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                                Before the
                     Federal Communications Commission
                          Washington, D.C. 20554

                                    )
In the Matter of                     )
Classic Telephone, Inc.              )
                                     )
Petition for Preemption, Declaratory )
Ruling and Injunctive Relief         )              CCBPol 96-10
)
                            )
             )
             )
             )
             )
             )
             )
             )
                                                  

                      MEMORANDUM OPINION AND ORDER


   Adopted:  September 30, 1996                                  Released:  October 1, 1996

By the Commission:


                             TABLE OF CONTENTS

I.   INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . .  2

II.  BACKGROUND. . . . . . . . . . . . . . . . . . . . . . . . . . . . .  2

III. DISCUSSION  . . . . . . . . . . . . . . . . . . . . . . . . . . .    8
     A.     Ripeness and Other Procedural Issues . . . . . . . . . . . .  9
     B.     Section 253(a) . . . . . . . . . . . . . . . . . . . . . . . 10
       C.   Sections 253(b) and 253(c) . . . . . . . . . . . . . . . . . 16
       D.   Section 251(f)(1)(A) . . . . . . . . . . . . . . . . . . . . 24
       E.   Conclusion and Remedies. . . . . . . . . . . . . . . . . . . 25

IV.  ORDERING CLAUSES. . . . . . . . . . . . . . . . . . . . . . . . . . 27
                             I.  INTRODUCTION

     1.     On March 19, 1996, Classic Telephone, Inc. (Classic) filed the above-captioned
Petition for Preemption, Declaratory Ruling and Injunctive Relief.  Classic claims that two
Kansas municipalities, Hill City and Bogue (the Cities), have blocked Classic's entry into the
local markets in violation of Section 253 of the Communications Act of 1934, added by the
Telecommunications Act of 1996 (1996 Act).  Section 253(a) bars State and local
governments from imposing legal requirements that may prohibit or have the effect of
prohibiting the provision of telecommunications services.  Accordingly, Classic requests that
the Commission preempt the Cities' conduct, direct the Cities to issue telecommunications
franchises to Classic, and enjoin the municipalities from further interfering with Classic's right
to provide telecommunications services in those municipalities.  For the reasons discussed
below, we grant Classic's request to the extent that we conclude that the Cities' decisions
denying Classic's franchise applications are preempted under section 253, and deny Classic's
petition in all other respects.

II.  BACKGROUND
                    
                    2.     Classic is a wholly-owned subsidiary of Classic Communications, a holding
company that controls various subsidiaries providing telecommunications services.  On March
10, 1995, Classic entered into a purchase and sale agreement to acquire four telephone service
exchanges in northwestern Kansas from United Telephone Company of Kansas (United). 
One of these exchanges was the Hill City Exchange, which serves both Hill City and Bogue,
Kansas (the Cities).  Classic Cable, another subsidiary of Classic Communications, provides
cable television services to the Cities as well as other communities in Kansas.

     3.     United has been the certified incumbent provider of local exchange and
exchange access telephone services in the Hill City Exchange, pursuant to a certificate of
public convenience and necessity (CPCN) granted by the Kansas Corporation Commission
(KCC).  Until 1993, United also held the local franchise authorizing it to operate a telephone
business and system in Hill City.  Although United never held a local franchise for Bogue, it
provided telephone service to that city during the same period it provided service to Hill
City.  In August 1993, Hill City terminated United's franchise effective December 31, 1993,
on the ground it was dissatisfied with the quality of United's local telephone service.  Since
terminating United's franchise, Hill City has permitted United to continue operating with an
expired franchise to ensure continuation of telephone service to its residents.   Similarly, at
Bogue's request, United continues to operate in Bogue without a franchise.

     4.     In March 1994, United sought declaratory and injunctive relief in Kansas state
court against Hill City regarding its refusal to renew United's telephone franchise.  On
appeal from the state district court, the Supreme Court of Kansas held in United Tel. Co. of
Kansas that, under Kansas law, a city may require a telephone company holding a CPCN
from the KCC to obtain a local franchise in order to provide telecommunications services to
residents of that city.  Kansas law permits local units of government to determine "which
company or companies shall serve their communities so long as that decision does not
interfere with intrastate and interstate communications."  The Supreme Court of Kansas
concluded that: 

     While a telephone company with a certificate of convenience and necessity to
     serve an area may construct lines through a city, it may not serve that city
     without a franchise.  While a city may grant a franchise to a telephone
     company, that company must obtain a certificate of convenience and necessity
     from the KCC.  Finally, while the KCC may grant or deny certificates of
     convenience and necessity based on its powers to regulate the statewide
     telecommunications system, it may not force a city to grant a franchise to a
     telephone company.

     5.     In May 1995, soon after having entered into the purchase and sale agreement
for the Hill City Exchange from United, Classic applied for telephone franchises to serve Hill
City and Bogue.   Each of the Cities denied Classic's application for a franchise to serve
that city.  Each city had previously granted a franchise to another company, Rural Telephone
Service Co. (Rural), to construct a telephone system and operate a telephone business within
the Cities.  As noted above, however, the Cities allowed United to continue to provide
service until Rural was operational.

     6.     In its September 1995 decision denying Classic's franchise request, Hill City
noted that it did not "want to see two telephone companies in Hill City, competing side by
side, in a situation that [would] be financially uneconomic for either company."  Hill City
then stated its reasons for selecting Rural, rather than Classic, as Hill City's telephone
franchisee: (i) Rural is a local company with a good reputation for telecommunications
services, whereas Classic's corporate headquarters is in Texas, and Classic did not have a
track record for furnishing telephone services; (ii) Rural's subscribers are its owners, whereas
Classic's owners are unknown; and (iii) Rural has shown that it has the financial resources
with which to build an advanced telecommunications network, whereas Classic has only
claimed that it is financially secure without revealing its balance sheet.  Moreover, Hill City
claimed that the KCC's "long standing policy of certificating only one telephone provider in
each service territory may have a rational basis."  As for Bogue, it does not appear from the
record before us that it issued a formal written decision explaining why it denied Classic's
franchise petition.

     7.     On December 8, 1995, the KCC approved the sale of United's Kansas
exchanges (the Exchanges) to Classic, granted Classic a CPCN, authorized the transfer of the
franchise, plant, property and equipment of United to Classic, and designated Classic as the
carrier of last resort for the Hill City Exchange service area, which serves both the Cities. 
In its decision, the KCC determined that Classic had "demonstrated it has sufficient
managerial, technical, and financial capabilities to operate a telecommunications public utility
in the described service territory;" that Classic is capitalized in an amount sufficient to assure
the smooth operation of the Exchanges; that the close proximity of the Exchanges to various
operations of Classic gives Classic the opportunity to consolidate services in the Exchanges;
and that Classic will assume all responsibility to complete the modernization activity
associated with the Exchanges by December 31, 1997.  The KCC also found that because
Classic was purchasing the assets of United, the existing certificated incumbent local exchange
carrier (LEC) for the Hill City Exchange, Classic would assume the obligation to be the
provider of last resort for the entire Hill City Exchange.  Furthermore, in light of the Kansas
Supreme Court's ruling in United Tel. Co. of Kansas, the KCC held that while the lack of a
local franchise may actually prevent Classic from providing service within the city limits of
Hill City and Bogue, the failure of the Cities to grant Classic permission to provide service
does not affect Classic's willingness or managerial, technical, and financial capabilities to
provide service within the Hill City Exchange.  The KCC also noted that, under Kansas law,
a local franchise cannot be exclusive.   In a separate decision issued on December 8th, the
KCC also granted Rural a CPCN to provide local exchange service in Kansas, but did not
designate Rural as the carrier of last resort in the Hill City Exchange.
     
     8.     The Cities immediately filed Petitions for Reconsideration of the KCC's
December 8th Order granting Classic a CPCN and designating Classic as the carrier of last
resort.  Hill City requested that the KCC clarify whether its designation of Classic as the
carrier of last resort was only until Rural's system was fully constructed, or if the designation
was in perpetuity.  Bogue argued in its reconsideration petition that the KCC erred in
granting Classic a CPCN and in designating Classic as the carrier of last resort because
neither United nor Classic currently had an official franchise in Hill City or Bogue.  On
January 11, 1996, the KCC affirmed and clarified its December 8th Order, stating that its
decision to designate Classic as the carrier of last resort was reasonable based on the ability of
Classic to provide "efficient and sufficient telephone service to the entire [Hill City]
Exchange."  The KCC stated that at the time of its decision, no other telecommunications
provider, including Rural, had a complete network to provide "necessary intrastate and
interstate services to all subscribers within the exchange."  The KCC noted that its decision
could be reconsidered at any time, and that when Rural completed its network, it could file a
petition to reopen the docket to consider the issue of carrier of last resort designation.  For
similar reasons, the KCC also affirmed its decision to grant Classic a CPCN.

     9.     On February 14, 1996, Classic formally requested Hill City and Bogue to
reconsider their denials of Classic's franchise applications in light of the enactment of the
1996 Act.  Classic stated in its requests for reconsideration that section 253 and other
provisions of the 1996 Act dealing with telephony favor competitive, not monopoly, provision
of such services.  Classic asserted that, pursuant to section 253, the Cities "must grant
competitive franchises when requested," and it notified the Cities that if they did not act on
Classic's renewed franchise requests, it would pursue all available remedies for
noncompliance under the 1996 Act.

     10.    Both cities rejected the renewed requests.  Hill City stated in its denial that it
would not grant Classic a franchise for the reasons set forth in its September 20, 1995 denial,
and further, that it did not agree with Classic's "broad" interpretation of the 1996 Act.  Hill
City also asserted that it was inappropriate to grant Classic a franchise for two additional
reasons:  (i) because the U.S. District Court for the District of Kansas had yet to issue a
decision on the Cities' petitions, filed on February 9, 1996, requesting review of the KCC's
December 8th and January 11th orders; and (ii) the FCC had not approved the transfer of
FCC licenses from United to Classic, or ruled on Classic's price cap waiver requests.

     11.    Bogue denied Classic's request for reconsideration on the grounds that:  (i)
Classic did not show that it would provide a telephone system equal in quality to the system
that Rural was constructing, which Bogue interpreted to mean that Classic would retain the
existing "obsolete" system, whereas Rural was already constructing an entirely "new, modern,
all buried, one party system;" (ii) Classic failed to provide Bogue sufficient financial
information that demonstrated Classic possessed the resources necessary to furnish telephone
service; and (iii) Classic did not show that service by two telephone exchange carriers was an
economical and efficient use of Bogue's rights-of-way.

     12.    Based on the Cities denials of Classic's requests for reconsideration, on March
19, 1996, Classic filed the above-captioned petition for preemption, declaratory ruling, and
injunctive relief.  On March 26, 1996, the Common Carrier Bureau issued a public notice
establishing the pleading cycle for comments on Classic's petition.  Eleven parties filed
comments, oppositions, or replies regarding Classic's petition.  In addition, Classic filed
several notifications of permitted ex parte presentations before the Commission.

                             III.  DISCUSSION

     13.    The issue before us in this proceeding is whether section 253 preempts the
Cities' decisions denying Classic's franchise requests.

     A.     Ripeness and Other Procedural Issues
     
     14.    Bogue contends that we need not reach the merits of Classic's petition because
it is premature.  Specifically, Bogue asserts that we are required by section 257 of the
Communications Act to complete a rulemaking to determine what constitutes a barrier to entry
before we may rule on the merits of any petition that seeks to invoke our preemption
authority under section 253.  Classic disputes Bogue's contentions on the grounds that
section 253 "authorizes the Commission to preempt any law or regulation" that violates the
section's prohibition against State and local entry barriers.  According to Classic, the
Commission is required, pursuant to this section, to issue a public notice and provide an
opportunity for public comment before reaching a decision on a petition that seeks to invoke
its authority under section 253, but is not required to conduct a rulemaking.  Moreover,
Classic contends that the delay that would result if the Commission were to defer action on
this petition pending the adoption of rules pursuant to section 257 would put Classic at a
competitive disadvantage in providing service in the Cities.  

     15.     We find that Classic's petition is not premature and is properly before us.  We
reject Bogue's assertion that section 257 of the Communications Act requires us to complete a
rulemaking prior to considering the merits of a petition filed under section 253.  Section 257
requires the Commission to establish regulations "for the purpose of identifying and
eliminating . . . market entry barriers for entrepreneurs and other small business."  We find
that our authority under section 257 to identify and eliminate "market entry barriers"
complements our authority under section 253 more broadly to preempt legal requirements that
"may prohibit or have the effect of prohibiting" the provision of telecommunications services. 
There is nothing in the language of section 257 or its legislative history even remotely
suggesting that it requires a rulemaking proceeding to implement section 253.  We determine
that the Commission's rulemaking responsibility under section 257 does not affect the issues
raised in this proceeding.

     16.    Moreover, section 253 itself does not require the Commission to conduct a
rulemaking prior to considering requests for preemption under section 253 and in fact,
requires a different procedure.  Rather, section 253(d) directs the Commission to rule on a
petitioner's preemption request after public notice and an opportunity for comment on a
particular State or local requirement.  While the Commission certainly could adopt rules to
implement section 253, it need not do so.  Where Congress required the Commission to
conduct a rulemaking proceeding prior to implementing a particular provision of the 1996
Act, the statutory provision makes that requirement explicit.  Section 253 contains no such
implementation requirements.

     B.     Section 253(a)

     17.    Classic claims that the Cities have awarded "de facto" exclusive franchises to
Rural for the provision of telecommunications services within Hill City and Bogue.  Classic
contends that the Cities' decisions to deny Classic's franchise application were based on
allegedly invalid concerns regarding the economic effects of having two competing telephone
companies.  Classic maintains, therefore, that the Cities' decisions violate section 253(a)
which states that "[n]o State or local statute or regulation, or other State or local legal
requirement, may prohibit or have the effect of prohibiting the ability of any entity to provide
any interstate or intrastate telecommunications service."   Classic argues that the Commission
must exercise its explicit preemption authority under section 253 to prevent local
governments, such as the Cities, from frustrating the pro-competitive, de-regulatory purpose of
the 1996 Act, and to remove decisions concerning the provision of telecommunications
services "from the vicissitudes of local politics and arbitrary regulatory restraints."  

     18.    The supporting commenters generally argue that by not granting a franchise to
Classic, the Cities are prohibiting Classic from providing telecommunications services in
violation of section 253, and that pursuant to this statute, the Commission must preempt the
actions of the Cities.  These commenters argue that the legislative history of section 253
demonstrates that Congress intended this section to remove all barriers to entry in the
provision of telecommunications services. 

     19.    The Cities maintain that their franchise denials do not prohibit the provision of
telecommunications services, and therefore, the decisions do not violate section 253(a). 
Specifically, Bogue contends that the Cities' actions are permitted because the real intent of
the 1996 Act is to protect competition, not individual competitors such as Classic.  Bogue
maintains that its denial of Classic's franchise request was not an explicit prohibition on entry,
but the denial of a franchise to a single company because that company is unqualified to
provide service.  Similarly, Hill City asserts that it has "no desire or intention to limit
qualified or trustworthy entities from providing telecommunication services within its
boundaries," but that it is permitted to deny the request of an unqualified company for a
franchise to operate a telephone system and business.

     20.    Moreover, Bogue argues that section 253 does not give the Commission
authority to preempt the purely local matter of franchising authority.  Bogue maintains that
Congress did not intend to alter the "dual regulatory system" set out in section 2(b) of the
Communications Act,  which provides that, with certain exceptions, nothing in the Act shall
be construed to give the Commission jurisdiction with respect to "regulations for or in
connection with intrastate communication service by wire or radio of any carrier . . ."  If
Congress had intended to modify this jurisdictional limitation, Bogue contends that Congress
would have explicitly granted the Commission authority to regulate local matters, including
matters relating to franchise issues.  Bogue further argues that because there is no clear
expression of preemption of franchising power in the 1996 Act, the Cities retain the authority,
which existed prior to the 1996 Act, to deny franchises, and not just impose conditions on
franchises.  
     
     21.    Furthermore, the Cities argue that construing a locality's denial of a franchise
application as a barrier to entry eliminates the ability of State or local governments to deny a
franchise under any circumstances.  Bogue contends, for example, that if the Commission
interprets section 253 to remove from State and local governments all authority to deny
franchises, State and local governments "would be required, without question, to issue a local
telephone exchange franchise" regardless of the technical, financial, and other qualifications of
an applicant. 

     22.    Classic replies that based on the unambiguous language of section 253, the
Commission's preemption authority extends to all barriers to entry, including those erected by
local authorities pursuant to their limited franchising power.  In addition, Classic contends
that section 2(b) of the Communications Act does not restrict the Commission's preemption
authority over legal requirements that violate section 253 because section 253 makes clear that
State or local barriers to entry affect competition in general and the harm to competition
cannot be separated into interstate and intrastate components of our nation's
telecommunications system.

     23.    Scope of Section 253.  Section 253(a) proscribes State or local statutes,
regulations, or legal requirements that "may prohibit or have the effect of prohibiting the
ability of any entity to provide any interstate or intrastate telecommunications services." 
Section 253 preempts legal requirements that may prohibit or have the effect of prohibiting
intrastate telecommunications services whether or not such legal requirements affect interstate
telecommunications services.  Contrary to Bogue's arguments, the plain language of section
253 does not exempt from the scope of federal preemption purely local matters of franchising
authority.  In addition, the legislative history confirms that Congress intended to preempt
purely intrastate matters; section 253 does not exclude all franchising issues.

     24.    Moreover, the standards for preemption established in Louisiana PSC do not 
foreclose preemption of State and local entry restrictions under section 253.  In Louisiana
PSC the Supreme Court found that section 2(b) of the Communications Act prohibits the
Commission from exercising federal jurisdiction with respect to "charges, classifications,
practices, services, facilities, or regulations for or in connection with intrastate
communications services."  Thus, section 2(b) makes clear that, in the absence of a grant of
authority to the Commission, State and local regulators retain jurisdiction over intrastate
matters.  But neither on its face nor as construed in Louisiana PSC does section 2(b) override
express statutory preemption by Congress as found in section 253.  Moreover, as we held in
the Local Competition First Report and Order, where section 2(b) conflicts with a later and
more direct provision of the Act, we will apply the latter provision despite section 2(b). 
Thus, to the extent that section 2(b) would otherwise preclude preemption of certain State or
local legal restrictions on the provision of intrastate telecommunications services, section 253
removes that limitation.  

     25.    Section 253(a).  We conclude that section 253(a), at the very least, proscribes
State and local legal requirements that prohibit all but one entity from providing
telecommunications services in a particular State or locality.  Such legal requirements
undeniably "may prohibit or have the effect of prohibiting the ability of any entity to provide
any interstate or intrastate telecommunications service," as proscribed by section 253(a).  The
legislative history confirms this straight forward interpretation of section 253(a).  Moreover,
this reading of section 253(a) is consistent with the overriding goals of the 1996 Act.  As
explained in the Local Competition First Report and Order, under the 1996 Act, the opening
of the local exchange and exchange access markets to competition "is intended to pave the
way for enhanced competition in all telecommunications markets, by allowing all providers to
enter all markets."  Section 253's focus on State and local requirements that may prohibit or
have the effect of prohibiting any entity from providing any telecommunications services
complements the obligations and responsibilities imposed on telecommunications carriers by
the 1996 Act that are intended to "remove not only statutory and regulatory impediments to
competition, but economic and operational impediments as well."  Congress intended
primarily for competitive markets to determine which entrants shall provide the
telecommunications services demanded by consumers, and by preempting under section 253
sought to ensure that State and local governments implement the 1996 Act in a manner
consistent with these goals.

     26.    We find that the evidence presented in this case supports Classic's contention
that the manner in which the Cities implemented their franchise requirements, as reflected in
their decisions denying Classic's franchise requests, prohibits Classic from providing interstate
and intrastate telecommunications services in Bogue and Hill City, Kansas.  Therefore, the
decisions appear to violate section 253(a)'s proscription against prohibitions on the provision
of telecommunications service by any entity, as well as the fundamental pro-competitive goal
of the 1996 Act.  For example, Hill City confirmed its intention to limit competition by
permitting only one company, Rural, to provide telecommunications services, stating in its
decision that Hill City does not "want to see two telephone companies . . . competing side by
side, in a situation that will be financially uneconomic for either company," and that it may
be a couple of years before true local service competition is present in Hill City.
Furthermore, as a basis for its denial, Hill City relied on the problems the community faced
with United's provision of telecommunications services, rather than examining Classic's
ability to provide quality telecommunications services.  Additionally, Bogue explained that its
decision to deny Classic's franchise request "is properly read as finding that [Classic] has not
demonstrated that two telephone exchange carriers could exist in the small city of Bogue."  

     27.    In their decisions, Hill City and Bogue both relied heavily on a comparison of
the relative capabilities of Classic and Rural to provide local telephone service.  The emphasis
placed on the comparative capabilities of the two providers suggests that the Cities intended to
choose only one entity as the telecommunications service provider for Bogue and Hill City,
the result of which was to impose an absolute prohibition on Classic from providing
telecommunications services.  This absolute prohibition on Classic's competitive entry is
precisely the type of action Congress intended to proscribe under section 253(a), absent a
demonstration that the franchise denials are an exercise of authority specifically reserved to
State and local governments under sections 253(b) or 253(c).  As stated previously, based on
the reasoning used by the Cities in their decisions denying Classic's franchise requests, the
Cities' application of their franchising requirements to Classic prevents Classic from providing
telecommunications services, and therefore, on its face, appears to violate section 253(a).  In
their pleadings in this proceeding, the Cities seek to justify their actions under sections 253(b)
and 253(c).  We address those claims below.

     28.    The Cities argue that a finding that the denials of Classic's franchise
applications violate section 253(a) has the untenable result of eliminating the authority of
States or localities to make franchising decisions.  We reject this contention.  We do not
believe that Congress intended to remove franchising authority from State and local
governments.  Nothing in the language of the 1996 Act or the legislative history reflects this
intention.  In fact, as discussed below, sections 253(b) and 253(c) recognize the authority of
States and localities (including the Cities) to impose franchise requirements for certain
purposes, and as such, these sections preserve the authority of States and localities to deny a
franchise application until such time the applicant complies with these permitted legal
requirements.  We find here only that, on this record, the Cities' exercise of their franchising
authority to prevent Classic from providing service appears, without further examination, to 
be prohibited by section 253(a).   

     C.     Sections 253(b) and 253(c)

     29.    Although the Cities did not specifically offer these reasons in their decisions
denying Classic's franchise applications, the Cities now claim in their submissions in this
proceeding that they denied Classic's franchise applications on consumer protection grounds,
the need to protect the public safety and welfare, and in order to manage the public rights of
way, pursuant to authority preserved under sections 253(b) and 253(c).  First, Bogue asserts
that section 253(b) permits competitively neutral franchise denials, and that "there is nothing
in the Communications Act of 1934 that requires a franchising authority to authorize
inadequate local exchange service."  Bogue claims that commenters fail to explain why the
Cities' efforts to protect the local community through the Cities' franchising power should be
preempted.  Bogue also maintains that the powers accorded to the States in section 253(b)
extend to localities by delegation under Kansas law.  Furthermore, Hill City contends that its
denial was consistent with section 253(b) because it was attempting to protect its citizens from
a harmful telecommunications provider.  Hill City also maintains that section 253(c) "creates
an express and reasonable exception to the general prohibition of new section 253(a)" against
barriers to entry, permitting the city to refuse to allow inadequate or harmful
telecommunications systems to dig up public areas for construction or modification.  Hill
City claims, and the National Telephone Cooperative Association agrees, that section 253(c)
permits the Cities to exercise police power over public rights-of-way to preclude unqualified
and/or untrustworthy entities from providing inadequate or unlawful telecommunications
services.  The Cities contend that their decisions denying Classic's franchise applications are
appropriate pursuant to sections 253(b) and 253(c), and that the Commission, therefore, must
deny Classic's petition for preemption.
     
     30.    In this regard, Hill City also raises allegations of general misconduct against
Classic.  Hill City claims that Classic was "attempting to monopolize local cable and
telephone service," would not be responsive to local service needs, was engaging in deceptive
and illegal tying practices, and had developed a "highly antagonistic relationship" with the
Cities.  

     31.     Classic replies that the Cities' decisions were not based on concerns about
consumer protection, quality of service, or management of the public rights-of-way, pursuant
to sections 253(b) or 253(c), and that the Cities' arguments are based on an unjustifiable
expansive reading of the limited powers given to States and localities under those sections. 
Classic argues that the Cities may not invoke the rights specifically reserved to the States
under section 253(b).  Classic contends, moreover, that even assuming local governments, by
delegation, have authority to impose requirements under section 253(b), nothing in this section
permits the Cities to impose preconditions on Classic in such a way as to prohibit entry. 
Commenters note that the Cities' legitimate service quality concerns should be addressed by
some means other than denying a franchise -- such as the introduction of the very competition
the Cities seek to prohibit.  Furthermore, commenters argue that management of the public
rights-of-way under section 253(c) does not include denial of entry or interference with the
provision of interstate or intrastate telecommunications services.  Classic and commenters also
assert that because Classic is purchasing the assets of the incumbent provider whose facilities
already occupy the rights-of-way that the Cities' claim would be overburdened, the Cities'
denials of Classic's franchise requests also exceed the authority reserved to local governments
in section 253(c).

     32.    Classic disputes the Cities' allegations of misconduct and maintains that it has
not engaged in deceptive marketing practices, has been found by the KCC to be fully
qualified to provide telephone service in the Cities, and has fulfilled all of its obligations with
respect to upgrading the existing United system, as ordered by the KCC.  Furthermore,
Classic argues that, even assuming that the allegations of misconduct were well founded, it
does not change the fact that the Cities unlawfully prohibited Classic from providing
telecommunications services. 

     33.    Classic Motion to Strike Hill City Comments.   Classic urges the Commission
to strike the majority of the Hill City comments in this proceeding on the basis that the
allegations of misconduct "run afoul of the Commission's recent reaffirmation of its
commitment to eliminate frivolous pleadings."  We deny Classic's request to strike without
reaching the issue of whether Hill City's allegations have merit.  As discussed, infra, to the
extent that Hill City shows that the alleged misconduct was an appropriate basis for denial
pursuant to section 253(b) or 253(c), the allegations of misconduct are relevant to a
determination of whether Hill City's denial of Classic's franchise application is preempted
under section 253.  We note that Classic's record as a cable operator, its promises to upgrade
the existing system, and its marketing practices are all actions the Cities may legitimately
regulate by requiring Classic, Rural, and all other qualified entities to abide by the same
competitively neutral requirements consistent with sections 253(b) and 253(c), or by taking
legitimate enforcement actions against Classic to address any violation of State laws. 
Moreover, as intended by Congress, the introduction of competition in the Cities should create
an incentive for Classic, Rural, and other potential carriers to provide high quality systems
and services at competitive rates.  Accordingly, we will not strike these arguments as
frivolous.

     34.    Authority of Localities Pursuant to Section 253(b). As an initial matter, we
must determine whether section 253(b) applies only to States, as argued by Classic and other
commenters, or also to their political subdivisions.  Unlike section 253(c), which refers to
both State and local government authority, section 253(b) refers only to the authority of
States.  It appears from the titles of the subsections and the history of this provision that
Congress deliberately separated the functions included under section 253(b) and 253(c). 
Previous versions of subsection (b) gave similar regulatory authority to both State and local
officials, but the text of the provision enacted limited to the States the authority of subsection
(b).  Nonetheless, this statutory language does not necessarily preclude States from
delegating their regulatory authority to local political subdivisions.  The Supreme Court, in
Wisconsin Public Intervenor v. Mortier, found that a federal statute that plainly authorizes
States to regulate, and is also plainly silent with reference to local governments, should not be
construed as leaving localities with no regulatory authority, but only that the localities "could
not claim the regulatory authority explicitly conferred upon the States that might otherwise
have been preempted" by federal law.  The Court explained that "[t]he principle is well
settled that local governmental units are created as convenient agencies for exercising such of
the governmental powers of the State as may be entrusted to them in its absolute discretion." 
As with section 253(b), earlier versions of the statutory provision at issue in Mortier included
both States and political subdivisions, but the provision as ultimately enacted referred only to
the States.  The Court in Mortier stated that while this change indicated "an unwillingness by
Congress to grant political subdivisions regulatory authority, it does not demonstrate an intent
to prevent the States from delegating such authority to its subdivisions, and still less does it
show a desire to prohibit local regulation altogether."  Accordingly, section 253(b) may be
read to preserve certain regulatory powers of the States, and if there is a specific delegation
by the State, local governments as well.  Kansas law envisions a role for both the KCC and
local units of government.  Thus, for purposes of this order, we will assume that the Cities
may attempt to justify their actions pursuant to section 253(b).

     35.    Section 253(b).  Section 253(b) preserves the authority of States to impose
requirements to preserve and advance universal service, protect the public safety and welfare,
ensure the continued quality of telecommunications services, and safeguard the rights of
consumers, provided that such requirements are necessary, competitively neutral, and
consistent with the statute's universal service requirements, set forth in section 254 of the
Communications Act, as amended.  Section 253(b), for example, ensures that States continue
to have authority to require telecommunications service providers to make emergency services
available to the public and comply with local consumer protection laws.

     36.    We conclude that the Cities have failed to provide sufficient evidence to show
that their denials of Classic's franchise requests are permitted pursuant to section 253(b). 
Rather, as discussed, the reasons set forth by the Cities in their decisions denying Classic's
franchise requests clearly indicate that the Cities simply did not want to authorize the entry of
a competitive telecommunications provider.

     37.    Furthermore, while the Cities have stated that their goals in denying Classic's
franchise applications were to ensure the continued quality of telecommunications services, the
Cities have not shown, or even attempted to show, that they applied their franchising
requirements in a "competitively neutral" manner as required under section 253(b).  In fact,
based on the evidence before us in this proceeding, it appears the Cities in effect applied their
franchise requirements to Classic in a manner that is not competitively neutral.  At the very
least, this mandate of competitive neutrality requires the Cities to treat similarly situated
entities in the same manner.  In this instance, the Cities denied Classic's franchise applications
outright while granting the application of Rural, subject to certain conditions subsequent
concerning service quality.  We find no basis in the record of this proceeding that would
justify such discrimination, which has the effect of foreclosing entry by one competitor while
allowing another to enter. 

     38.       Moreover, the Cities have not provided any evidence that their absolute
denials of franchises to Classic were "necessary" to achieve the stated public interest goals as
required by section 253(b).  Congress envisioned that in the ordinary case, States and
localities would enforce the public interest goals delineated in section 253(b) through means
other than absolute prohibitions on entry, such as clearly defined service quality
requirements or legitimate enforcement actions.  We find that the record in this proceeding
does not support the Cities' claim that Classic is "unqualified" to provide local telephone
service in the affected areas and that, therefore, the denials were necessary to protect the
public interest goals set out in section 253(b).  To the contrary, the record reveals that unlike
the Cities' decisions, the KCC based its Dec. 8th decision to grant Classic a CPCN on a
record of empirical evidence including, among other information, Classic's debt to asset ratio,
projected income, and a stipulation regarding the gain on sale of the United system. 
Relying on that comprehensive evidentiary record, the KCC found that Classic is capitalized
in an amount sufficient to assure the smooth operation of the exchanges; that the close
proximity of the exchanges to various operations of Classic gives Classic the opportunity to
consolidate services in the exchanges; and that Classic will assume all responsibility to
complete the modernization activity associated with the exchanges by Dec. 31, 1997.  These
findings by the relevant state regulatory commission support the view that Classic is qualified
to provide telecommunications services to the residents of the Hill City Exchange and belie
the Cities' assertions to the contrary that their franchise denials are permitted pursuant to
section 253(b) as necessary to "preserve and advance universal service, protect the public
safety and welfare, ensure the continued quality of telecommunications services, and safeguard
the rights of consumers."

     39.    Section 253(c).  Section 253(c) preserves the authority of State and local
governments to manage the public rights-of-way, but requires such regulations to be both
competitively neutral and nondiscriminatory.  In addition, section 253(c) permits State and
local governments to impose compensation requirements for the use of the public rights-of-
way so long as such compensation is fair and reasonable, competitively neutral, non-
discriminatory, and is publicly disclosed.  The legislative history sheds light on permissible
management functions under section 253(c).  During the Senate floor debate on section
253(c), Senator Feinstein offered examples of the types of restrictions that Congress intended
to permit under section 253(c), including State and local legal requirements that:  (1) "regulate
the time or location of excavation to preserve effective traffic flow, prevent hazardous road
conditions, or minimize notice impacts;" (2) "require a company to place its facilities
underground, rather than overhead, consistent with the requirements imposed on other utility
companies;" (3) "require a company to pay fees to recover an appropriate share of the
increased street repair and paving costs that result from repeated excavation;" (4) "enforce
local zoning regulations;" and (5) "require a company to indemnify the City against any
claims of injury arising from the company's excavation."  

     40.    We find that the Cities have failed to show that their franchise denials reflect
an exercise of public rights-of-way management authority or the imposition of compensation
requirements for the use of such rights-of-way.  The Cities' denials, therefore, do not trigger
section 253(c).  Instead, the Cities merely claim that section 253(c) permits their decisions,
without providing any support for this contention.  Based on the record before us, we
conclude that the Cities have not established an adequate premise to invoke the provisions of
section 253(c). 

     41.    Neither City relied on authority to manage public rights-of-way in its initial
decision denying Classic's franchise request.  Although both of the Cities issued their
reconsideration decisions after enactment of the 1996 Act, neither decision relied on the
Cities' authority to manage public rights-of-way in affirming its earlier denial of a franchise
to Classic.  Specifically, in its decision on reconsideration Hill City simply reiterated that its
denial of Classic's franchise request was based on the reasons set forth in its September 20,
1995 decision.  Hill City's initial denial predated by more than four months passage of the
1996 Act and did not discuss issues relating to its management of the public rights-of-way or
related compensation.  Similarly, Bogue's decision on reconsideration did not refer to, or
specifically rely on section 253(c), nor did it invoke concerns about management of rights-of-
way or related compensation.  

     42.    Indeed, in its pleadings in this proceeding Bogue did not argue that its denial of
Classic's franchise was an exercise of its authority to manage the public rights-of-way or
related compensation requirements.  Moreover, Hill City advanced its arguments based on 
management of rights-of-way and section 253(c) for the first time in conclusory fashion in its
pleadings in this proceeding.  In its comments in opposition to Classic's petition, Hill City
claimed that, pursuant to section 253(c) it retained authority to deny Classic's franchise
request because "police and franchise powers [preserved by section 253(c)] permit it to deny
franchises to those who attempt to deceive its citizens, to monopolize critical
telecommunications services and links, and to intimidate local governments and
individuals."  Hill City asserted that, from the beginning, it was merely attempting "to
obtain access to quality and reasonably priced telecommunications facilities and services for
its residents and businesses."  These conclusory statements are inadequate to establish that
the Cities actions reflect an exercise of public rights-of-way management authority or the
imposition of compensation requirements for the use of such rights-of-way.  Thus, upon
evaluation of the record before us, we conclude that the denials did not involve the Cities'
efforts "to manage the public rights-of-way" or to impose compensation requirements "for use
of public rights-of-way," and therefore, do not trigger section 253(c).

     D.     Section 251(f)(1)(A)

     43.    Bogue also contends that, although it has shown other valid reasons for denying
Classic's franchise application, as a rural locality it is entitled pursuant to section 251(f) to
deny Classic's franchise on economic grounds.  Bogue asserts that section 251(f) expressly
prohibits local telecommunications exchange competition in rural areas, absent an affirmative
finding by the appropriate State agency that such competition is not unduly economically
burdensome.  

     44.    Classic replies that the Cities' reliance on section 251(f) to justify their denials
of Classic's franchise applications is misplaced.  First, Classic argues that section 251(f)
permits States, not localities, to make a determination as to whether a rural LEC shall be
exempted from section 251(c) obligations.  In addition, Classic contends that the key
distinction made between rural and non-rural markets under section 253 is in subsection
253(f) which declares that a State may require a telecommunications carrier in a rural area "to
meet the requirements in section 214(e)(1) for designation as an eligible telecommunications
carrier before being able to provide such service."

     45.    Section 251(f)(1)(A) provides that the obligations imposed on incumbent LECs
pursuant to section 251(c) "shall not apply to a rural telephone company until (i) such
company has received a bona fide request for interconnection, services, or network elements,
and (ii) the State commission determines . . . that such request is not unduly economically
burdensome [and] is technically feasible . . . "  Section 251(f) permits the State
commission, not the local government, to decide on a case-by-case basis whether a rural LEC
has offered evidence that application of the Commission's section 251(c) requirements "would
be likely to cause undue economic burdens beyond the economic burdens typically associated
with efficient competitive entry."  Even assuming that the KCC has properly delegated its
authority under section 251(f) to the Cities, that section has no bearing on franchising
decisions and opportunities for entry.  Because the record does not reflect that the KCC (or
even Bogue) has made such a decision, that Classic is a rural LEC, or that section 251(f) has
bearing on these issues, section 251(f) does not appear to be applicable to the franchise issue
before us.

     E.     Conclusion and Remedies

     46.    As stated previously, the Cities' decisions reflect the application of their
franchise requirements in a manner that prohibits Classic from providing telecommunications
services.  The decisions, on their face, appear to violate section 253(a).  Moreover, the Cities
have failed to provide any evidence to show that their franchise denials are permitted pursuant
to section 253(b).  In addition, the Cities have not demonstrated that their actions were public
rights-of-way management or related compensation actions so as to trigger section 253(c). 
We find, therefore, that section 253 preempts the Cities' decisions denying Classic's franchise
applications for the provision of telecommunications services.  

     47.    In its petition, Classic requests that the Commission:  (1) declare that the
Cities' denials of franchises to Classic have prohibited Classic from providing
telecommunications services in violation of section 253(a); (2) declare that the Cities' denials
are preempted pursuant to section 253(d); (3) declare that the Cities "must immediately grant
to Classic all necessary franchise authorizations to offer telecommunications services within
their corporate limits;" and (4) enjoin the Cities "from taking any action that has the purpose
or effect of directly or indirectly interfering with Classic's provision of telecommunications
services anywhere within Classic's service area."  Classic maintains that the Commission's
authority encompasses more than the ability to preempt any legal requirements that violate
section 253, but also extends to the power to strike the barrier and issue injunctions to effect
the pro-competitive policies of section 253.  Classic contends that in addition to the explicit
preemption authority pursuant to section 253, the Communications Act of 1934, as amended,
empowers and requires the Commission to "execute and enforce the provisions of this Act,"
and that under this directive, the Commission has broad discretion to determine the
appropriate tools to remedy any violation of the prohibition on barriers to entry articulated in
section 253.        

     48.    Bogue contends that the Commission is prohibited from declaring that the
Cities "must immediately grant to Classic all necessary franchises."  Bogue argues that the
Tenth Amendment of the U.S. Constitution prohibits the Commission from issuing an order to
a State or locality that requires the State to take action in furtherance of a federal regulatory
objective.

     49.    In the instant proceeding, section 253 preempts the Cities' decisions denying
Classic's franchise applications.  It appears from the record that the relevant Kansas
franchising statute and regulations, which prohibit exclusive franchises, do not themselves
prohibit or have the effect of prohibiting the ability of any entity to provide
telecommunications services in violation of section 253.  They do not create explicit barriers
to entry and are facially competitively neutral.  Section 253 does not, therefore, as suggested
by some of the commenting parties, preempt the applicable franchising statute or local
regulations.  Likewise, we do not find it necessary to examine the decision of the Supreme
Court of Kansas in United Tel. Co. of Kansas, confirming that under Kansas law a telephone 
company holding a CPCN from the KCC must also obtain a franchise from the city the
telephone company intends to serve.

     50.    Section 253 preempts the Cities from enforcing their franchise requirements as
reflected in the record in this proceeding -- with the effect of precluding Classic from
providing local telecommunications services within the Cities.  We expect the Cities to
expeditiously reconsider Classics' franchise applications, i.e., within 60 days from the release
of this order, in a manner consistent with this opinion.  At this time, however, we decline
Classic's request to "enjoin Hill City and Bogue from taking any action that has the purpose
or effect of directly or indirectly interfering with Classic's provision of telecommunications
services anywhere within Classic's service area."  We do not believe such action is
necessary at this time.  We believe that, in this decision, we have provided the Cities
sufficient guidance to implement their franchising requirements in a manner that does not
prohibit the ability of any entity, including Classic, from providing telecommunications
services and we expect they will do so.  We note that, contrary to Bogue's arguments, the
Tenth Amendment of the U.S. Constitution is not offended by federal preemption pursuant to
section 253.  Section 253 explicitly preempts State and local legal requirements.  In this
situation, pursuant to the Supremacy Clause of Article VI of the Constitution, federal law
governs.

IV.  ORDERING CLAUSES
                     
     51.    Accordingly, pursuant to section 253 of the Communications Act of 1934, as
amended by the Telecommunications Act of 1996, 47 U.S.C.  253, IT IS ORDERED that
the Petition for Preemption, Declaratory Ruling and Injunctive Relief filed by Classic
Telephone, Inc. IS GRANTED to the extent discussed herein, and is in all other respects
DENIED.

                                   FEDERAL COMMUNICATIONS COMMISSION



                                   William F. Caton
                                   Acting Secretary