FCC asks for comments on that conclusion.

So, this is a very simple proposal, but one that will still no doubt be the subject of significant controversy, especially given the current active market for the purchase and sale of television station licenses. Comments will be due on this proposal 30 days after the proposal is published in the Federal Register. Reply comments will be due 30 days after that.