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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: ) ) Implementation of Section 302 of) CS Docket No. 96-46 the Telecommunications Act of 1996) ) Open Video Systems ) ORDER ON REMAND Adopted: November 9, 1999 Released: November 19, 1999 By the Commission: I. INTRODUCTION 1. In City of Dallas, Texas v. FCC, the United States Court of Appeals for the Fifth Circuit considered consolidated appeals of the Commission's open video system rules affirming in part, reversing in part, and remanding in part those rules. In this Order on Remand ("Order"), the Commission amends its rules in accordance with the Fifth Circuit's decision. II. BACKGROUND 2. In the Telecommunications Act of 1996 ("1996 Act"), Congress established four means by which common carriers may enter the video programming marketplace: (1) radio-based systems; (2) common carriage of video traffic; (3) cable systems; and (4) open video systems. The Conference Report for the 1996 Act "recognize[d] that telephone companies need to be able to choose from among multiple video entry options to encourage entry, and so systems under this section [shall be] allowed to tailor services to meet the unique competitive and consumer needs of individual markets." In rulemakings implementing the open video system provisions of the 1996 Act, the Commission concluded that Congress did not intend to restrict open video system service to telephone companies alone, and permitted non-local exchange carriers and cable operators to operate, and to obtain carriage on open video systems where "consistent with the public interest, convenience, and necessity. . . ." The Commission stated that the open video system model "can provide the competitive benefits that Congress sought to achieve: market entry by new service providers, enhanced competition, streamlined regulation, investment in infrastructure and technology, diversity of programming choices and increased consumer choice." 3. Although subject to streamlined regulation as compared to their cable counterparts, open video system operators are not without clearly defined obligations and responsibilities, such as offering up to two-thirds of their channel capacity to unaffiliated programmers. Open video system operators may not unreasonably nor unjustly discriminate against unaffiliated programming providers, and must provide just and reasonable rates, terms, and conditions for carriage to all eligible programming providers that seek carriage. The Commission determined that "by requiring open video system operators to provide carriage opportunities for video programming providers . . . Congress sought to foster competition by encouraging multiple programming sources on open video systems." 4. Five petitioners challenged aspects of the Commission's orders implementing the open video system framework. The challenges fell into three categories. The National Association of Telecommunications Advisors and Officers ("NATOA"), the City of Dallas, and the U.S. Conference of Mayors challenged the impact of the Commission's open video system rules on local governments. The National Cable Television Association ("NCTA") challenged the treatment of cable operators under the open video system rules. Finally, BellSouth, a local exchange carrier ("LEC"), challenged the requirement that open video system operators obtain Commission certification before commencing construction related to open video systems. 5. In its review, the Fifth Circuit affirmed the Commission's rules: (i) limiting the fees that localities may charge to open video system operators pursuant to Section 653(c)(2)(B) of the Communications Act; (ii) prohibiting localities from requiring open video systems to provide institutional networks; and (iii) prohibiting non- local exchange carrier cable operators and cable operators whose franchises have expired from becoming open video system operators unless they face effective competition. The Fifth Circuit reversed the Commission's rules: (i) preempting localities from requiring open video systems to obtain franchises prior to commencing service; (ii) requiring that open video system operators obtain Commission certification before constructing new open video system facilities; and (iii) prohibiting local exchange carriers that are also cable operators from providing open video system service in the absence of effective competition. The Fifth Circuit invalidated and remanded the Commission's rule generally prohibiting in-region cable operators from providing video programming on unaffiliated open video systems but permitting open video system operators discretion to waive this prohibition. The Commission filed a petition for panel rehearing and a petition for rehearing en banc, each of which the Fifth Circuit denied. The Commission did not seek review by the United States Supreme Court and the time period for seeking such review has expired. III. DISCUSSION 6. In this portion of the Order, we address those provisions of the Commission's open video system rules reversed and remanded by the Fifth Circuit and the amendment of those provisions necessitated thereby. A. Preemption of Open Video System Franchises 7. Section 653(c)(1)(C) of the Communications Act provides that, with a few exceptions not relevant here, parts III and IV of Title VI shall not apply to open video system operators. Included in the Title VI provisions that do not apply to open video systems is Section 621(b)(1), which provides that, "a cable operator may not provide cable service without a franchise." In addressing the preemption issue, the Commission in Implementation of Section 302 of the Telecommunications Act of 1996: Open Video Systems, Second Report and Order ("Second Report and Order") stated that "[w]e believe that the most natural reading of Section 653, in light of Congress's stated intent, is that state and local governments cannot require any open video system operator to obtain a Title VI franchise from a state or local authority for use of public rights-of-way necessary to operate its open video system." The Commission upheld this conclusion on reconsideration in Implementation of Section 302 of the Telecommunications Act of 1996: Open Video Systems, Third Report and Order and Second Order on Reconsideration ("Third Report and Order"). 8. In addressing the Commission's holding that localities are prohibited from requiring that open video system operators obtain a franchise prior to construction and operation of its system, the Fifth Circuit stated that: The [Commission's] preemption of local franchising requirements is at odds with the [1996] Act's preservation of state and local authority and with a "clear statement" principle the Supreme Court has articulated. Section 601(c)(1) of the [1996] Act, which was adopted at the same time as [Section] 653, directs that "the amendments . . . shall not be construed to modify, impair, or supersede Federal, State or local law unless expressly so provided in such Acts or amendments." We conclude that [Section] 653(c)(1)(C)'s statement that parts of title VI, including [Section] 621, shall not apply to [open video system] operators does not constitute the express preemption of local franchising authority that [Section] 601(c) requires. The Fifth Circuit concluded that: Section 621 states that a cable operator may not provide cable service without a franchise. This amounts to a federal requirement that a cable operator obtain a franchise from a local authority before providing service. Eliminating [Section] 621 results in the deletion of the federal requirement that cable operators get a franchise before providing service; it does not eviscerate the ability of local authorities to impose franchise requirements, but only their obligation to do so. Consequently, simply saying that [Section] 621 shall not apply to [open video system] operators does not expressly preempt local franchising authority, as [Section] 601(c)(1) requires. Finding that the authority to require franchising was a power inherent in localities, the Fifth Circuit concluded that, "[w]hile [Section] 621 may have expressly recognized the power of localities to impose franchise requirements, it did not create that power, and elimination of [Section] 621 for [open video system] operators does not eliminate local franchising authority." 9. While extensively discussed in its open video system implementation orders, the franchise prohibition was not codified as part of the Commission's open video system rules. Accordingly, we need not amend our rules to effectuate the Fifth Circuit's decision. We emphasize that the Fifth Circuit determined only that localities retain their existing franchising authority, not that localities must exercise this authority through the imposition of open video system franchises. The decision of whether to impose a franchise on an open video system operator is committed to the discretion of the locality. Congress, however, clearly articulated its desire that "the reduced regulatory burdens imposed on open video systems [in the 1996 Act]" would "encourage common carriers to deploy open video systems and introduce vigorous competition in entertainment and information markets." B. Commission Certification Prior to Construction of New Facilities 10. In the Second Report and Order, the Commission stated that open video system operators may apply for certification at any time before commencement of service. However, "[i]f construction of new physical plant is required, the applicant must obtain Commission approval of its certification prior to the commencement of construction." The Commission upheld this requirement on reconsideration. BellSouth argued to the Fifth Circuit that the Commission's pre-construction certification requirement contravenes the statutory language of Sections 651 and 653 of the Communications Act. The Fifth Circuit agreed, finding that two convincing statutory arguments support the view that the Commission erred in adopting the pre-construction certification rule. The Fifth Circuit found that: The first [argument] relies on the mandatory language of [Section] 653(a)(1), the third sentence of which states, "An operator of an open video system shall qualify for reduced regulatory burdens under subsection (c) of this section if the operator of such system certifies to the Commission that such carrier complies with the Commission's regulations under subsection (b) of this section and the Commission approves such certification." Any new construction rule the Commission promulgates is not a "regulation[] under subsection (b)," so, consistently with the statute, failure to follow the rule could not prevent an operator from qualifying for reduced regulatory burdens under subsection (c). The Fifth Circuit also found that Sections 651(c) and 653(c)(3) affirmatively prohibit the Commission from adopting a pre-construction certification requirement for open video system operators. 11. The Commission codified the pre-construction certification requirement at Section 76.1502(a) of its rules, which provides: An operator of an open video system must certify to the Commission that it will comply with the Commission's regulations in 47 CFR 76.1503, 76.1504, 76.1506(m), 76.1508, 76.1509, and 76.1513. If construction of new physical plant is required, the Commission must approve such certification prior to the commencement of construction. If no new construction is required, the Commission must approve such certification prior to the commencement of service at such a point in time that would allow the applicant sufficient time to comply wit the Commission's notification requirements. In accordance with the Fifth Circuit's decision, we hereby delete the pre-construction certification requirement from Section 76.1502(a) of our rules. C. Local Exchange Carriers As Cable Operators 12. Section 653(a)(1) of the Communications Act, in pertinent part, provides: A local exchange carrier may provide cable service to its cable service subscribers in its telephone service area through an open video system that complies with this section. To the extent permitted by such regulations as the Commission may prescribe consistent with the public interest, convenience, and necessity, an operator of a cable system or any other person may provide video programming through an open video system that complies with this section. In adopting rules to effectuate this provision, the Commission determined that: [W]e will not permit a cable operator to become an open video system operator in its cable franchise area if effective competition is not present for video programming delivery, even if it also becomes certified as a local exchange carrier within the franchise area. The second sentence of Section 653(a)(1) authorizes the Commission to determine when cable operators may become open video system operators, and the Commission retains this authority with respect to all cable operators, regardless of whether they are also providing local exchange service. Therefore, although the first sentence of Section 653(a)(1) allows LECs, without qualification, to operate open video systems within their telephone service areas, this sentence does not apply to cable operators that are also LECs. Again, the Commission upheld this determination on reconsideration. 13. The Fifth Circuit affirmed the Commission's determination as it applied to non-LEC cable operators and cable operators whose franchises have expired. The Fifth Circuit, however, disagreed with the Commission's determination as it applied to LEC cable operators, holding that: We do not accept the Commission's claim that the statute is ambiguous as to "hybrid" LEC/cable operators. The language of sentence one [of Section 653(a)(1)] is straightforward: "A local exchange carrier may provide cable service to its cable service subscribers in its telephone area through an open video system that complies with this section." The [Commission] recognized the unequivocal nature of this provision when it stated, "[T]he first sentence of Section 653(a)(1) allows LECs, without qualification, to operate open video systems within their telephone service areas . . . ." 14. The Commission codified the cable operator effective competition requirement at Section 76.1501 of its rules, which, in pertinent part, provides: Any person may obtain a certification to operate an open video system pursuant to Section 653(a)(1) of the Communications Act, 47 U.S.C. 573(a)(1), except that an operator of a cable system, regardless of any other service that the cable operator may provide, may not obtain such certification within its cable service area unless it is subject to "effective competition" as defined in Section 623(l)(1) of the Communications Act, 47 U.S.C. 543(l)(1). In accordance with the Fifth Circuit's decision, we hereby amend Section 76.1501 to provide that the effective competition requirement does not apply to a LEC cable operator that seeks open video system certification within its cable service area. D. Open Video System Operator Discretion 15. In the Second Report and Order, the Commission, while generally prohibiting competing, in-region cable operators or their affiliates from becoming programmers on open video systems operating in their franchise areas, granted open video system operators discretion to permit carriage of such cable operators' programming. In granting open video system operators this discretion, the Commission reasoned that ". . . at least in some instances, the open video system operator will find it in its interest to allow the competing, in-region cable operator to obtain capacity on the open video system (e.g., where the operator believes that the programming offered by the competing, in-region cable system or programming affiliate is necessary to the success of the open video system operation)." The Commission affirmed this conclusion on reconsideration stating: [A]n open video system operator may determine that the viability of its system is enhanced by carriage of video programming that is offered by the competing, in-region cable operator. We believe that it is not appropriate for the Commission to deny an open video system operator the independent business discretion to decide that a cable operator's presence on its system may be beneficial. This business discretion may prove critical to the success of the open video system, and we believe that because such success will foster competition in the video delivery marketplace, this exception will serve the public interest. Accordingly, the Commission adopted Section 76.1503(c)(2)(v) of its rules which provides: Notwithstanding the general prohibition on an open video system operator's discrimination among video programming providers contained in paragraph (a) of this section, a competing, in-region cable operator or its affiliate(s) that offer cable service to subscribers located in the service area of an open video system shall not be entitled to obtain capacity on such open video system, except: (A) Where the operator of an open video system determines that granting access to the competing, in-region cable operator is in its interests; or (B) Where a showing is made that facilities-based competition will not be significantly impeded. 16. The Fifth Circuit invalidated the Commission's rule permitting an open video system operator discretion to permit carriage of a competing, in-region cable operator's programming. The Fifth Circuit held that the rule violated the plain language of Section 653(b)(1)(A) of the Communications Act which requires the Commission to "prohibit an operator of an open video system from discriminating among video programming providers with regard to carriage on its open video system." The Fifth Circuit determined that: Because this regulation is contrary to the plain language of [Section] 653(b)(1)(A) . . . we invalidate these rules and remand for further consideration. On remand, the agency must forbid discrimination among video programming providers, as [Section] 653(b)(1)(A) requires. * * * If the Commission is declaring cable operators ineligible to the extent [open video system] operators want them to be ineligible, then it is permitting discrimination by [open video system] operators among video programming providers. Section 653(b)(1)(A) requires the agency not to do that. Alternatively, the Commission is impermissibly delegating to the [open video system] operators its authority to determine "the extent" to which cable operator carriage promotes the public interest. 17. We believe that the most efficient and expeditious method of discharging the Fifth Circuit's remand is simply deleting subsection 76.1503(c)(2)(v)(A) of the Commission's rules which grants discretion to open video system operators with regard to carriage of the programming of competing, in-region cable operators and their affiliates. In this way, competing, in-region cable operators and their affiliates would continue to be permitted, in limited instances, to obtain capacity on open video systems that operate in their franchise area where such cable operator can demonstrate that facilities-based competition will not be significantly impeded. In any event, the discretion whether to grant or deny carriage would rest with the Commission to be exercised consistent with the statutory mandate prohibiting discrimination by an open video system operator among video programming providers. IV. REGULATORY FLEXIBILITY ANALYSIS AND INITIAL PAPERWORK REDUCTION ACT OF 1995 ANALYSIS 18. A supplemental final regulatory flexibility analysis is attached to this Order as Appendix B. This Order contains rule amendments that have been analyzed with respect to the Paperwork Reduction Act of 1995 and found to impose no new or modified information collection requirement on the public. V. ORDERING CLAUSES 19. IT IS ORDERED that, pursuant to authority found in Sections 4(i), 303(r) and 653 of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 303(r), and 573, the Commission's rules are hereby amended as set forth in Appendix A. 20. IT IS FURTHER ORDERED that the rules as amended in Appendix A shall become effective upon approval by the Office of Management and Budget. 21. IT IS FURTHER ORDERED that the Commission's Office of Public Affairs, Reference Operations Division, shall send a copy of this Order on Remand including the Supplemental Final Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of Small Business Administration, in accordance with paragraph 603(a) of this regulatory Flexibility Act. Pub. L. No. 96-354, 94 Stat. 1164, 5 U.S.C.  601 et seq. (1981). FEDERAL COMMUNICATIONS COMMISSION Magalie Roman Salas Secretary Appendix A Part 76 of Title 47 of the Code of Federal Regulations is amended as follows: PART 76 -- MULTICHANNEL VIDEO AND CABLE TELEVISION SERVICE 1. The authority citation for Part 76 continues to read as follows: AUTHORITY: 47 U.S.C. 151, 152, 153, 154, 301, 302, 303, 303a, 307, 308, 309, 312, 315, 317, 325, 503, 521, 522, 531, 532, 533, 534, 535, 536, 537, 543, 544, 544a, 545, 548, 549, 552, 554, 556, 558, 560, 561, 571, 572, 573. 1. Section 76.1501 is amended as follows:  76.1501 Qualifications to be an open video system operator. Any person may obtain a certification to operate an open video system pursuant to Section 653(a)(1) of the Communications Act, 47 U.S.C. 573(a)(1), except that an operator of a cable system may not obtain such certification within its cable service area unless it is subject to "effective competition" as defined in Section 623(l)(1) of the Communications Act, 47 U.S.C. 543(l)(1). The effective competition requirement of the preceding sentence does not apply to a local exchange carrier that is also a cable operator that seeks open video system certification within its cable service area. A cable operator that is not subject to effective competition within its cable service area may file a petition with the Commission, seeking a finding that particular circumstances exist that make it consistent with the public interest, convenience, and necessity to allow the operator to convert its cable system to an open video system. Nothing herein shall be construed to affect the terms of any franchising agreement or other contractual agreement. 2. Section 76.1502(a) is amended as follows:  76.1502 Certification. (a) An operator of an open video system must certify to the Commission that it will comply with the Commission's regulations in 47 CFR 76.1503, 76.1504, 76.1506(m), 76.1508, 76.1509, and 76.1513. The Commission must approve such certification prior to the commencement of service at such a point in time that would allow the applicant sufficient time to comply with the Commission's notification requirements. 3. Section 76.1503(c)(2)(v) is amended as follows:  76.1503 Carriage of video programming providers on open video systems. (c) ***** (2) ***** (v) Notwithstanding the general prohibition on an open video system operator's discrimination among video programming providers contained in paragraph (a) of this section, a competing, in-region cable operator or its affiliate(s) that offer cable service to subscribers located in the service area of an open video system shall not be entitled to obtain capacity on such open video system, except where a showing is made that facilities-based competition will not be significantly impeded. APPENDIX B REGULATORY FLEXIBILITY ANALYSIS Supplementary Final Regulatory Flexibility Act Analysis 1. As required by the Regulatory Flexibility Act of 1980 ("RFA"), the Commission has prepared a Final Regulatory Flexibility Analysis ("FRFA") of the expected significant economic impact on small entities by the open video system policies and rules. The Fifth Circuit's decision in City of Dallas, Texas v. FCC reversed and remanded several of these rules. This FRFA addresses the impact on small entities of the rules changes required by the Fifth Circuit's decision. The Commission's Office of Public Affairs, Reference Operations Division shall send a copy of this Order, including the FRFA, to the Chief Counsel for Advocacy of the Small Business Administration ("SBA") in accordance with the RFA. 2. Need for Action and Objectives of the Proposed Rule. In 1996, the Commission adopted its rules pursuant to Section 653 of the Communications Act implementing the open video system provisions thereof. Those rules were affirmed in part, reversed in part, and remanded in part by the United States Court of Appeals for the Fifth Circuit in City of Dallas v. FCC. In this Order, we amend our rules in accordance with the reversed and remanded portions of the Fifth Circuit's decision. 3. Legal Basis. The authority for the action proposed for this rulemaking is contained in Sections 4(i), 303(r), and 653 of the Communications Act. 4. Summary of Significant Issues Raised by Public Comments. Because the rules changes adopted in this Order are required by the Fifth Circuit's decision, no comments were solicited or filed. We have, however, considered the economic impact on small entities of the rule changes adopted herein and conclude that the Order will not negatively impact small entities. 5. Description and Estimate of the Number of Small Entities Impacted. The RFA directs the Commission to provide a description of and, where feasible, an estimate of the number of small entities that will be affected by the proposed rules. The RFA defines the term "small entity" as having the same meaning as the terms "small business," "small organization," and "small business concern" under Section 3 of the Small Business Act. Under the Small Business Act, a small business concern is one which: (1) is independently owned and operated; (2) is not dominant in its field of operation; and (3) satisfies any additional criteria established by the SBA. 6. Small MVPDs: The SBA has developed a definition of small entities for cable and other pay television services, which includes all such companies generating $11 million or less in annual receipts. This definition includes cable system operators, closed circuit television services, direct broadcast satellite services, multipoint distribution systems, satellite master antenna systems and subscription television services. According to the Bureau of the Census, there were 1,758 total cable and other pay television services and 1,423 had less than $11 million in revenue. We address below each service individually to provide a more precise estimate of small entities. 7. Cable Systems: The Commission has developed, with SBA's approval, our own definition of a small cable system operator for the purposes of rate regulation. Under the Commission's rules, a "small cable company" is one serving fewer than 400,000 subscribers nationwide. Based on our most recent information, we estimate that there were 1439 cable operators that qualified as small cable companies at the end of 1995. Since then, some of those companies may have grown to serve over 400,000 subscribers, and others may have been involved in transactions that caused them to be combined with other cable operators. Consequently, we estimate that there are fewer than 1439 small entity cable system operators that may be affected by the decisions and rules we are adopting. We believe that only a small percentage of these entities currently provide qualifying "telecommunications services" as required by the Communications Act and, therefore, estimate that the number of such entities are significantly fewer than noted. 8. The Communications Act also contains a definition of a small cable system operator, which is "a cable operator that, directly or through an affiliate, serves in the aggregate fewer than 1% of all subscribers in the United States and is not affiliated with any entity or entities whose gross annual revenues in the aggregate exceed $250,000,000." The Commission has determined that there are 61,700,000 subscribers in the United States. Therefore, we found that an operator serving fewer than 617,000 subscribers shall be deemed a small operator, if its annual revenues, when combined with the total annual revenues of all of its affiliates, do not exceed $250 million in the aggregate. Based on available data, we find that the number of cable operators serving 617,000 subscribers or less totals 1450. Although it seems certain that some of these cable system operators are affiliated with entities whose gross annual revenues exceed $250,000,000, we are unable at this time to estimate with greater precision the number of cable system operators that would qualify as small cable operators under the definition in the Communications Act. 9. Open Video System ("OVS"): The Commission has issued 25 certifications to operate OVS systems. Of these 25 certifications, only one OVS operator, RCN, is providing service in various service areas across the United States. Little financial information is available for the other entities authorized to provide OVS that are not yet operational. We believe that one OVS licensee may qualify as a small business concern. Given that other entities have been authorized to provide OVS service but have not yet begun to generate revenues, we conclude that at least some of the OVS operators qualify as small entities. 10. Program Producers and Distributors: The Commission has not developed a definition of small entities applicable to producers or distributors of television programs. Therefore, we will utilize the SBA classifications of Motion Picture and Video Tape Production (SIC 7812), Motion Picture and Video Tape Distribution (SIC 7822), and Theatrical Producers (Except Motion Pictures) and Miscellaneous Theatrical Services (SIC 7922). These SBA definitions provide that a small entity in the television programming industry is an entity with $21.5 million or less in annual receipts for SIC 7812 and 7822, and $5 million or less in annual receipts for SIC 7922. The 1992 Bureau of the Census data indicate the following: (1) there were 7265 U.S. firms classified as Motion Picture and Video Production (SIC 7812), and that 6987 of these firms had $16,999 million or less in annual receipts and 7002 of these firms had $24,999 million or less in annual receipts; (2) there were 1139 U.S. firms classified as Motion Picture and Tape Distribution (SIC 7822), and that 1007 of these firms had $16,999 million or less in annual receipts and 1013 of these firms had $24,999 million or less in annual receipts; and (3) there were 5671 U.S. firms classified as Theatrical Producers and Services (SIC 7922), and that 5627 of these firms had less than $5 million in annual receipts. 11. Each of these SIC categories is very broad and includes firms that may be engaged in various industries including television. Specific figures are not available as to how many of these firms exclusively produce and/or distribute programming for television or how many are independently owned and operated. Consequently, we conclude that there are approximately 6987 small entities that produce and distribute taped television programs, 1013 small entities primarily engaged in the distribution of taped television programs, and 5627 small producers of live television programs that may be affected by the rules adopted in this Order. 12. Reporting, Recordkeeping, and other Compliance Requirements: The rules adopted in this Order will not require a change in record keeping requirements. 13. Significant Alternatives Which Minimize the Impact on Small Entities and which are Consistent with Stated Objectives: The Order adopts rule changes required by the Fifth Circuit's decision in City of Dallas, Texas v. FCC. 14. Federal Rules which Overlap, Duplicate, or Conflict with the Commission's Proposal: None.