Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) Implementation of Section 302 of ) CS Docket No. 96-46 the Telecommunications Act of 1996 ) ) Open Video Systems ) REPLY COMMENTS OF BELL ATLANTIC BELLSOUTH GTE LINCOLN TELEPHONE PACIFIC BELL SBC COMMUNICATIONS April 11, 1996 TABLE OF CONT ENTS SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . .ii I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. DISCUSSION . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 A. OVS Rules Must Afford Operators Flexibility To Fashion Systems That Can Compete Successfully. . . . . . . . . . . . . . . . . . . . . . . . . . 3 1. Carriage of video programming providers. . . . . . . . . . . . . . . . . . . . . . 6 2. Price, terms, and conditions of carriage . . . . . . . . . . . . . . . . . . . . .16 3. Certification process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 B. Part 64 and Price Cap Regulation Provide Adequate Protection Against Cross Subsidy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 C. Designated Title VI Obligations Should Apply Generally In The Same Manner As They Apply To Cable Overbuilders, But Without Replicating Local Franchise Regulation. . . . . . . . . . . . . . . . . . . . . . . .24 1. Must carry and retransmission consent . . . . . . . . . . . . . . . . . . .25 2. PEG access26 D. The Commission Should Not Allow Local Governments To Convert Their Interests In Public Rights-Of-Way Into A Surrogate Franchise Process 28 1. The FCC should not be distracted by baseless claims that Congress' passage of the 1996 Act constitutes a Fifth Amendment taking.. . . . .29 2. The League is incorrect in claiming the Fifth Amendment gives property owners a right to deny consent to the public use of private property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 3. The League's argument that the FCC lacks authority to authorize OVS to use rights-of-way ignores Congress' explicit instructions in the 1996 Act.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 E. Joint Marketing And Bundling. . . . . . . . . . . . . .36 F. Equipment Compatibility . . . . . . . . . . . . . . . .39 III. CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . .40 SUMMARY The various parties filing comments in this proceeding fall generally into three groups: (1) those who want open video systems to be a viable business option; (2) those who say that they want open video systems to be a viable business option, but do not; and (3) those pleading special interests. The first group, having experienced video dialtone s death by regulation, argue for flexible regulation with substantial reliance on the dispute resolution process, consistent with the 1996 Act. The second group, having instigated video dialtone s death by regulation, argue for a similar approach to open video systems. The third group generally supports any rule that promotes their interests. Congress aligned itself with the first group. If Congress had believed that detailed, front-loaded regulation would promote competition and diversity in the cable business, it would not have terminated the video dialtone rules or eliminated the Section 214 requirement. The cable lobby would recreate video dialtone, because they have little to gain and much to lose if open video systems become an attractive competitive option. The cable lobby s two-fold strategy for derailing open video systems is identical to their successful video dialtone strategy: (1) promote the idealized view that open video systems should be as open as the public switched telephone network and insist on a prophylactic rule for every conceivable way in which operators might fall short of that ideal; and (2) postulate rampant cross-subsidization and insist on draconian, costly, and uneven rules to ensure there can be no misallocation of costs. The cable lobby obstinately ignores the Commission s intent to implement the requirements of the open video system framework in a way that will promote Congress goals of flexible market entry, enhanced competition, streamlined regulation, diversity of programming choices, investment in infrastructure and technology, and increased consumer choice. The Commission must reject the heavy-handed, prospective regulation proposed by the cable lobby, or there will be no open video systems. Instead, the Commission should simply promulgate rules that codify the requirements of Section 653, adopt a streamlined certification process, and then rely on the dispute resolution process to enforce compliance. The Commission must not allow the cable lobby to smother open video systems before they can become a viable competitive option. Only rules that enable open video systems to be competitively viable and that entail significantly less regulation than cable franchises will encourage local exchange carriers and others to deploy such systems. For this reason, the Commission must also reject all attempts by local governments to impose franchise-like regulation on open video systems. Without exception, the parties that have a genuine interest in the success of open video systems urge the Commission to minimize regulation -- both federal and local -- and maximize business flexibility. These commenters caution against repeating the mistakes of video dialtone: inflexible Title II or Title ll-like rules, detailed prospective resolution of hypothetical issues in rules, and multiple, open-ended layers of approval that provide opportunities to obstruct the entry of competitive operators. FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) Implementation of Section 302 of ) CS Docket No. 96-46 the Telecommunications Act of 1996 ) ) Open Video Systems ) Reply Comments The undersigned Joint Parties submit these reply comments in response to comments filed on April 1, 1996, addressing issues in the Notice Of Proposed Rulemaking (FCC 96-99), released on March 11, 1996 ( Notice ). I.INTRODUCTION The various parties filing comments in this proceeding fall generally into three groups: (1) those who want open video systems ( OVS ) to be a viable business option; (2) those who say that they want OVS to be a viable business option, but do not; and (3) those pleading special interests. The first group, having experienced video dialtone s death by regulation, argue for flexible regulation with substantial reliance on the dispute resolution process, consistent with the 1996 Act. The second group, having instigated video dialtone s death by regulation, argue for a similar approach to OVS. The third group generally supports any rule that promotes their interests. The Commission understands that Congress aligned itself with the first group. If Congress had believed that detailed, front-loaded regulation would promote competition and diversity in the cable business, it would not have terminated the video dialtone ( VDT ) rules or eliminated the Section 214 requirement. The parties in the second group, primarily incumbent cable operators and their lobbying groups, would recreate the VDT experience, because they have little to gain and much to lose if OVS becomes an attractive competitive option. The cable lobby s two-fold strategy for derailing OVS is identical to their successful VDT strategy: (1) promote the idealized view that OVS should be as open as the public switched telephone network and insist on a prophylactic rule for every conceivable way in which operators might fall short of that ideal; and (2) postulate rampant cross-subsidization and insist on draconian, costly, and uneven rules to ensure there can be no misallocation of costs. The cable lobby obstinately ignores the Commission s intent to implement the requirements of the open video system framework in a way that will promote Congress goals of flexible market entry, enhanced competition, streamlined regulation, diversity of programming choices, investment in infrastructure and technology, and increased consumer choice. Similarly, the third group ignores Congress mandate that OVS be subjected to lesser regulatory burdens. The Commission must reject heavy-handed, prospective regulation or there will be no open video systems. Instead, the Commission should simply promulgate rules that codify the requirements of Section 653 and then rely on the dispute resolution process to enforce compliance. II.DISCUSSION A. OVS Rules Must Afford Operators Flexibility To Fashion Systems That Can Compete Successfully. Only rules that enable OVS to be competitively viable and that entail significantly less regulation than cable franchises will encourage local exchange carriers and others to deploy OVS. Without exception, the parties that have a genuine interest in the success of OVS urge the Commission to minimize regulation and maximize business flexibility. These commenters caution against repeating the mistakes of VDT: inflexible Title II or Title ll-like rules, detailed prospective resolution of hypothetical issues in rules, and multiple, open-ended layers of approval that provide opportunities for incumbents to obstruct competitive entry. For instance, Henry Geller recommends that with only a few exceptions where clarification is clearly needed at this time (e.g., how to measure the operator s one-third share of activated channels where it can select the programmer), the Commission should avoid adopting specific rules to flesh out in some detail the approaches to be taken in areas like channel allocation, analog/digital, channel positioning, just and reasonable rates, access for cable operators, etc. . . . Rather . . . the Commission should generally repeat the statutory standards, call for good faith negotiation between the OVS operator and programmers, and promptly resolve disputes . . . within the short time frame prescribed by the statute (180 days). In this way, telcos and others will be encouraged to enter the OVS field, the Commission will quickly gain expertise through concrete market developments, and can act to remedy specific cases and to develop specific rules on the basis of the market experience so gained. The wisdom of this proposal is hidden only to those who have a stake in the status quo. Programmers not affiliated with incumbent cable operators, such as the members of Access 2000, an association of independent program producers, recognize that consumers will be better served by the successful deployment and operation of OVS than by a truckload of carefully crafted rules and procedures. Access 2000 urges the Commission to establish incentives [for] telephone companies to build and operate OVS and to provide for maximum business flexibility, minimum regulation, and appropriate oversight and review through the complaint process. The Joint Parties endorse a similar Viacom proposal: To provide OVS operators not only with reasonable flexibility but also the regulatory certainty necessary to proceed with confidence, . . . the Commission [should] couple its broad prescriptive rules with some safe harbor examples of practices that would be deemed presumptively fair and reasonable. The Joint Parties have proposed rules that do exactly what Viacom and Access 2000 have proposed. Perhaps, the most compelling evidence that restrained, flexible regulation is essential for the competitive success of OVS is found in the comments of parties representing incumbent cable operators. Without exception, those parties argue for heavy-handed regulation. To support their positions, the cable lobby focuses exclusively on a purported need for strict regulation to ensure that video programming providers will be able to compete against OVS operators. The cable lobby ignores the primary premise of OVS: the absolute need for OVS operators and unaffiliated video programming providers to compete against incumbent cable operators. If the rules do not first secure the competitive viability of OVS, any rules to protect unaffiliated video programming providers will be futile. Understanding that over-regulated OVS will not be deployed, the cable lobby argues that the Commission should impose detailed regulations governing all aspects of OVS, including rules that unaffiliated video programming providers can compete against OVS operators. Congress, however, focused on ensuring a genuine opportunity for unaffiliated video programming providers to select programming on a substantial portion of the system, but not on ensuring competition between the operator and other providers on the system. Indeed, Congress expressly permits operators to market the programming of all providers to subscribers, presumably because Congress recognized that cooperative relationships between OVS operators and other programming providers are far more likely to promote robust two- wire video competition than are onerous rules designed to ensure Title II-like openness. As Viacom observes: [T]he emergence and viability of OVS in the multichannel marketplace will hinge directly on whether LECs and other potential OVS operators are afforded sufficient flexibility to make Open Video Systems an attractive business option. To insist too strictly on securing the most broadly conceived notion of open access imaginable from OVS would be ultimately self-defeating. . . . The cable lobby urges the Commission to adopt numerous requirements that will competitively cripple OVS and thereby discourage deployment. The following paragraphs discuss the most extreme proposals, but the Commission will fail to implement the will of Congress if it adopts any rule based on the recommendations of the cable lobby. 1. CARRIAGE OF VIDEO PROGRAMMING PROVIDERS a)Carriage of incumbent cable operators Section 653(b)(1)(A) requires the Commission to prescribe regulations that except as required pursuant to section 611, 614, or 615, prohibit an operator . . . from discriminating among video programming providers with regard to carriage on its open video system . . . . The cable lobby argues that this language prohibits absolutely any discrimination in carriage except for PEG and must-carry and that therefore OVS operators cannot refuse to provide carriage to operators of cable systems in OVS service areas - even if such refusals are just and reasonable. No policy goal of Section 653 or any other part of the 1996 Act will be served by forcing OVS to provide carriage to competing cable operators. To the contrary, such a requirement would undermine the pro-competitive intent of Congress in creating the OVS option. The anti-competitive effect of the interpretation advanced by the cable parties is wholly inconsistent with the congressional purpose to maximize competition between local exchange carriers and cable operators within local markets . When cable s interpretation is juxtaposed with their other positions, its flaws are obvious: (1) For example, NCTA argues that OVS operators must be limited to one-third of the activated channel capacity in all situations in which demand exceeds capacity, including when only one other video programming provider is seeking capacity. Read with its interpretation of the carriage requirement, this position would require an OVS operator to permit the incumbent cable operator, if it is the only other video programming provider requesting capacity, to commandeer a substantial portion of the OVS. For example, if an OVS had 90 channels, of which 15 were required for PEG and must-carry, the operator could get 30, but the competing cable operator could get 45. Added to the cable operator s existing capacity of 30 or more channels, the capacity captured on the OVS would give the cable operator an insurmountable competitive advantage. No rational business person will invest in a system that his principal competitor can use against him. (2) NCTA argues that each OVS should be administered by the programming providers or by an independent party selected by all of the programming providers. If the incumbent is one of those programming providers (possibly the only one other than the operator), the operator would be required to permit his principal competitor to share in decisions directly affecting the competition between their respective systems. NCTA contends that Section 653(b)(1)(A) is unambiguous and that the Commission has no choice but to prohibit all discrimination in carriage except for PEG and must-carry. It is impossible, however, to apply Section 653(b)(1)(A) without implementing some reasonableness limitation. Carried to its logical conclusion, NCTA s position would require that OVS operators accommodate all requests for carriage at the same time. They could never refuse or postpone carriage of any video programming provider at any time for any reason. Section 653 cannot reasonably be interpreted to impose such an onerous burden. The Commission must resolve the ambiguity in Section 653(b)(1)(A) s nondiscrimination requirement in a manner that furthers the pro- competitive purpose of Congress and must avoid any interpretation that makes OVS deployment irrational. b)Analog/digital and channel positioning issues Several commenters, mostly the cable lobby, argue for separate treatment of analog and digital channels and for strict rules governing channel positioning. Without flexibility to deal with these issues in a manner that responds to local market conditions, OVS operators will be severely handicapped in their efforts to compete against incumbent cable operators. The Commission should not adopt specific rules on these issues, but should make it clear that actions reasonably required to enable the system to compete effectively in local markets justify discrimination. As the Joint Parties stated in their Comments, the Commission should evaluate all proposals for OVS rules by a litmus test to determine whether the rules will make OVS a viable competitive option. That test is whether the rules will make OVS an attractive option for cable operators. When that test is applied to this issue, it should be obvious that cable operators will not convert to OVS if they are not permitted sufficient flexibility to maintain their existing analog programming packages. This flexibility should extend to operators that deploy systems with both analog and digital capacity. Given the cost of equipping systems with digital channels, no operator will deploy digital capacity merely for the sake of greater flexibility in assigning analog channels. Operators will deploy digital capacity only if they believe their digital channels will attract enough programming and subscribers to support the investment. Having made such an investment, they will have compelling financial incentives to promote use of the digital capability. If such operators are afforded flexibility in assigning analog channels to compete effectively against incumbent cable operators, that flexibility will ultimately benefit all programming providers on their systems. c)Channel counting The cable lobby s objective on this issue is to minimize the flexibility of OVS operators. NCTA argues for the most restrictive rules for counting the operator s one-third minimum share, even endorsing the error in calculation of activated channel capacity at footnote 34 of the Notice. The Commission does not have the latitude to calculate operators one-third on less than the entire activated channel capacity of the system or to include programming that Congress selected (i.e., must-carry and PEG) in the operator s minimum share. The Commission does have the latitude to resolve ambiguities in favor of greater flexibility for operators (for example, to permit operators to exclude shared channels from their minimum share). The Commission should determine from the outset that it wants OVS to succeed and that it will, therefore, implement the will of Congress by enhancing the business flexibility of OVS operators. d)Channel sharing In an effort to make OVS rules as rigid as VDT rules, NCTA contradicts the plain language of Section 653. After quoting the language that permits an operator of an open video system to carry on only one channel any video programming service that is offered by more than one video programming provider, NCTA directly contradicts that language, asserting that Section 653 does not authorize the OVS operator to decide that particular program networks should be shared, while others may be offered on an exclusive basis. Undeterred by a lack of actual information about channel sharing, about the market or technical factors that may affect it, or about actual abuses of channel sharing, NCTA proposes rigid rules to govern this unknown. Operators may or may not find channel sharing a practical technique for mitigating capacity limitations and may or may not decide to use it. If, however, it is burdened from the start by requirements not expressed in Section 653, channel sharing will have no opportunity to contribute to the viability of OVS. The Commission should adopt a rule that invokes the language of Section 653 without elaboration. NCTA also asserts that channel sharing cannot be required with respect to a particular program network if the packager s arrangement with the program network does not explicitly permit such carriage. No carriage arrangements, including channel sharing, may violate copyright laws or contracts governing the distribution of programming. There is no need for the Commission to adopt rules to enforce copyrights or contracts. NCTA, however, would have the limitations placed by copyright holders on the distribution of their programming operate as a limitation on OVS operators exercise of the right granted by Section 653(b)(1)(C). The term channel sharing is shorthand for a broader right to carry on only one channel any video programming service that is offered by more than one video programming provider . . . provided that subscribers have ready and immediate access to any such video programming service. In spite of the common use of the term channel sharing to refer to this right, channel sharing as such is not necessarily the only legitimate way in which this right can be exercised. For instance, an operator may advise video programming providers that it will carry a video programming service on only one channel and let the copyright holder to determine which video programming provider it will authorize to carry the programming service on the system as long as all subscribers have ready and immediate access to the programming. The Commission should not establish rules that limit OVS operators flexibility and ability to innovate. e)Channel administration Some commenters, NCTA included, contend that the Commission should not permit OVS operators to administer their systems, including assignment of channels, channel positions, and shared channels. This proposal ignores the language of Section 653, which anticipates that operators will administer their systems, which does not authorize the Commission to require third-party administration, and which decrees a dispute resolution process to deal with allegations of improper administration by operators. Section 653 places squarely on the operator, not another administrator, the responsibility for compliance with its requirements. If a third-party administrator were truly independent of the operator, as some proposals contemplate, operators would find it difficult or impossible to exercise sufficient control to ensure that administrators actions would not put operators in violation of Section 653. The only purpose served by a third-party administration requirement would be to make open video systems totally unattractive objects of investment. No prudent business would cede total control of its investment to an independent third party, particularly one that its principal competitor could help select and govern. f)Changes in demand/capacity NCTA acknowledges that requiring an operator to make immediate adjustments in channel assignments to accommodate changes in demand could cause unjustified disruption to the entity s business plans and to the expectations of customers. NCTA does not, however, support a transition sufficient to prevent these recognized harms. NCTA would allow no more than a year for transition. Such a short period would seriously undermine the operators ability to enter into market-based contracts for programming it has selected or contracts with other video programming providers in order to free capacity for new demand. A transition period would not be reasonable unless it permitted operators to enter into contracts for durations common in the video industry or to make adjustments without violating existing contracts. The Joint Parties have recommended that operators be given a reasonable period to make capacity available. Viacom s proposal is similar and warrants serious consideration: [T]he certainty required for viable business planning would be undercut if subsequent expansion of, or demand for, capacity would trigger an obligation that any program packager (including the OVS affiliate) relinquish channels it has previously secured. Neither consumers nor programmers would be served by a Commission rule obligating or (explicitly or implicitly) permitting the OVS operator to abrogate any program affiliation agreements on this basis. Instead, if the OVS- affiliated packager s use of capacity after the initial enrollment exceeds the one-third cap, the operator should be required to make new capacity available to unaffiliated program packagers on a fair and reasonable basis -- perhaps by limiting the OVS-affiliated packager to no more than one-third of any new capacity if oversubscription recurs. NCTA also proposes that operators be required to make capacity available on a part-time basis as a means of dealing with changes in demand. NCTA fails to explain how a part-time capacity requirement would address changes in demand, however. NCTA argues that cable operators have been offering public access users blocks of time on channels, rather than requiring their use on a full-time basis. OVS operators will be required to provide public access channels and may find the offering of time blocks expedient in that context. There is no basis, however, in Section 653 for a rule requiring OVS operators to offer part-time carriage. The Commission should leave operators free to address markets as they find them. g) The Head Start Problem On behalf of incumbent cable operators, whose facilities pass 96 percent of all television households in the nation with a subscriber penetration of over 65 percent, NCTA maintains that the OVS operator should not use its control over the facility to obtain the marketing advantage of a head start over other programmers. This is another attempt by the cable lobby to shackle OVS to preserve incumbent cable operators own head start. Price, terms, and conditions of carriage Section 653(b)(1)(A) requires the Commission to prescribe regulations that ensure that the rates, terms, and conditions for OVS carriage are just and reasonable, and are not unjustly or unreasonably discriminatory. Unlike Title II, Section 653 does not establish a procedure for public filing or review of rates, terms, and conditions prior to their becoming effective. Some parties would, however, have the Commission believe that it must regulate OVS rates, terms, and conditions in the same way it regulates common carrier services, notwithstanding the explicit intent of Congress that neither Title II nor Title II- like regulation be applied to OVS. NCTA scolds the Commission for paying attention to Congress and anticipating that OVS operators will lack market power. NCTA attempts to establish a false dichotomy between market power in relation to subscribers, which it concedes OVS will lack, and market power in relation to video programming providers. With regard to the latter, NCTA asserts that OVS operators will control a bottleneck facility and will have strong incentives to use that control to disadvantage competing programmers. NCTA fails to explain, because it defies logical explanation, how the second wireline video distribution facility in a community can be a bottleneck facility, particularly when there also are existing satellite and wireless distribution facilities. Open video systems will enter the market with no market power with respect to end users or video programming providers. Heavy-handed, Title II-like regulation of OVS rates, terms, and conditions cannot be justified based on this spurious bottleneck argument. The most effective way to determine whether operators use rates to the disadvantage of other video programming providers is to review rates in response to complaints. Several parties suggest that operators make OVS contracts public. The Commission should reject this approach as it did in its recent decision not to require cable operators to disclose contracts underlying their leased access rates. Cable operators had argued against public disclosure, because a requirement that all information supporting the calculation of an operators highest implicit rates be made public would cause the cable industry to suffer by giving competitors the ability to gain access to proprietary information and thereby decrease competition. The Commission refused to adopt a proposal to require public disclosure, stating, We believe that this could be unnecessarily intrusive on business relationships between operators and non-leased access programmers. However, we note that upon request from the Commission in the context of a leased access complaint, operators are required to justify fully their leased access rates, including by presentation of underlying contracts if necessary, subject to the operators right under our rules to request confidentiality of this information. A requirement for the public filing of rates for OVS carriage would be inconsistent with this decision. NCTA further argues that OVS operators be required to offer transmission service at the same per channel rate to all customers. The rigidity of such an approach would not enable OVS operators to adapt their rates to market requirements. The result would be rates that were too low for programming with a high market value and too high for programming with a low market value. This approach would be particularly disadvantageous for program producers without an established market position and non-profit programmers. The market-responsive approach proposed by Access 2000 better serves both independent programmers and consumers. OVS operators should be allowed to develop prospective payment models and apply those models to categories of video programmers. Payment could be based upon the number of subscribers, or set as a fixed percentage of a video programmers revenues. OVS operators and their affiliates should be allowed to develop other business and financial models to develop or license programming that would be distributed over the OVS network. . . . The Commission must give operators significant flexibility to base rates for carriage on relevant market factors and must permit them to justify rate differences based on such market factors. The Commission must avoid treating OVS carriage as a mere transmission service. The Commission should permit the service to develop as the market leads. 3. Certification process NCTA and others have proposed a burdensome certification process. Because the 10-day approval period mandated by Congress severely constrains cable s opportunity to impede entry, these parties support a requirement for extensive pre-certification filings. NCTA s proposed process would effectively reinstate the Section 214 process in its entirety. Even the Section 214 economic justification requirement would be reincarnated in a proposed requirement to justify rates. This is the sort of burdensome regulation that ultimately defeated video dialtone. NCTA s proposal directly conflicts with Section 653 and the plain intent of Congress that OVS be lightly regulated. B. Part 64 and Price Cap Regulation Provide Adequate Protection Against Cross Subsidy. Just as they did for VDT, competitors raise the specter that LECs will cross-subsidize OVS by misallocating OVS costs to common carrier services and imposing higher rates on ratepayers for their telephone service. They argue as a result that the Commission must undertake an extensive cost allocation proceeding before approving any requests for OVS certification. These arguments are nothing more than an attempt by the cable lobby to delay competitive entry and to so hamstring OVS by onerous regulatory constraints that it will never be a viable competitor against incumbent cable operators. As an initial matter, the assumption by the cable commenters that any form of burdensome cost allocation is necessary is simply wrong. In today s environment, where telephone companies are routinely subject to price cap regulation and where their common carrier services are increasingly subject to competition, any incentive to shift cost has vanished. As the Commission and courts have repeatedly held, the Commission s existing body of price cap and cost allocation rules effectively eliminate any risk that telephone companies might cross-subsidize non-common carrier services such as OVS. Moreover, the Commission has noted in another context that [p]roceeding under existing price cap rules is consistent with eliminating regulatory barriers and distorted incentives to efficient investment in telecommunications facilities. The Commission, therefore, should reject claims that additional regulations or safeguards are needed. Seeking to bolster their arguments for a new cost allocation proceeding, the cable interests claim that LECs need direction and guidance on the application of Part 64 to OVS. Those comments reflect a fundamental misunderstanding of the Part 64 rules. Those rules fully accommodate the joint provision of common carrier and non-common carrier services. Moreover, they include detailed requirements for the filing of cost allocation manuals and changes to those manuals. Consequently, there is no need to delay OVS by conducting a cost allocation proceeding first. A number of cable interests also argue that price caps and Part 64 are inadequate to protect against cross-subsidization. Those claims are a familiar litany, which the Commission heard and rejected many times in the context of VDT. Such claims should not be given new life with OVS, which is supposed to involve lesser regulatory burdens, not greater ones. Finally, a number of cable commenters argue that the Commission should go beyond Part 64 and require, in addition, that separate subsidiaries be required for OVS systems and affiliated video programming providers. These arguments fly in the face of the 1996 Act and would clearly undermine Congress goal of flexible market entry, enhanced competition, streamlined regulation, diversity of programming choices, investment in infrastructure and technology, and increased consumer choice. First, such a requirement adds nothing in the way of benefits to the Commission s existing regulatory safeguards, but would impose significant costs that ultimately would be borne by consumers. In effect, it would mean that the left side of telephone company wires would be owned by one company, while the right side would be owned by a different one. Since the cable interests argue that structural separation means the two companies could not have any common employees, this would require complete duplication of all functions now performed by a single company ranging from network operations and maintenance to marketing. The result would be artificial inflation of both OVS and local telephony costs. While this would benefit the cable interests, it would obviously harm consumers. Moreover, contrary to TCI s argument, the 1996 Act does not require that OVS be provided through a separate subsidiary. Indeed, the Act makes clear that Congress did not intend for the Commission to impose such a requirement. The 1996 Act permits BOCs to provide incidental interLATA services upon enactment. Incidental interLATA services are defined to include the interLATA provision by a Bell operating company of video programming, or other programming services to subscribers , the capability for interaction by such subscribers to select or respond to such . . . programming , and the provision of services to distributors of programming that the BOC is permitted to distribute. Section 272 of the Act specifically excepts from the requirement for a separate affiliate incidental interLATA services described in paragraphs (1) [and others] of Section 271(g). Given this explicit statutory statement, and Congress clear direction that the Commission not impose Title II or Title II-like regulation on OVS, the Commission should reject arguments for the imposition of a separate subsidiary requirement. Finally, NARUC argues that the Commission should immediately initiate a Joint Board to review separations issues raised by OVS. There is no need to do so. Because OVS, unlike VDT, is not a common carrier service, its costs do not flow through the Part 36 process. C. Designated Title VI Obligations Should Apply Generally In The Same Manner As They Apply To Cable Overbuilders, But Without Replicating Local Franchise Regulation. The 1996 Act requires OVS operators to comply, to the extent possible, with the must-carry and retransmission consent and PEG rules in a manner that is no greater or no lesser than those applied to existing cable systems. It is clear that the qualifier to the extent possible grants the Commission latitude to fashion a flexible regulatory approach that recognizes the differences between OVS and closed cable systems. Most importantly, however, the Commission must determine how to apply those Title VI obligations to OVS operators without effectively reimposing local franchise regulation. Despite Congress clear intent to exempt OVS operators from burdensome entry regulation, several parties insist that OVS certification be predicated on a showing of compliance with applicable Title VI regulations. Their position ignores Section 653(a)(1), which provides only for certification of compliance with the Commission s regulations under subsection (b). Title VI requirements are applied to OVS operators in subsection (c). Their position also ignores the sequence implicit in Section 653(c)(1), which provides that the designated parts of Title VI shall apply to any operator of an open video system for which the Commission has approved a certification under this section (emphasis added). Moreover, before commencing operations, OVS operators can certify only that they will comply with the Commission s rules. 1. Must carry and retransmission consent To apply the must carry and retransmission consent rules set forth in Section 614 to OVS operators, the Commission need only codify general rules requiring adherence to the provisions of Subpart D of its Rules. Several parties, however, insist on the promulgation of rules that are either redundant to existing regulations or not contemplated under Section 653. For example, broadcasters insist on rules that would ensure that they will retain their existing channel positioning options as they exist on cable systems or that OVS facilities will transmit must-carry signals to those portions of the service area within the relevant television market. OVS operators should be subject to the same provisions of Subpart D of the Commission s Rules as are cable systems; therefore, there is no need to establish any additional rules for OVS. Other parties contend that the Commission should mandate a tier buy- through requirement for OVS, similar to that established under the cable rate regulation rules. The Commission has no authority to impose such a requirement on OVS. The tier buy-through rules were designed to implement the rate regulation provisions of the 1992 Cable Act, from which OVS is exempt. PEG access Some parties propose that OVS operators be required to duplicate existing PEG facilities or negotiate with franchising authorities for the provision of PEG access. These proposals ignore the possibility that OVS facilities may offer different capabilities than existing cable systems and may be able to provide equivalent carriage of PEG programming to that provided by cable operators in the OVS service area by means other than the duplication of facilities. For instance, operators that deploy entirely digital OVS will be unable to duplicate analog PEG facilities, but they will be able to provide equivalent carriage of PEG programming. If Congress had intended to impose a rigid duplication requirement, it could have easily done so. Instead, Congress called for obligations that to the extent possible are no greater or lesser than the Title VI PEG obligations. Further, OVS operators must not be required to negotiate PEG access with local authorities and incumbent cable operators as a condition for certification. Mandated negotiations would simply reimpose the obligations of Section 621(a)(4)(B), from which Congress clearly intended to exempt OVS operators. Moreover, as already shown, Section 653 s certification requirement does not include certification of PEG compliance. If local authorities believe that an OVS operator has failed to meet its PEG obligations, it can pursue the issue through the dispute resolution process. OVS operators should be encouraged to employ flexible and workable solutions in achieving the Act s PEG requirements. For example, through the use of narrowcasting, it may be feasible to deliver different PEG programming to different communities in an OVS operator s coverage area. Where it is not economically or technically feasible to employ narrowcasting, however, OVS operators should be allowed to provide other reasonable arrangements such as sharing of PEG capacity among multiple communities. The Commission also should affirm that OVS operators may interconnect with existing PEG feeds to comply with the terms of the 1996 Act. Cable operators and local authorities should not be allowed to prevent or otherwise restrict access to such feeds or condition any interconnection arrangement on compliance with other obligations not expressly imposed by the 1996 Act. Many communities are now establishing separate non-profit organizations to manage PEG access independent of existing cable operations. These arrangements hold the promise of providing community access to PEG services in a manner that can easily accommodate competing video distribution providers. If the Commission adopts overly-restrictive PEG access rules in this proceeding, they may hinder the use of new and innovative approaches to providing PEG access. The Commission Should Not Allow Local Governments To Leverage Their Interests In Public Rights-Of-Way Into A Surrogate Franchise Process. As argued above, in order for OVS to become a viable competitive service, it is critical that OVS operators not be overburdened by unnecessary government regulation. That is the essence of Congress' explicit direction that OVS operators need not obtain local franchises. Yet, some local government representatives in effect argue that municipalities should be allowed to use their interests in public rights-of-way as a back-door franchise requirement. They argue that LEC OVS operators may not use pre-existing right-of-way authority, should be required by the Commission to obtain additional right-of- way authority before filing for certification as an OVS operator, should compensate local governments for the use of rights-of-way through the provision of a payment that exceeds the fee in lieu of franchise fee contemplated by the 1996 Act, and that anything less than such a fee would be an unconstitutional taking. The Joint Parties believe that the League's arguments are based on a misreading of applicable law and would cripple the introduction of OVS as a practical matter. Accordingly, the Commission should reject the League's attempt to use rights-of-way as a means of constructing a local approval process that Congress has clearly denied to local governments. Instead, the Commission should follow the Act's explicit instructions by promulgating regulations that expedite deployment of OVS with limited local government involvement. 1. The FCC should not be distracted by baseless claims that Congress' passage of the 1996 Act constitutes a Fifth Amendment taking. In raising its unsupportable claim that deployment of OVS would result in an unconstitutional taking, the League is simply attempting to distract the Commission from the purpose of the proceeding. As the League conceded in its comments, Congress has the power to take private property for public use in exchange for just compensation. It has no less power to require that state or local rights-of-way accommodate intrastate commerce or federal uses. Accordingly, Congress is within its realm to pass a law instructing the FCC to authorize OVS operators to use public rights-of-way in exchange for a compensatory fee in lieu of a franchise fee. Since Congress has already considered and decided this issue, the Commission may not second-guess Congress, much less defy the specific intent of Congress by effectively granting local governments a veto over OVS. By its express terms, the 1996 Act exempts OVS operators from the requirement of obtaining a franchise and instructs the Commission to set regulations for the payment to cities of a fee in lieu of a franchise fee. At no point does the Act give local governments the right to veto the deployment of OVS systems, a right that would be effectively indistinguishable from a franchise obligation. Instead, the Act limits local governments to a managerial role over rights-of-way, a role that must be carried out in a nondiscriminatory and competitively neutral manner in exchange for a fair and reasonable fee. Additionally, the Act gives the FCC an express right to "preempt" local regulations that exceed a purely managerial function. Taken together, these provisions provide express instruction for the FCC's certification of OVS systems using public rights-of-way in exchange for a just fee. The Commission should not eviscerate these provisions by allowing local governments to wield a type of franchise power in the guise of managing rights-of-way. The Commission should also refrain from placing other obstacles in the path of rapid certification of OVS systems. Specifically, nothing in the Act suggests that local right-of-way authority is a prerequisite to filing or approval of OVS certifications, and the League cites no authority for its contrary assertion that OVS certifications "must include incontestable evidence of specific [right-of-way] authorization. . . in the form of . . . licenses or franchises." Indeed, the clear intent of the Act belies any such assertion. Moreover, the timeframe established by the Act clearly evinces Congress' intent to enable the quick introduction of OVS service rather than an intent to allow municipalities to burden the certification process with unnecessary, extra- statutory requirements. 2. The League is incorrect in claiming the Fifth Amendment gives property owners a right to deny consent to the public use of private property. As discussed above, the League's claim that the 1996 Act violates the Fifth Amendment takings clause is little more than a smoke screen designed to divert the Commission from the Act's explicit instructions that OVS should be rapidly authorized with minimal regulatory burdens. The Commission should note, however, that the League's takings arguments misconstrue applicable law and should be rejected. Most of the League's "takings" arguments are based on the incorrect assumption that the Fifth Amendment gives local governments a right to "grant or deny consent" to the use of its rights-of-way. In fact, the protection provided by the Fifth Amendment consists solely of a guarantee of "just compensation" whenever the federal government takes private property for public use. It has never been construed to permit property owners to "deny consent" to the taking of property by the federal government for public use. In this regard, the League is incorrect in asserting that the U.S. Supreme Court held in Loretto v. TelePrompter Manhattan CATV Corp. that "an apartment building owner has the right to grant or deny consent to a telecommunications company that wishes to run cables through or on its building." Instead, Loretto affirmed a private property owner's right to "just compensation" -- but only for a compelled physical invasion of its property. Applying the holding in Loretto to OVS and assuming for argument s sake that the Fifth Amendment s takings clause applies to public rights-of-way, they are not entitled to deny consent to the rapid deployment of OVS. In reality, many local telephone companies already have right-of-way authority, whether by state statutory fiat or negotiated franchise agreements with communities. The introduction of new services -- such as OVS -- does not alter this authority. Indeed, the League has cited no law to suggest that existing right-of-way authority is somehow obviated by new service introduction; nor does the 1996 Act provide for such a result. 3. The League's argument that the FCC lacks authority to authorize OVS to use rights-of-way ignores Congress' explicit instructions in the 1996 Act. While the League of Cities makes several other takings-related arguments in its comments, they are irrelevant to this proceeding. First, the League incorrectly claims that the issue of appropriate compensation is irrelevant to the threshold question of whether a taking has occurred. The League cites Ramirez de Arellano v. Weinberger for this proposition, but that case simply reaffirms the requirement that a government agency must have statutory authority to take private property, regardless of whether compensation is offered. In this case, as discussed previously, the statutory authority for the FCC's certification of OVS is explicit in the 1996 Act. Accordingly, the holding in Ramirez de Arellano is irrelevant. The League similarly argues that the Commission cannot authorize OVS operators to use rights-of-way because such authorization would necessitate the power of eminent domain, a power that must derive from Congress either through express statutory terms or by necessary implication. As discussed above, however, by its express terms, the 1996 Act exempts OVS operators from a franchise requirement, limits local governments to a managerial role over rights-of-way, and instructs the FCC to "preempt" local regulations that exceed a purely managerial function. Taken together, these provisions provide express authority for FCC certification of OVS systems using public rights-of-way in exchange for compensation. Even if express authority did not exist in the Act, the statutory authority for FCC certification of OVS systems is evident through necessary implication. The Act's direction that OVS operators be permitted to deploy systems in a nondiscriminatory and competitively neutral manner necessitates rules that deny local governments a veto power over OVS deployment. Substantial evidence exists that allowing local governments to have a veto power over OVS would result in substantial delay and unintended pre-conditions that could result in the abandonment of planned OVS systems in many communities. Such a result would be directly contrary to the clear intent of the 1996 Act. Accordingly, in order to carry out the direction of Congress, the Commission necessarily must refuse to place a veto power in the hands of local governments. The League of Cities also argues that because Congress did not explicitly authorize a taking in the 1996 Act, the Act must be construed as to not require a taking. As shown above, however, Congress was explicit in its instructions regarding the Commission s authority to certify OVS, and the most appropriate construction of the Act provides a mechanism for compensation. Accordingly, the cases cited by the League are irrelevant since each case dealt with a statute that could be construed as authorizing the public use of private property without providing for compensation. Finally, the League is misplaced in arguing that the FCC's implementation of the 1996 Act would expose the federal government to unauthorized fiscal liability. Since the 1996 Act expressly contemplates the provision of appropriate fees to cities by OVS operators, no fiscal liability would be created for the federal government. E. Joint Marketing And Bundling Several parties propose restrictions on OVS operators ability to bundle and market video programming jointly with telecommunications services. There is no authority in the 1996 Act for this position. Indeed, the Conference Report expresses a congressional intent to allow OVS operators to tailor services to meet the unique competitive and consumer needs of individual markets. These commenters rely on Section 653(b)(1)(E), which simply prohibit[s] an operator of an open video system from unreasonably discriminating in favor of the operator or its affiliates with regard to material or information (including advertising) provided by the operator to subscribers for the purposes of selecting programming. This provision contains no reference to joint marketing or bundling and should be applied only to information provided over open video systems, not via other means. Moreover, because the Act specifically restricts joint marketing in the context of long distance services, it is obvious that Congress was well aware of the issue and chose not to impose joint marketing restrictions on video programming services. The Commission must therefore reject the commenters calls for limitations on inbound and outbound joint marketing. There is no statutory basis for the Commission to prohibit LECs from jointly marketing video and telephony services or to preclude joint marketing until cable companies provide telephony and engage in their own outbound marketing. Likewise, there is no authority in the 1996 Act to forbid outbound marketing by LECs until they satisfy the requirements of Sections 251-252 of the 1996 Act. Proposals to restrict OVS operators from making marketing calls that compare their program offerings to those provided by the competing cable company are not only absurd, but may violate the First Amendment. Even more absurd are proposals to prohibit OVS operators from informing subscribers of their own programming services unless they also provide information about the competing cable company, to require pre- certification filings of joint marketing plans, and to compel OVS operators to give their subscriber lists to all other programming providers on the OVS. Adopting these proposals not only would defeat the congressional objective of increasing competition in the video marketplace, but also would help ensure the swift and untimely death of OVS. Even NCTA concedes that joint marketing and bundling of services facilitate convenient one-stop shopping and states that there should be no prohibition against the institution of marketing inducements to encourage consumers to purchase bundled packages of services. In the next breath, however, NCTA makes the unsubstantiated assertion that new residents in a community usually call the telephone company first and uses this assertion to conclude that LECs offering OVS should not be allowed to market video services to such customers. NCTA s claim ignores the many sources of information routinely made available to new residents regarding the service providers in communities, including cable companies, and is fundamentally at odds with Congress intent that telephone companies be allowed to introduce competition into the video marketplace. OVS operators should be given discretion, within the OVS non- discrimination framework, to market video and telephony services jointly and to bundle or package such services for customers. There is no basis for any greater restriction on such practices than those which apply under existing antitrust laws. F. Equipment Compatibility Although Congress specifically exempted OVS from the Cable Act s equipment compatibility standards, some parties ask the Commission to promulgate rules regarding compatibility OVS and consumer electronic equipment. As HBO correctly points out, however, various industry standard-setting bodies are establishing standards to facilitate compatibility and access to broadband services. In short, market forces are working appropriately and should be left undisturbed by government intervention. The Commission should leave such standards-setting activities to the market- place and refrain from stifling innovation by dictating particular approaches to technology. As one commenter aptly put it, there are major technological changes coming in the architecture of broadband communications networks provided by cable TV companies and common carriers. These developments could be stifled by regulatory policies that deprive network operators of the flexibility to deploy network components in a manner that is technically and economically efficient. The Congressional policy set forth with respect to Open Video Systems is consistent with a Congressional purpose to permit the development of new and innovative services and technologies with minimal regulatory intervention. III.CONC LUSION The Joint Parties respectfully urge the Commission to adopt OVS rules that invoke the language of Section 653 without elaboration and establish a streamlined certification process. Enforcement of the obligations imposed on OVS operators, including the nondiscrimination and PEG requirements, should be left to the dispute resolution process where the Commission can address real operational issues on the basis of facts, not hypothesis. Any other approach will assure for OVS the same fate as VDT. BELL ATLANTIC TELEPHONE COMPANIES and BELL ATLANTIC VIDEO SERVICES COMPANY By their Attorney: ________________________________ Leslie A. Vial 1320 North Court House Road Eighth Floor Arlington, VA 22201 (703) 974-2819 BELLSOUTH CORPORATION and BELLSOUTH TELECOMMUNICATIONS, INC. By their Attorneys: ________________________________ Herschel L. Abbott, Jr. Michael A. Tanner Suite 4300 675 West Peachtree St., N.E. Atlanta, GA 30375 (404) 335-0764 GTE SERVICE CORPORATION and its affiliated domestic telephone operating companies and GTE MEDIA VENTURES, INC. By their Attorneys: ________________________________ John F. Raposa, HQE03J27 P. O. Box 152092 Irving, TX 75015-2092 Gail L. Polivy 1850 M Street, N.W. Suite 1200 Washington, D.C. 20035 (202) 463-5214 LINCOLN TELEPHONE AND TELEGRAPH COMPANY By its Attorneys: ________________________________ Robert A. Mazer Albert Shuldiner Vinson & Elkins 1455 Pennsylvania Avenue, N.W. Washington, D.C. 20004-1008 (202) 639-6500 PACIFIC BELL By its Attorneys: ________________________________ Lucille M. Mates Christopher L. Rasmussen Sarah Rubenstein 140 New Montgomery Street Room 1522A San Francisco, CA 94105 (415) 542-7649 Margaret E. Garber 1275 Pennsylvania Avenue, N.W. Washington, D.C. 20004 (202) 383-6472 SBC COMMUNICATIONS, INC. and SOUTHWESTERN BELL TELEPHONE COMPANY By their Attorneys: ________________________________ James D. Ellis Robert M. Lynch David F. Brown 175 E. Houston Room 1254 San Antonio, TX 78205 (210) 351-3478 Mary W. Marks One Bell Center Room 3558 St. Louis, MO 63101 Date: April 11, 1996