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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 ) In the Matter of ) Classic Telephone, Inc. ) ) Petition for Emergency Relief, ) Sanctions and Investigation ) CCBPol 96-10 ) MEMORANDUM OPINION AND ORDER Adopted: September 23, 1997 Released: September 24, 1997 By the Commission: I. INTRODUCTION 1. On December 6, 1996, Classic Telephone, Inc. (Classic) filed the above- captioned Petition for Emergency Relief, Sanctions and Investigation (Petition for Emergency Relief). Classic contends that the cities of Bogue and Hill City, Kansas (the Cities) have failed to reconsider their denials of Classic's franchise applications pursuant to the Commission's Classic Telephone Preemption Order issued on October 1, 1996. Based on this contention, Classic asks the Commission to take enforcement action against the Cities and provide other affirmative relief. We conclude that the enforcement action requested by Classic is unwarranted in the circumstances before us. Accordingly, we deny the Petition. We are extremely concerned, however, that unreasonable delays in acting on franchise applications can thwart local exchange competition in contravention of the Telecommunications Act of 1996. Thus, we believe that the Cities must act promptly on any future franchise applications filed by Classic. II. BACKGROUND AND PROCEDURAL HISTORY 2. In May 1995, soon after entering into a purchase and sale agreement to acquire the Hill City Exchange from the United Telephone Company of Kansas (United), Classic applied for local telephone franchises to serve the cities of Hill City and Bogue, Kansas. Each city had previously granted a franchise to another company, Rural Telephone Service Co. (Rural), to construct and operate a telephone system within the Cities. The Cities denied Classic's franchise applications. In their decisions, the Cities cited concerns regarding the ability of the service area to support two telephone exchange carriers. The Cities also relied on a comparison of the relative capabilities of Classic and Rural to provide local telephone service. On February 14, 1996, Classic formally requested that Hill City and Bogue reconsider their denials of Classic's franchise applications in light of the recent enactment of the 1996 Act, in which a primary goal is to encourage competition in the local exchange telephone market. The Cities rejected these requests. 3. As a result, on March 19, 1996, Classic filed its Preemption Petition. In that Petition, Classic alleged that the Cities had blocked Classic's entry into the local exchange telephone market in violation of Section 253 of the Communications Act, which provides 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." 4. After notice and an opportunity for public comment on Classic's Preemption Petition, the Commission issued the Classic Telephone Preemption Order on October 1, 1996. In that Order, the Commission concluded 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 . . . and appear[s] to violate section 253(a) . . . ." In addition, the Commission found that the Cities had failed to show that their reasons for denying the franchise applications fell within the scope of permissible state and local regulatory action under section 253(b). The Commission also found that because the Cities did not provide any support for their contention that section 253(c), concerning rights-of-way management, permitted their decisions, the Cities had not established an adequate premise to invoke the provisions of section 253(c). Consequently, the Commission concluded that "[s]ection 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." The Commission added that it "expect[ed] the Cities to expeditiously reconsider Classic's franchise applications, i.e., within 60 days from the release of this order, in a manner consistent with [the Commission's] opinion." 5. The Cities filed a Petition for Review of the Commission's Classic Telephone Preemption Order with the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit) on November 22, 1996. At that time, the Cities did not seek a stay of the Classic Telephone Preemption Order from either the Commission or the court. On December 20, 1996, in response to a motion by the Commission for expedited review, the court issued an order establishing an expedited briefing schedule. 6. On December 6, 1996, Classic filed the present Petition for Emergency Relief with the Commission. The Common Carrier Bureau issued a public notice establishing a pleading cycle for comments on Classic's Petition shortly thereafter. On December 27, 1996, the Cities filed an Emergency Petition for Writ in the Nature of Prohibition and Request for Ruling by January 10, 199[7] with the D.C. Circuit. The Cities requested that the court issue "a writ of prohibition directed against the Federal Communications Commission . . . to prevent the [Commission] from proceeding with the enforcement action announced in its December 13, 1996 [Public Notice]." Alternatively, the Cities asked the Court to consider their Petition as an emergency motion for stay of the Classic Telephone Preemption Order. 7. In an Order issued on January 14, 1997, the D.C. Circuit denied the Cities' Petition for Writ of Prohibition, stating that the Cities had not demonstrated that they had "a clear and indisputable right to relief." In the same Order, the court, on its own motion, vacated its December 20, 1996, Order granting expedited review of the Classic Telephone Preemption Order and ordered that proceedings in the appeal of the Classic Telephone Preemption Order be held in abeyance pending further order of the court. The court ordered the parties to file status reports concerning the Commission's proceedings on Classic's Petition for Emergency Relief, and directed the parties "to submit motions to govern further proceedings within 30 days after [the Commission] issues a final order in connection with Classic's petition." 8. On February 7, 1997, Classic announced that it would not close its purchase and sale agreement with United to acquire the Hill City Exchange, citing its inability to obtain a local franchise. The Cities, however, claim that Classic did not complete its purchase of the Hill City Exchange because it could not obtain financing. The KCC subsequently held that its certification of Classic as a local exchange carrier in Kansas was contingent upon Classic's purchase of the Hill City Exchange from United, and concluded that Classic never had an effective certificate of public convenience and necessity. Classic has applied to the KCC for certification as a competing local exchange carrier in Hill City and Bogue, and this application is still pending. III. POSITIONS OF THE PARTIE S A. Classic's Petition 9. In its Petition for Emergency Relief, Classic argues that the Cities have refused to comply with the Classic Telephone Preemption Order and have not reconsidered Classic's franchise applications as required by the Commission. Classic alleges that the Cities' strategy in this proceeding "is to ignore the law long enough to deny Classic a real competitive opportunity in [the Cities]." Classic contends that the Commission must direct the Cities to grant Classic's franchise applications or risk undermining the effectiveness of section 253 in removing state and local barriers to competition. 10. In its Petition, Classic contends that the Commission's authority under the 1996 Act "extends to the power to strike the [entry] barrier and issue injunctions." Classic requests that the Commission issue an emergency order enjoining the Cities from taking any action that interferes with Classic's provision of telecommunications services within their boundaries. Classic also requests that the Commission find that the Cities' inaction justifies the issuance of an order granting Classic a franchise "and all other necessary authority for Classic to engage in the provision of intrastate telecommunications service within the Cities." In addition, Classic asks that the Commission: (1) impose sanctions on the Cities, "including but not limited to attorneys [sic] fees and costs[;]" (2) notify the Cities of their "apparently willful violation of Section 253 of the Communications Act . . . and the Commission's Order in this proceeding and assess a forfeiture in an amount to be determined pursuant to Title V and this Commission's rules and regulations[;]" (3) direct the Cities to show cause why the Commission should not initiate further proceedings to assess additional forfeitures for continued violations of the 1996 Act; and (4) grant any other relief that the Commission determines is appropriate. Classic requests that the Commission grant the requested relief on an expedited basis. B. Comments and Replies 11. Four parties, including the Cities, filed comments in response to Classic's petition. Both Classic and the Cities filed reply comments. In addition, Classic and the Cities made ex parte presentations to the Commission staff. 1. Supporting Comments 12. ALTS and TCG generally support Classic's position. TCG argues that unless the Commission enforces its original Order, it risks serious erosion of the effectiveness of section 253. Thus, TCG urges the Commission to grant the relief requested by Classic. ALTS also urges the Commission to "take whatever action is necessary to ensure that Classic is no longer denied the right to provide service in [the Cities]." AT&T states that it supports the mandate of the 1996 Act, and the Commission's policy, that "all legal and regulatory barriers to local services competition be eliminated." 13. TCG also alleges that it faces regulatory delays and other barriers to entry by many state and municipal governments that prefer one service provider to another. TCG therefore asks that the Commission clarify that sections 253(b) and (c) of the Act do not grant new regulatory powers to states and localities, but rather preserve, subject to certain conditions, preexisting powers held by the states or delegated to their political subdivisions. TCG also objects to the fact that in some states, new entrants must obtain franchises from both state and local authorities in order to provide local telephone service. In addition, TCG challenges the informal practice by many local officials of considering new entrants' qualifications to provide service in other contexts even after a grant of a state franchise. TCG therefore urges the Commission to clarify that for purposes of section 253, "a finding by a state [agency] that a telecommunications provider has the . . . qualifications to provide telecommunications statewide creates a strong presumption that those qualifications exist in every community in the state." In states that do not explicitly authorize local franchising of telecommunications providers, TCG argues that the presumption should be conclusive. TCG also asks that the Commission clarify that section 635A of the Communications Act, which insulates cable television franchising authorities from any monetary damages arising from claims related to the regulation of cable service, is not applicable to actions taken by local governments under the auspices of their telecommunications franchising authority. 2. Cities' Opposition 14. The Cities oppose Classic's Petition and urge the Commission to "terminate the instant proceeding without taking any action against the Cities." The Cities contend that the Commission concluded in the Classic Telephone Preemption Order that the 1996 Act "authorize[s] the Commission to review state telephone exchange franchise decisions and to issue orders to the [s]tates compelling them to follow certain procedures and to issue local telecommunications exchange franchises." The Cities argue that, when interpreted in this fashion, the 1996 Act is unconstitutional as a violation of the Tenth Amendment. In support of this position, the Cities rely on New York v. United States, arguing that the Commission lacks constitutional authority to compel state and local governments to adopt regulatory policies to further federal regulation of interstate commerce. 15. The Cities also assert that the Commission lacks jurisdiction to conduct the instant proceeding, citing Greater Boston Television Corp. v. Federal Communications Comm'n to the effect that "once a petition for review has been filed in court, the [Commission] has no authority to conduct further proceedings without the court's approval." The Cities state that they are currently seeking review of the Classic Telephone Preemption Order in the D.C. Circuit and that the issues before the court are the same issues raised in the present proceeding. The Cities add that there is no evidence that the Commission has obtained such judicial approval for further proceedings. 16. In addition, the Cities claim that the Commission's issuance of the Public Notice initiates an enforcement proceeding and thus "constitutes a clear abuse of discretion." The Cities claim that the Commission's decision to seek public comment on Classic's Petition is improper because it "appears calculated merely . . . to apply pressure on [the Cities] to cave in on the constitutional argument . . . and to otherwise inconvenience [the Cities]." The Cities assert that the Commission has prejudged the issues raised in Classic's Petition for Emergency Relief, as evidenced by the Commission's statements to the effect that the Cities have violated the Communications Act and failed to comply with the Classic Telephone Preemption Order in the Commission's December 19, 1996, Emergency Motion filed with the D.C. Circuit. 17. Moreover, the Cities allege that the Commission improperly waived the ex parte communication prohibition in the Public Notice without explanation, designating the instant proceeding as non-restricted for purposes of the Commission's ex parte rules. The Cities argue that the present proceeding is properly classified as an adjudication, and that section 1.1208(c)(ii)(A) of the Commission's rules provides that adjudications are restricted, with ex parte communications prohibited. The Cities assert that classification of the pending proceeding as non-restricted "appears calculated to prejudice Petitioners unfairly." They cite the burden of obtaining copies of the summaries of oral ex parte presentations, and state that they have experienced difficulty obtaining information from the Commission's public files. The Cities argue that all ex parte filings in this proceeding should have been served on the Cities. 18. Finally, the Cities argue that "by filing petitions for review with the Court of Appeals, [the Cities] must necessarily have reconsidered their decisions denying Classic's franchise applications." The Cities expand on this point in their ex parte filings, claiming that Classic did not approach the Cities after release of the Classic Telephone Preemption Order, either to provide financial information which the Cities had previously requested or for any other purpose related to reconsideration of Classic's franchise applications. The Cities therefore recommend that the Commission dismiss Classic's Petition for failure to prosecute. 3. Replies 19. In its Reply, Classic argues that absent a stay by the Commission or the courts, the Classic Telephone Preemption Order remains in full force pending action on appeal, and that the Commission retains the authority to enforce the Classic Telephone Preemption Order. Classic also asserts that "[t]he issues concerning section 253 that the Cities selected for appeal are not the same as the enforcement issues that Classic raised in its emergency petition." Classic notes that the Cities could have sought to stay enforcement of the Classic Telephone Preemption Order in their Petition for Review, but did not do so. 20. Classic asserts that the Classic Telephone Preemption Order is fully consistent with the Tenth Amendment, and does not compel the Cities to adopt a regulatory scheme contrary to the dictates of New York v. United States. Instead, Classic argues that section 253 of the Act provides for federal preemption of state or local requirements. Classic also contends that Commission action granting Classic a franchise would not be contrary to the Tenth Amendment because "[t]he federal government's authority to direct state officers to take or refrain from taking certain actions is well established." 21. Classic views as insupportable the Cities' claims that they have been or will be denied an opportunity to be heard on whether they violated the Classic Telephone Preemption Order. Classic maintains that the Cities fully participated in the phase of the proceeding leading up to the Classic Telephone Preemption Order, and that the Cities had the opportunity to file comments and reply comments in the present enforcement phase of this proceeding. Classic also argues that there is no basis for concluding that the Commission has prejudged the issues in this proceeding. Moreover, Classic argues that the Commission's designation of this proceeding as non-restricted for purposes of ex parte communications is entirely proper, contending that the Cities misconstrue the Commission's rules regarding when a proceeding is restricted. Classic states that the "permit but disclose procedures" allow the Cities, as well as all other interested parties, to make ex parte presentations to Commission staff, subject to appropriate disclosure requirements, and do not prejudice the Cities. 22. The Cities contend in their Reply that the Commission has admitted that section 253 and the Classic Telephone Preemption Order are unconstitutional or, in the alternative, that the Commission has instituted the present proceeding "merely to abuse [t]he Cities." In particular, the Cities assert that if the Classic Telephone Preemption Order does not compel them to implement a federal regulatory program, "there is no order for the Cities to violate." In that case, the Cities assert that "the Commission has instituted the present enforcement action merely to abuse the Cities in an attempt to get them to succumb to whatever expectation the Commission may hold vis-a-vis local telephone franchising issues." On the other hand, the Cities assert that if the Classic Telephone Preemption Order does require the Cities to comply with the federal regulatory program prescribed in section 253, then the Order is invalid. 23. In addition, the Cities contend that neither section 253(d) of the Communications Act nor section 1.282 of the Commission's rules gives the Commission authority to conduct a proceeding to enforce the Classic Telephone Preemption Order. The Cities also assert that, pursuant to section 401(b) of the Communications Act, the Commission may not conduct its own proceedings to enforce the Classic Telephone Preemption Order but, rather, must seek an injunction from a federal district court. III. DISCUSSION 24. Contrary to the Cities' contentions, we find that the Commission has jurisdiction to address the present Petition despite the pending appeal of the Classic Telephone Preemption Order. In its January 14, 1997, Order denying the Cities' Petition for Writ of Prohibition, the D.C. Circuit held in abeyance proceedings on the Cities' Petition for Review of the Classic Telephone Preemption Order. The court also directed the parties, including Classic, the Cities, and the Commission, "to submit motions to govern further proceedings within 30 days after [the Commission] issues a final order in connection with Classic's petition for emergency relief, sanctions, and investigation, which is currently pending before [the Commission]." Thus, the court's Order clearly contemplates that the Commission will act on Classic's Petition for Emergency Relief and is consistent with the general principle that, absent a stay, an agency order remains operative pending appellate review. 25. We are not persuaded that the Commission's action in this proceeding is contrary to Greater Boston Television Corp. v. FCC, as argued by the Cities. Greater Boston required that the Commission obtain judicial approval for further proceedings in certain types of cases that are subject to pending petitions for review. Even if we assume that this proceeding is the type of case to which Greater Boston should apply, the D.C. Circuit has effectively granted permission for Commission action on Classic's Petition for Emergency Relief by holding the review proceedings in abeyance pending Commission action on the Classic Petition. Moreover, we do not believe that this proceeding is the type of case to which Greater Boston applies, since Classic has asked the Commission to enforce the Classic Telephone Preemption Order, not reconsider our directives in that Order. Thus, we reject the Cities' contention that the Commission lacks jurisdiction to examine the issues raised in the Petition for Emergency Relief merely because the Cities filed a Petition for Review of the Classic Telephone Preemption Order. 26. In the present circumstances, however, we decline to grant the relief requested by Classic. As noted above, Classic originally applied to the Cities for franchises to provide intrastate telecommunications services based on its agreement to purchase the Hill City Exchange from United. On February 7, 1997, however, Classic announced that it would not complete the purchase, citing its inability to obtain a local franchise. Classic stated that it intends to provide telecommunications service in the Cities "utiliz[ing] other strategies and facilities," for which Classic must obtain franchises from the Cities. Since Classic no longer proposes to provide service using the facilities described in its previously-filed franchise application, it appears that approval of the original franchise application would not constitute proper authority for Classic to provide service to the Cities under an alternative plan. Under these circumstances, there would be little point to favorable action on Classic's previously- filed franchise application. 27. We are very concerned that there may be merit to Classic's contention that it likely will face unreasonable delay by the Cities in the processing of any future franchise applications, given the Cities' past decision not to issue a written reconsideration order and reports concerning the views of Bogue and Hill City officials on this proceeding. At this time, however, we choose not to take action that would foreclose the Cities from having a reasonable opportunity to review and take action on new or amended franchise applications by Classic in a timely fashion, consistent with the requirements of section 253 of the Communications Act. Accordingly, we deny Classic's request that we enjoin the Cities and that we require the Cities to grant Classic a franchise "and all other authority necessary" to provide intrastate telecommunications service in the Cities. We also deny Classic's request that we impose sanctions on the Cities under the present circumstances. 28. We make clear, however, the Commission's serious concerns about the potential adverse effect on the development of local exchange competition caused by unreasonable delay by local governments in processing franchise applications and other permits. If a potential entrant is unable to secure the necessary regulatory approvals within a reasonable time, it may abandon its efforts to enter a particular market based solely on the inaction of the relevant government authority. Here it is notable that Classic alleges that it is declining to purchase the Hill City Exchange due to its inability to obtain a local franchise. Although we recognize that the Cities dispute Classic's allegation, we also note that regulatory delays may threaten the viability of financing arrangements for new entry or transactions for the purchase of existing facilities. Such results would seriously undermine the development of local competition, and run counter to Congress' procompetitive goals in the 1996 Act. More specifically, in certain circumstances a failure by a local government to process a franchise application in due course may "have the effect of prohibiting" the ability of the applicant to provide telecommunications service, in contravention of section 253. 29. We are especially troubled, moreover, by the Cities' failure to reconsider Classic's franchise applications in a meaningful fashion before Classic abandoned its plans to purchase the Hill City Exchange from United on February 7, 1997. The Cities claim that they reconsidered their decisions denying Classic's franchise applications, as evidenced by their filing of a Petition for Review of the Classic Telephone Preemption Order with the D.C. Circuit. Even assuming that the Cities' claim is valid, the Cities' decision not to issue written orders reexamining their decisions on Classic's franchise applications effectively precludes Commission review and a determination of whether the reasoning articulated in support of a denial satisfies the requirements of section 253(b) or (c) of the Act. We can conclude at most that by filing a Petition for Review with the D.C. Circuit, the Cities have reaffirmed, without additional explanation, the very franchise denials that the Commission previously preempted. 30. Accordingly, we wish to make clear that if the Cities fail to act on any new or revised franchise applications filed by Classic within a reasonable period of time, the Commission, upon appropriate request and after an opportunity for comment by interested parties, will consider whether to take further action pursuant to section 253 or other provisions of the Communications Act. Possible actions which might be considered include, for example, preemption of the Cities' franchising requirements as they apply to Classic. Any decision on whether to take further action and, if so, what action is warranted, would be based on the facts and circumstances as well as the legal and policy arguments reflected in the record before the Commission at that time. 31. We find it unnecessary to address the remaining issues raised by Classic and the Cities in light of our decision to deny Classic's Petition, although we will address briefly the Cities' charges concerning the propriety of our handling of Classic's Petition for Emergency Relief and the application of our ex parte rules in this proceeding. 32. Contrary to the Cities' apparent understanding, the Commission routinely issues public notices to allow interested parties to comment on petitions requesting action by the Commission. The purpose of issuing the Public Notice in response to Classic's request for relief was to give all interested parties, including the Cities, an opportunity to respond to the issues raised by Classic. In issuing a public notice that establishes a pleading cycle on a filing, the Commission does not indicate a view on the merits of the issues involved. Rather, the Commission seeks to obtain a complete and accurate record on which to resolve the issues. We therefore find baseless the Cities' contention that the Commission abused its discretion or somehow prejudged the issues by issuing a public notice requesting comment on Classic's Petition for Emergency Relief. We also conclude that the statements of Commission counsel in the Emergency Motion for Expedited Review cannot reasonably be construed as prejudgment of the issues raised by Classic's Petition. Although in that court filing, Commission counsel very briefly noted that the Cities apparently had not reconsidered Classic's franchise applications, this should not be interpreted to mean that the Commission would refuse to consider subsequently-filed comments addressing this issue. 33. We also conclude that the designation of this proceeding as non-restricted, so that ex parte presentations are generally permissible but subject to disclosure, is a reasonable exercise of the Commission's broad and well-established authority under sections 4(i) and (j) of the Communications Act to conduct its proceedings "as will best conduce to the proper dispatch of business and to the ends of justice," and to "issue such orders, not inconsistent with this Act, as may be necessary in the execution of its functions." The Commission's ex parte rules also permit us to modify ex parte requirements, and the Commission has frequently designated proceedings involving broad policy issues for non-restricted treatment in the belief that this facilitates the compilation of a complete record. Although Classic's Petition is in many respects adjudicatory in nature, it is also the first request for Commission enforcement of a preemption order under section 253(d) of the Communications Act, and thus also raises broad policy issues of future applicability commonly found in rulemaking proceedings. Our action designating this proceeding as non-restricted and giving all parties full and fair notice of the applicable ex parte procedures in our December 13, 1996, Public Notice is reasonable. Our intention in permitting ex parte presentations was to facilitate the compilation of a complete record and to foster a full exploration of the issues raised by Classic's Petition. All parties were given a full opportunity to make ex parte presentations, subject to disclosure, and both Classic and the Cities have done so. We therefore conclude that the Cities' claims that the fairness of this proceeding has been compromised by the Commission's administration of its ex parte rules is without merit. Even if our action in this regard did constitute error, it is clearly harmless to the Cities given the outcome of our decision on Classic's Petition for Emergency Relief. 34. We decline to resolve most of the broader issues raised by TCG on the grounds that they are beyond the scope of this proceeding. Despite this, we conclude that it is appropriate to note certain general concerns that we have regarding local telecommunications regulation. As we recently stated in our TCI Cablevision Order, we are concerned that some local governments "appear to be reaching beyond traditional rights-of-way matters and seeking to impose a redundant 'third tier' of telecommunications regulation" on top of traditional state and federal regulation consistent with the Communications Act, as amended. This "third tier" of local regulation "aspires to govern the relationships among telecommunications providers, or the rates, terms and conditions under which telecommunication service is offered to the public." Such regulations are difficult to justify as "within the scope of permissible local rights-of-way management authority or other traditional municipal concerns." We are concerned that local telecommunications regulations that vary from community to community will very likely discourage the development of competition. We also share TCG's concern with the possible discriminatory application of telecommunications regulation by state and local governments, and its effect on the development of competition. Thus, attempts to impose a "third tier" of telecommunications regulation at the local level "will be met with close scrutiny by the Commission." At the same time, we recognize that "interpreting the 1996 Act is not an easy task," and requires the combined efforts of state and local governments, as well as this Commission. We must all remain mindful, however, of the fundamental purpose of the Act: "to promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies." IV. ORDERING CLAUSES 35. Accordingly, pursuant to section 253 of the Communications Act, 47 U.S.C.  253, IT IS ORDERED that the Petition for Emergency Relief, Sanctions and Investigation IS DENIED. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary