[Federal Register Volume 59, Number 237 (Monday, December 12, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30241]
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[Federal Register: December 12, 1994]
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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 63
[CC Docket No. 87-266; FCC 94-269]
Telephone Company-Cable Television Cross-Ownership Rules and
Regulatory Procedures for Video Dialtone Service
AGENCY: Federal Communications Commission.
ACTION: Final rule.
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SUMMARY: In a Memorandum Opinion and Order on Reconsideration in Common
Carrier Docket 87-266, the Commission substantially affirmed the Second
Report and Order, while modifying and clarifying that Order in various
respects. Among the more significant actions, we first reaffirm the
basic video dialtone regulatory construct adopted in the Second Report
and Order. Local exchange carriers (LECs) offering video dialtone
service must make available a common carrier platform that provides
sufficient capacity to serve multiple video programmers, and may not
allocate all or substantially all analog capacity to a single ``anchor
programmer.'' Second, we clarify and modify our video dialtone policy
to help ensure that telephone ratepayers do not have to bear the costs
of video dialtone. These measures should also protect cable operators
from potential anticompetitive actions by LECs, stemming from LEC
incentives and opportunities to price video dialtone service
unreasonably low relative to the cost of providing such service. For
instance, we set forth specific guidance for application of our pricing
rules to ensure that interstate video dialtone rates cover video
dialtone costs--both the incremental costs of video dialtone and a
reasonable allocation of shared plant costs and overheads. We also
establish a data collection program to monitor the impact of video
dialtone deployment on local rates as well as on separation results.
Third, we modify our assertion of exclusive jurisdiction over all video
dialtone services to recognize that states have jurisdiction over
intrastate video dialtone services. This modification should provide a
sound jurisdictional basis for the exercise of federal and state
regulatory authority over video dialtone services. Finally, we issue a
Third Further Notice of Proposed Rulemaking seeking additional
information and comment on various issues not adequately addressed in
the record currently before us.
EFFECTIVE DATE: January 11, 1995 except that paragraphs 7, 80, 85, and
86 of this Federal Register Summary shall be effective March 14, 1995.
FOR FURTHER INFORMATION CONTACT:
Jane Jackson, (202) 418-1593 or Gary Phillips, (202) 418-1573, Policy
and Program Planning Division, Common Carrier Bureau.
SUPPLEMENTARY INFORMATION: This is a synopsis of the Memorandum Opinion
and Order on Reconsideration in Common Carrier Docket 87-266: Telephone
Company-Cable Television Cross-Ownership Rules, Sections 63.54-63.58,
adopted October 20, 1994, and released November 7, 1994. The complete
text of this Memorandum Opinion and Order on Reconsideration is
available for inspection and copying, Monday through Friday, 9 a.m.-
4:30 p.m., in the FCC Reference Room (room 239), 1919 M Street NW.,
Washington, DC 20554. The complete text of the Memorandum Opinion and
Order on Reconsideration may also be purchased from the Commission's
copy contractor, International Transcription Services, Inc., 2100 M
Street NW., suite 140, Washington, DC 20037, (202) 857-3800.
Paperwork Reduction Act
1. In the Memorandum Opinion and Order on Reconsideration, the
Commission added video dialtone service to the basic service categories
for which it requires that LECs report installation and maintenance
activities. In addition, the Commission required that each of the Bell
Operating Companies (BOCs) and GTE Service Corporation (GTE) to file,
by March 14, 1995, a detailed description of the types of CPNI to which
it anticipates having access as a provider of video dialtone service.
The Commission directed the BOCs and GTE to explain how they would plan
to use such information in marketing video dialtone services to video
programmers or consumers. The Commission also required LECs providing
video dialtone service to notify the Chief of the Common Carrier
Bureau, of any anticipated or existing capacity shortfall in their
video dialtone platform and of plans for addressing such shortfall.
Such notice must be provided within thirty days after the LEC becomes
aware of an anticipated shortfall or within five days after denying
capacity to a video programmer, whichever occurs first. The public
reporting burden for these collections of information is estimated to
average approximately 200 hours per response, including the time for
reviewing instructions, searching existing data sources, gathering and
maintaining the data needed, and completing and reviewing these
collections of information. Send comments regarding this burden
estimate or any other aspect of these collections of information,
including suggestions for reducing the burden, to the Federal
Communications Commission, Records Management Branch, Paperwork
Reduction Project (3060-0149), Washington, DC 20554 and to the Office
of Management and Budget, Paperwork Reduction (3060-0149), Washington,
DC 20503.
Synopsis of Memorandum Opinion and Order on Reconsideration
2. The Memorandum Opinion and Order on Reconsideration clarifies or
modifies the Second Report and Order, 57 FR 41106 (September 9, 1992),
in several respects. These modifications are consistent with the
Commission's intent to eliminate artificial regulatory barriers to
competitive entry and to efficient investment, thereby facilitating
competition in video delivery services, promoting investment in
infrastructure, and fostering greater diversity in video programming.
A. Sufficient Capacity to Serve Multiple Service Providers
3. We affirm our requirement that telephone companies wishing to
offer video dialtone service must make available a basic common carrier
platform offering sufficient capacity to serve multiple video
programmers. This requirement will enable multiple video programmers to
obtain access on nondiscriminatory terms to LEC video delivery
capabilities, thereby fostering new and diverse sources of video
programming and generating competition in the provision of such
programming to end users. Such competition will be generated both among
users of the video dialtone platform and among such users and video
programmers that use other systems, such as cable systems, to
distribute their products to end users in the same geographic area.
4. We also affirm our requirement that video dialtone common
carrier platforms offer sufficient capacity to serve multiple video
programmers. Without this requirement, video dialtone would not be as
effective in achieving our goal of fostering a diversity of information
sources to the public. This goal was and remains one of the key
purposes of our video dialtone policy.
5. We reject requests that LECs be permitted to allocate all or
substantially all analog capacity to a single ``anchor programmer.''
These requests appear to be premised on the assumption that only analog
capacity allows a viable alternative to cable service in the short
term. To grant these requests would thus be inconsistent with the
common carrier model for video dialtone and our requirement that LECs
offer sufficient capacity to accommodate multiple video programmers.
6. Finally, we affirm our expandability requirement, subject to the
modification discussed below. This requirement, we believe, compounds
the benefits of video dialtone by ensuring greater diversity in the
sources of video programming and fostering infrastructure development.
This requirement is also a critical factor in reducing the ability of
LECs to discriminate in their provision of video dialtone service.
7. While we affirm our capacity and expandability requirements, we
take this opportunity to elaborate on the scope of the expandability
obligation. As critical as this obligation is to our video dialtone
construct, it would not be reasonable to require LECs to expand to meet
all demand, regardless of technical and economic considerations.
Indeed, such a requirement might well discourage LECs from constructing
and operating video dialtone systems because of the risk of excessive
idle investment. We therefore clarify that, under our video dialtone
requirements, LECs are required to expand whenever, and to the extent
that, expansion is technically feasible and economically reasonable. A
LEC may not refuse to expand simply because it does not wish to permit
video programmers to offer certain types of video programming on its
video dialtone system. We will address claims by LECs that expansion is
not technically feasible and economically reasonable on a case-by-case
basis in light of all relevant circumstances. In this review process,
we will look to all relevant information and data, including the
capacity offered on other video dialtone systems, data relating to
demand for video delivery in the LEC's region or in comparable regions,
and technical data. To monitor LEC progress in expanding capacity and
to ensure that LECs expand in accordance with the standards set forth
herein, we require LECs to notify the Chief of the Common Carrier
Bureau of any anticipated or existing capacity shortfall and of plans
for addressing such shortfall. Such notice must be provided within
thirty days after the LEC becomes aware of an anticipated capacity
shortfall or within five days after denying capacity to a video
programmer, whichever occurs first. To the extent a LEC concludes that
expansion is not technically feasible or economically reasonable at
that time, the LEC must explain in detail the basis for its
determination and indicate when it anticipates expansion would be
technically feasible and economically reasonable.
B. Acquisition of Cable Facilities
8. We substantially affirm our decision in the Second Report and
Order, to prohibit telephone companies from acquiring cable facilities
in their telephone service areas for the provision of video dialtone.
We believe that generally retaining the ban will benefit the public by
promoting greater competition in the delivery of video services,
increasing the diversity of video programming, and advancing the
national communications infrastructure. At the same time, however, we
recognize that the ban may effectively preclude the deployment of video
dialtone systems in markets that cannot support an additional wired
video delivery system and could in those markets impede our goal of
eliminating regulatory barriers to investment. In the Third Further
Notice of Proposed Rulemaking, we seek information and comment that
would permit us to develop criteria for identifying those markets. We
also propose to amend our rules so that these criteria serve as the
basis for either an automatic exception to the ban or a presumption
that the ban should not apply.
9. In general, opponents of the ban assert that it is an
inefficient and counterproductive means of implementing video dialtone,
and one that is likely to deter widespread deployment of video
dialtone. Contrary to these assertions, we believe that retaining the
ban in areas where facilities-based competition is viable will spur the
development of competitive wire-based video delivery systems, thereby
offering significant benefits to consumers. First, the added
competition will likely provide a check on both cable and video
dialtone rates. LECs that charge too much for video dialtone delivery
services will face the risk that video programmers will forgo video
dialtone service and rely on cable systems for distribution of their
product. To the extent that competition can provide a check on video
dialtone rates, video programmers will be able to lower their rates to
consumers. This, in turn, would constrain cable rates. Second,
competition between cable operators and LECs would give both incentives
to invest in infrastructure and develop new and innovative services to
increase the attractiveness of their products to consumers. Third, the
availability of additional distribution systems would offer increased
channel capacity, thereby fostering greater diversity of programming
options for consumers. Retaining the ban could also facilitate the
development of competitive local telephone networks by cable operators.
10. By contrast, if we eliminate the ban, LECs might seek to
acquire cable systems in their service areas to eliminate competition
in the provision of video delivery services. They might also have
incentives to acquire cable facilities to eliminate a likely competitor
in the provision of local telephone services. At the same time,
elimination of the ban would unacceptably increase cable operator's
incentives to move their video programming to a LEC's video dialtone
system, rather than make the changes necessary to respond effectively
to competition. We therefore disagree with parties who argue that
eliminating the ban would allow market forces to dictate the deployment
of video dialtone technology.
11. While we thus generally retain the ban on acquisitions of cable
facilities for provision of video dialtone, we conclude that allowing
telephone companies to lease cable company drop wires, if the lease is
limited in scope and duration, should be permitted. Our prohibition on
acquisitions of in-region cable facilities is intended generally to
encourage the development of competing LEC and cable video delivery
systems. We do not believe that permitting LECs to lease drop wires
from a cable operator for a limited term of three years on a non-
exclusive basis will impede the realization of this goal. In
particular, we do not believe that any revenues that a cable operator
may derive from such leases would be sufficient to affect materially
its decision to use video dialtone or provide a competitive
transmission service. Moreover, permitting LECs to lease cable drops
could accelerate the delivery of video dialtone services to end users
and thus increase competition in the video marketplace. Therefore, we
do not prohibit such leasing arrangements, provided they are executed
for non-renewable terms no longer than three years. At the conclusion
of the three-year period, LECs are prohibited from acquiring the cable
drop wires.
12. We also prohibit LECs from acquiring exclusive rights to use
cable drops. Specifically, LECs may not unreasonably restrict the
access of any video programmer to leased cable drops, nor may they
restrict cable operators from providing to third parties drops not
covered by the LEC lease. We will require any LEC proposing to lease
cable drop wires to describe in its Section 214 video dialtone
application the material terms of that lease, including the cost of the
lease to the LEC. We will scrutinize these terms to ensure that they
are reasonable and, in particular, do not undermine our goal of
promoting competitive wire-based video systems.
C. Ownership Affiliation Standards
13. We affirm the ownership affiliation standard of up to 5%, as
adopted in the Second Report and Order. We modify the Second Report and
Order, however, by defining more clearly the application of the
standard. For example, we hold that, while a nonvoting ownership
interest, which confers no power to control or influence decision
making, may not implicate the purposes of the mass media multiple
ownership rules, that same interest may raise concern about incentives
for discrimination. The same could be true for a 49% interest in an
entity with a single majority shareholder. In light of these different
goals, we decline to apply all aspects of the mass media multiple
ownership rules to video dialtone. We do, however, modify the Second
Report and Order, by clarifying that the provisions of our mass media
multiple ownership standards relating to vertical ownership chains, not
involving investment companies, do apply in the video dialtone context.
While the Second Report and Order did not specifically address this
issue, these rules are essential to ensure that LECs cannot avoid
ownership limitations by using intervening corporate entities. We also
hold that, consistent with the statutory prohibition on provision by
LECs of video programming to subscribers in their telephone service
areas, an LEC may not hold an ownership interest of 5% or greater in a
video programmer that offers service in the LEC's telephone service
area. For purposes of the video dialtone rules, we define a video
programmer as any person who provides video programming directly, or
indirectly through an affiliate, to subscribers. Any entity shall be
deemed to ``provide'' video programming if it determines how video
programming is presented for sale to subscribers, including making
decisions concerning the bundling or ``tiering'' of the programming or
the price, terms, or conditions on which the programming is offered to
subscribers.
14. We clarify that our cross-ownership rules do not prohibit LECs
from owning video programming, even programming that another,
independent programmer (i.e., a programmer neither owned nor controlled
by the LEC) provides over the LEC's video dialtone system. Nor is any
LEC prohibited from owning entities that provide video programming
outside its service area. LECs may not, however, provide or distribute
any video programming directly to subscribers in their telephone
service area. Further, LECs may not hold a cognizable ownership
interest, as defined above, in any entity that provides video
programming directly to subscribers in their telephone service area.
D. Non-Ownership Relationships and Activities Between Telephone
Companies and Video Programmers
15. We affirm our decision to permit LECs to enter into non-
ownership relationships that exceed a carrier-user relationship with
video programmers, but modify our rules in this area in several
respects. We relax these rules in two respects: First, we permit LECs
to offer enhanced and other nonregulated services related to video
programming to any video programmer, in areas substantially served by a
video dialtone platform, without regard to whether the video programmer
purchasing such services has a nexus to that platform. An area shall be
considered substantially served by a video dialtone platform if video
dialtone service is available to a significant majority--i.e., 70%--of
the households in that area. Second, we permit LECs to enter into
certain other types of non-ownership relationships with video
programmers who are not franchised cable operators, without regard to
the existence of a video dialtone platform.
16. We also tighten the non-ownership rules in two respects. First,
we generally prohibit LECs from exceeding the carrier-user relationship
in their telephone service area with franchised cable operators, except
to provide enhanced or other nonregulated services related to the
provision of video programming in areas substantially served by a video
dialtone platform, or to lease cable drop wires. Second, we generally
prohibit affiliations between LECs and any video programmer for the
purpose of operating a basic video dialtone platform.
17. We relax our non-ownership rules as described above because
those rules as originally structured appear to be more restrictive than
necessary to achieve our objectives. In the Second Report and Order, we
permitted LECs to exceed the carrier-user relationship with a video
programmer, but only if that programmer was a customer of,
interconnected with, or shared the construction or operation of the
basic video dialtone platfrom. In requiring this connection, we
explained that we believed it necessary ``to assure that, in exceeding
the current carrier-user relationship, telephone companies will both
provide the basic platform to video programmers and use it as the basis
for their own participation in the video marketplace.'' We were
concerned that, absent this link, telephone companies might forego
investing in video dialtone, limiting themselves instead to providing
services on existing cable facilities.
18. We conclude that our goal of encouraging LECs to build and use
basic video dialtone platforms can be achieved without requiring that
purchasers of LEC enhanced or other nonregulated services related to
the provision of video programming maintain a nexus to those platforms.
So long as a LEC has built a basic platform that satisfies our video
dialtone requirements, and that is available in a particular video
programmer's service area, there is no public interest justification
for prohibiting the LEC from offering enhanced or other nonregulated
services to that video programmer, even if the programmer has no nexus
to the platform. Indeed, permitting that video programmer to purchase
such services from the LEC expands the range of potential customers of
LEC enhanced and nonregulated services, thereby increasing LEC
incentives to build video dialtone systems. At the same time,
permitting LECs to provide services to video programmers who have no
nexus to a video dialtone platform, including cable operators, benefits
video programmers by enabling them to take advantage of such services,
even if they choose not to use video dialtone as their transmission
medium.
19. We recognize that a video programmer's service area often will
not coincide precisely with the area served by a video dialtone
platform. For example, a cable operator's franchise service area that
substantially overlaps a video dialtone service area may include
households outside the video dialtone service area. In that situation,
so long as the LEC has made video dialtone available to a significant
majority of the households in the area in which the cable company seeks
enhanced or other nonregulated services from the LEC, there would be no
reason to prohibit the LEC from providing enhanced or other
nonregulated services to that cable operator. We therefore hold that
LECs may provide enhanced and other nonregulated services within their
telephone service area to a video programmer if video dialtone is
available to a significant majority of the households in the area in
which the video programmer seeks such services. We also hold that, for
purposes of applying this rule, 70% of the households in the area in
which a video programmer seeks enhanced or other nonregulated services
would constitute a ``significant majority.'' We acknowledge that this
seventy percent standard is not the only standard that we could have
adopted. We believe, however, that this standard is reasonable because
it does require that video dialtone be available to a significant
majority of households within the area in which the video programmer
seeks to take LEC nonregulated services and thus provides LECs with the
necessary incentives to deploy video dialtone.
20. We also permit LECs to enter into certain other non-ownership
relationships (e.g., joint ventures and debt financing) within their
service area with video programmers who are not cable operators,
without regard to the existence of a video dialtone platform.
Eliminating the requirement that LECs build a video dialtone platform
before establishing these other relationships will not compromise our
goal of encouraging video dialtone deployment. The revenues offered by
a video dialtone system, including the ability of LECs to provide
enhanced and other nonregulated services in areas substantially served
by video dialtone, should provide ample incentives for LECs to
construct video dialtone platforms. Indeed, it is not clear that the
rule adopted in the Second Report and Order, would further the goal of
ensuring widespread deployment of video dialtone systems. Under that
rule, it could be argued that a LEC could enter into a non-ownership
relationship with any video programmer who had a nexus to a single
video dialtone platform of that LEC. Thus, for example, a LEC could
provide debt financing to a national video programmer if that
programmer offered one program on one video dialtone platform operated
by that LEC. We do not believe that this required nexus has a
sufficiently compelling relationship to our goals to retain it.
21. While we thus liberalize our non-ownership relationship rules
in certain respects, we also narrow these rules in other respects.
First, we generally prohibit LECs from exceeding the carrier-user
relationship in their telephone service area with any franchised cable
operator, except (as described above) to provide enhanced or other
nonregulated services related to the provision of video programming in
an area substantially served by a video dialtone platform, or to lease
cable drop wires. One of the primary goals of this proceeding is to lay
the groundwork for the development of competition in wire-based video
delivery services. We believe that allowing a broad range of
affiliations between LECs and cable operators in a LEC's telephone
service area could undermine this goal. For example, permitting LECs
and cable operators to construct or operate jointly a video dialtone
platform could encourage cable operators to abandon their facilities in
favor of the video dialtone platform. Indeed, we consider it highly
unlikely that a cable operator would participate in the construction or
operation of a video dialtone system unless it planned to use or was
using that platform. In that event, the public would lose the benefit
of competition provided by the cable system. Conversely, LECs might be
inclined to underwrite a cable operator instead of building competing
video distribution systems. Moreover, even in markets in which LECs
build video, dialtone systems, incentives to compete vigorously could
be tempered by debt financing, joint ventures, and other non-ownership
relationships with the cable operator. We are particularly concerned
about that possibility given that, in the near-term, the LEC and cable
operator are likely to be the only two wire-based video systems in most
markets. Under the circumstances, the risks of anticompetitive
consequences outweigh any public gain that could be offered by
permitting such relationships.
22. Second, we generally prohibit cable operators or any other
video programmers from participating in the operation of a basic video
dialtone platform. Unlike LECs, which are subject to Title II of the
Communications Act, and, in the case of the largest LECs, nonstructural
safeguards designed to prevent or reveal discrimination, video
programmers are subject to no Title II nondiscrimination obligations or
requirements. We therefore conclude that, without special safeguards,
permitting video programmers wide latitude in participating in the
operation of the basic video dialtone platform raises too great a risk
of discrimination. Nevertheless, we may permit discrete roles for video
programmers in operating the video dialtone platform if we conclude
that the benefits of permitting such roles outweigh any risk of
discrimination that they raise.
23. These modifications, aside, we otherwise affirm our rules
governing non-ownership affiliations. We also affirm that we are not
statutorily precluded from allowing LECs to exceed the carrier-user
relationship in providing video dialtone service.
24. To summarize, LECs may provide enhanced or other nonregulated
services related to the provision of video programming to any video
programmer, including a cable operator, in areas substantially served
by a video dialtone platform. LECs may also enter into other types of
non-ownership relationships with video programmers that are not
franchised cable operators, except that they generally may not jointly
operate the video dialtone platform. LECs may not, however, otherwise
exceed the carrier-user relationship in their telephone service area
with franchised cable operators, except to lease cable drop wires. We
believe that these modifications of the non-ownership affiliation rules
make them more consistent with our overall video dialtone policies.
25. We note that LECs remain unrestricted in the provision of
enhanced or other nonregulated services unrelated to the provision of
video programming, whether within or outside the LEC service area. LECs
also remain unrestricted in the provision of video programming directly
to subscribers outside their service area. Finally, for purposes of our
non-ownership affiliation rules, we will treat debt that is convertible
to stock as non-cognizable unless the interest is converted, or, based
on an analysis of the specific facts involved, we conclude that the
interest confers control over a video programmer. This is consistent
with our treatment of convertible debt in other areas. Moreover, to the
extent the equity interest would be impermissible, LECs would be unable
lawfully to convert the debt. Therefore, it is proper to view it as
debt, rather than equity, unless and until any such conversion occurs.
E. Definition of Video Programming
26. We affirm our interpretation of the statutory definition of
video programming set forth in the Second Report and Order. We believe
that the Commission's interpretation most closely comports with
congressional intent in enacting the 1984 Cable Act. We also affirm the
Commission's conclusion that video-on-demand images can be severed from
the interactive functionalities and thereby constitute video
programming.
F. Federal and State Jurisdiction
27. We modify our assertion in the Second Report and Order, of
exclusive jurisdiction over all video dialtone services. We hold that
we have exclusive jurisdiction over only interstate video dialtone
services, which include services involving delivery of video
communications that are part of a continuous stream of communication
provided at least partially by means of radio waves. We hold that
states have jurisdiction over intrastate video dialtone services.
28. In General Telephone of California v. FCC, the court held that
channel service provided by a LEC for a cable operator, formerly known
as a community antenna television operator, is ``an integral component
in an indivisible dissemination system which forms an interstate
channel of communication from the broadcaster to the viewer.'' The
court held that the Commission has exclusive jurisdiction over LEC
provision of services that form part of a broadcast transmission.
Because broadcasting is inherently interstate, the court held, LEC
delivery of signals that have been broadcast over radio waves is
interstate, even if the LEC delivers such signals over physically
intrastate facilities.
29. Consistent with General Telephone of California v. FCC, we
conclude that broadcast or other radio-based video signals delivered by
a LEC over a video dialtone system constitute an integral part of an
interstate radio transmission service. Accordingly, we have exclusive
jurisdiction over video dialtone services involving delivery of video
communications that are part of a continuous stream of communication
provided at least partially by means of radio waves. A determination of
whether certain other, non-radio-based video dialtone services are
interstate and thus within our exclusive jurisdiction depends upon the
nature of the communication, as in the telephone context. For example,
we have exclusive jurisdiction over all video dialtone services
provided between two or more states because such services are
interstate. In contrast, under Section 2(b) of the Communications Act,
states retain authority to regulate intrastate video dialtone service
to the extent such regulation has not been preempted by the Commission
under the standards set forth in Louisiana Public Service Commission v.
FCC and its progeny. For example, states have jurisdiction over the
delivery by wire of video programming between a video library and an
end-user located within the same state, as part of a video-on-demand
service.
30. While we do not in this proceeding preempt any state regulation
of intrastate video dialtone services, we note that we have already
preempted certain state regulations of BOC provision of enhanced
services in the BOC Safeguards Order, 57 FR 4373 (February 5, 1992). In
that decision, we preempted any state regulation requiring (1)
Separation of facilities and personnel to provide the intrastate
portion of jurisdictionally mixed enhanced services; or (2) prior
authorization for use of Customer Proprietary Network Information
(CPNI) whenever such authorization is not required by our rules.
Because we have explicitly applied our existing enhanced services
safeguards to video dialtone, state regulation in the areas preempted
in the BOC Safeguards Order, are also preempted by that decision in the
video dialtone context. We reject various parties' requests for broader
preemption at this time, but we will consider preempting any state
regulation of intrastate video dialtone service that is not severable
from interstate service if such regulation would negate federal policy.
G. Section 214 Process
31. We now affirm our decision to require LECs to obtain approval
pursuant to Section 214 of the Act before beginning construction of
video dialtone facilities or offering video dialtone service. We reject
arguments that we lack authority to require such approval or that we
should refrain from exercising that authority at this time. Because
video dialtone is based upon new and evolving technologies, the Section
214 process is critical to our ability to ensure that video dialtone is
implemented in a manner that best serves the public interest.
Nevertheless, we permit LECs to seek generic approval of those aspects
of a video dialtone system that do not require case-by-case review. In
addition, we anticipate that, over time, as the service evolves and
precedents are established, it may no longer be necessary to require
the same level of Section 214 scrutiny to future video dialtone
offerings. We will consider, at that time, on our own motion or on
petitions of parties, streamlining our Section 214 requirements for
video dialtone offerings.
1. FCC Authority to Require Section 214 Certification
32. As an initial matter, we conclude that the Commission has
jurisdiction to require LECs to obtain Section 214 certification to
upgrade existing facilities to provide video dialtone. Section 214(a)
requires a carrier to obtain certification before constructing or
extending a line it will use for interstate communications. Even
facilities that are wholly located within a state are interstate for
Section 214 purposes, if a LEC uses those facilities at least in part
for interstate communications.
33. We conclude further that an upgrade of LEC facilities to offer
video dialtone service constitutes the establishment or extension of a
``line'' pursuant to Section 214. In 1944, Congress amended Section 214
to define ``line'' as a ``channel of communication established by
appropriate equipment * * *.'' Because video dialtone systems create
new channels of communication, the systems constitute the establishment
of lines under Section 214.
34. We also conclude that video dialtone systems involve ``new
construction.'' The exemption in Section 214 for ``any installation,
replacement, or other changes in plant, operation, or equipment, other
than new construction'' applies only if no new construction occurs, or
any new construction or installation is minor. The upgrading of
existing facilities to be used for video dialtone thus does not fall
within this exemption.
35. Furthermore, we conclude that new construction occurs even when
LECs upgrade existing facilities to provide video dialtone through the
addition of small amounts of equipment, because such upgrades enable
the LECs to offer a new and different type of interstate service.
Section 214 requires a carrier to obtain certification before upgrading
existing intrastate facilities for interstate service. Thus, upgrading
customer loops, which are currently used primarily for intrastate local
exchange service, to provide video dialtone service, constitutes ``new
construction,'' and Section 214 certification is required. Moreover,
because the construction of video dialtone systems does not constitute
the construction of ``local, branch, or terminal lines not exceeding
ten miles in length,'' we reject arguments that we should apply the
statutory exemption contained in Section 214(a)(2) of the
Communications Act to LEC video dialtone Section 214 applications.
2. Elimination or Streamlining of Section 214 Requirement for Video
Dialtone
36. We decline to eliminate or streamline the Section 214
certification process at this time. We reject arguments that the tariff
review process is at this time, by itself, an adequate mechanism for
overseeing video dialtone deployment. Because video dialtone is an
emerging technology, and because we anticipate and encourage variations
in networks, architectures, technology, and services, many important
policy issues would likely be raised only in connection with specific
video dialtone proposals. Therefore, streamlining our Section 214
process could preclude us from properly overseeing video dialtone
deployment.
37. For similar reasons, we also decline to limit the type of
construction or deployment subject to full Section 214 review.
Particularly during the early stages of video dialtone implementation,
even those applications that propose previously approved architectures
may pose other issues that warrant careful consideration in the context
of that specific proposal.
38. While we do not streamline our Section 214 process at this
time, we will consider generic applications for approval of those
aspects of a Section 214 application that do not require case-by-case
consideration. These generic applications can serve to narrow the range
of issues to be considered in the Section 214 process. We also note
that we anticipate that, as video dialtone evolves, and we develop a
body of precedent governing its implementation, the Section 214 process
may become a less critical vehicle for identifying and addressing
policy issues, thereby making streamlining appropriate at that time.
39. Finally, as another possible means of expediting the Section
214 process, we direct the Bureau to consider whether it would serve
the public interest to clarify in a Public Notice the basic information
that the Commission requires in a video dialtone Section 214
application. We note that the Bureau has found it necessary to request
additional information from LECs in connection with the Bureau's review
of virtually every application that has been filed for Section 214
authorization to construct a commercial video dialtone system. Further
clarification of the information required in a Section 214 application
could help LECs avoid the delays that necessarily result when
applications have to be supplemented.
3. Delaying Section 214 Certifications
40. We determined in the Second Report and Order, and affirm now
that our existing rules and safeguards generally will prevent improper
cross-subsidization and discrimination by LECs in the provision of
video dialtone. Therefore, we do not believe that an additional
comprehensive review of these rules is necessary prior to the
implementation of video dialtone service. Indeed, to the extent that
any further changes in these rules may be necessary, permitting
deployment of video dialtone should provide us with a better basis for
fashioning such changes. While we thus decline to defer consideration
of Section 214 applications pending a comprehensive review of our
rules, we will condition the granting of each Section 214 certificate
on implementation of any accounting and other safeguards that we have
adopted or subsequently adopt.
H. Cross-Subsidy/Pricing Issues
1. Overview
41. We conclude that initial video dialtone service offerings by
LECs subject to price cap regulation should be subject to the existing
price cap rules. Proceeding under existing price cap rules is
consistent with eliminating regulatory barriers and distorted
incentives to efficient investment in telecommunications facilities,
thereby serving our goals of increasing video services competition and
investment in telecommunications infrastructure, and promoting greater
diversity of video programming. We also conclude that these rules, as
further delineated below, should protect telephone ratepayers from
improperly subsidizing video dialtone service.
42. As Joint Petitioners point out, LECs, along with other
telecommunications providers, may, over time, invest billions of
dollars to build a modern telecommunications infrastructure. We share
their concern regarding possible effects of video dialtone investment
on basic regulated telephone rates, and possible anticompetitive
results with respect to cable television service and other multichannel
video programming distributors. We are committed to implementing video
dialtone in a manner that does not subject basic telephone ratepayers
to unreasonable rate increases or allow improper cross-subsidization.
We do not, however, agree that ratepayer protection requires that this
Commission adopt comprehensive, video dialtone-specific accounting and
cost allocation rules before authorizing video dialtone services.
43. Contrary to the arguments of the Joint Petitioners, this
Commission's actions in authorizing interstate video dialtone services
will not require increases in telephone rates on the order of $20 per
month to pay for the cost of a nationwide fiber-to-the-home network. No
LEC Section 214 application for video dialtone service has proposed a
fiber-to-the-home architecture, and it appears unlikely based on the
record that anyone will. In addition, where integrated networks are
proposed, much of the investment will be used in the provision of
intrastate telephone services, and will require the necessary state
regulatory approvals. We also note that investment in video dialtone
will, of necessity, proceed over a period of years, permitting Federal
and State regulators to monitor the results of the initial deployments
and take any actions that might be needed to prevent large amounts of
video dialtone investment from being improperly shifted to ratepayers.
44. We decline, however, to adopt technology-specific cost
accounting rules. The record in this proceeding demonstrates that such
cost accounting rules can be rapidly overtaken by technological or
marketplace changes. Joint Petitioners, for example, supported in their
pleadings the establishment of accounts to identify loop investment as
either copper or fiber. Such accounts, had we adopted them in 1992,
would no longer serve the purposes envisioned by their proponents
because carriers have since that time developed proposals to
incorporate a third transmission medium, coaxial cable, into the loop.
45. While we do not propose to amend Parts 32, 64, 36, and 69 of
our rules before authorizing video dialtone services, we find that
adjustments are necessary to fit video dialtone into our regulatory
program. These adjustments, which will be implemented on a case-by-case
basis and do not require further rulemaking at this time, are explained
below.
46. We view the price cap regulatory regime, and not the Part 36/
Part 69 cost allocation scheme, as our primary means of protecting the
telephone customers of price cap LECs from unreasonably high rates.
Under price caps, a LEC has no guarantee that it will be able to
recover increased costs in telephone rates. Its incentive to ``shift''
costs from video dialtone to regulated telephone services is thus
greatly reduced.
47. In addition, the price cap baskets and service categories limit
the extent to which price reductions in one service can be offset by
price increases in another. We conclude that a separate price caps
basket for video dialtone services may be necessary both to protect
interstate telephone ratepayers and to deter anti-competitive pricing
of video dialtone services. Therefore, in the Price Caps Performance
Review docket, 59 FR 23042 (May 4, 1994), we will seek comment on a
proposal to establish that basket.
48. We recognize that LECs under rate base/rate of return
regulation (ROR) or the optional incentive plan may also wish to
develop video dialtone services. Such carriers will bear the burden of
demonstrating to us how they will ensure that the costs of video
dialtone will not be improperly recovered in the rates charged for
other interstate services. They, like the price cap LECs, will also be
required to comply with the other safeguards adopted in the Memorandum
Opinion and Order on Reconsideration.
49. We deny requests by parties that seek a comprehensive
examination of both jurisdictional separations and access charge rules
in this proceeding. As explained above, we believe our existing rules
adequately protect consumers against improper cross-subsidy and anti-
competitive activity at this time. As video dialtone systems are
implemented and we gain more experience with this new service, we can
amend our rules if necessary or appropriate to address unanticipated
problems or results. We agree that long-term video dialtone cost
allocation issues would be a part of any comprehensive review of Parts
36 or 69. We do not think, however, that the public interest would be
well served by postponing for consumers the benefits that video
dialtone services may offer pending the commencement and completion of
such proceedings. Therefore, and for the reasons discussed in more
detail below, we reject requests for adoption of video dialtone-
specific accounting, cost allocation, separations, and pricing rules
prior to granting video dialtone authorizations.
2. Part 32--Uniform System Accounts for Telecommunications Companies
50. We reject the parties' requests that we amend our accounting
rules to require carriers providing video dialtone to segregate all
video plant investment in new Part 32 accounts or separate subaccounts.
Part 32 accounting rules were designed to create a stable basic account
structure that would not require modifications as technologies,
services, or reporting requirements change.
51. We further conclude that, in the case of video dialtone, our
regulatory information needs can be satisfied without making permanent
changes to the accounting system at this time. Because it would help
our monitoring effort and tariff review process to have a record of LEC
video dialtone costs, we hereby require that LECs offering video
dialtone identify all video dialtone costs by establishing two sets of
subsidiary accounting records: one to capture the revenues, investments
and expenses wholly dedicated to video dialtone, the other to capture
any revenues, investments and expenses that are shared between video
dialtone and the provision of other services. These accounting records
will also assist state regulators in assuring that video dialtone costs
are not improperly included in local rates. LECs authorized to provide
video dialtone must file a summary of these subsidiary records with the
Commission on a quarterly basis. All video dialtone Section 214
authorizations will be conditioned upon compliance with this
requirement. We delegate to the Chief, Common Carrier Bureau, the
authority to determine the content and format of the subsidiary
accounting records as well as the quarterly reports.
3. Part 64--Separation of Regulated and Nonregulated Costs
52. We reject claims that we should amend Part 64 because current
rules would not prevent LECs from improperly subsidizing video dialtone
nonregulated services. To the contrary, we conclude that existing Part
64 rules do not require modification to prevent such an outcome.
53. The Joint Cost rules set forth in Part 64 were formulated to
accommodate new enhanced services offerings in an increasingly
competitive telecommunications environment. Part 64, for the most part,
does not prescribe cost categories or allocation factors. Rather, each
carrier selects, subject to public comment and Commission review, the
cost pools and allocators it needs to identify the costs of all of its
nonregulated activities. The Commission chose this approach because it
believed that the mix of nonregulated activities and the organizational
structure would vary widely from carrier to carrier, and that a single,
prescribed manual could not adequately encompass the possible
variations. No party has shown that video dialtone-related nonregulated
products and services will exhibit, initially, less variety than other
nonregulated activities, or will be more amenable to uniform treatment.
Similarly, parties that object to the aggregation of video dialtone-
related nonregulated costs with the costs of other nonregulated
activities fail to explain what valid regulatory purpose of this
Commission would be served by revisiting our determination in the Joint
Cost Order, 52 FR 6557 (March 4, 1987), to avoid product-specific cost
allocations to nonregulated products and services. Therefore, we
decline to promulgate video dialtone-specific cost allocation rules for
nonregulated activities related to video dialtone service at this time.
However, we may require uniformity in the video dialtone cost
allocation procedures in the future as we gain experience with video
dialtone services and LEC Part 32 subsidiary accounting records.
54. Under our rules, interested parties, as well as the Commission,
will have ample opportunity to review the application of Part 64 to
video dialtone-related nonregulated offerings. All LECs with $100
million or more in annual operating revenues are required to keep their
current Part 64 Cost Allocation Manuals (CAMs) on file with this
Commission. To assist State regulators and other interested parties in
tracking video dialtone-related CAM filings, we hereby require that any
LEC receiving authorization to provide video dialtone file CAM
amendments within thirty days after the effective date of the Section
214 authorization and at least sixty days prior to providing
nonregulated products or services related to video dialtone. Video
dialtone-related CAM amendments are subject to public comment and will
be closely scrutinized by the Commission. Changes to time reporting
procedures, cost apportionment tables, and the affiliate transactions
statement can, if necessary, be suspended for up to 180 days, after
which the Bureau may either allow the new procedures to become
effective or prescribe different procedures.
4. Part 36--Jurisdictional Separations
55. We decline the parties' requests that we institute at this time
Federal-State Joint Board proceedings to amend our Part 36
jurisdictional separations rules for video dialtone service. For the
time being, LECs will allocate regulated video dialtone investment and
expenses between the State and Federal jurisdictions in accordance with
existing rules. To ensure that our decisions do not have untoward
effects outside of our regulatory jurisdiction, we are directing the
Common Carrier Bureau to monitor the impact of video dialtone on
separations results and on intrastate local telephone rates, and to
report its findings periodically to this Commission. This course of
action will provide us and State regulators with the practical
experience and the data necessary to make appropriate decisions
concerning the future of the Part 36 rules.
56. Joint Petitioners and others have complained that existing
separations rules would assign to the States 75% of increased loop
costs attributable to video dialtone, but no video dialtone revenues.
This argument is premised on our jurisdictional determination in the
Second Report and Order, which we now modify on reconsideration. Thus,
regulated video dialtone services of a purely intrastate nature may be
tariffed in the intrastate jurisdiction. The availability of intrastate
video dialtone revenues should help offset any increase in intrastate
costs caused by LEC provision of video dialtone services and help
prevent any local rate increases.
57. In declining to institute a Joint Board proceeding to address
issues raised by the particular video dialtone proposals now pending
before the Commission, we do not mean to imply that we will never
revisit Part 36. Indeed, it appears likely that, as telecommunications
networks and the marketplace evolve, the separations rules will require
revision. In our judgment, however, it is too soon to begin proceedings
to propose specific rule changes in this area. Video dialtone is but
the first of what we expect to be an array of broadband services, and
the current video dialtone proposals may or may not be representative
of the manner in which those services will use network facilities, or
of the jurisdictional mix of those services. Under these circumstances,
scarce Federal and State regulatory resources should not be expended to
craft separations rules tailored to video dialtone.
58. We will take the following steps to help ensure that local
telephone ratepayers are not being harmed by the advent of video
dialtone--a preeminent concern of State commenters. We direct the
Common Carrier Bureau to develop a data collection program that will
track the impact of video dialtone on both separations results and
intrastate telephone rates. As part of this program, the Bureau will
require all carriers offering video dialtone to submit detailed
explanations of how they are applying the Part 36 rules, as well as
Parts 32, 61, and 64, to video dialtone investments and expenses. The
Bureau will report is results periodically so that this Commission and
State regulators can determine when and if rule changes or other
actions appear necessary.
59. We also will open an inquiry proceeding focusing on a matter of
paramount concern to both Federal and State regulators--the
implications for the jurisdictional separations process of the
introduction of new technologies, including broadband technology, into
LEC networks. This proceeding will provide a forum for exploring the
broader separations policy issues raised by continuing changes in
network technology, of which video dialtone is but one example. The
inquiry also will be a vehicle for updating, in light of actual video
dialtone experience, the record created in the instant proceeding. We
strongly encourage active State commission involvement in our inquiry
and seek to establish a dialogue between State and Federal regulators
on these issues. The information we gather in this inquiry could serve
as a basis for future rulemaking proposals as we examine our existing
rules in light of the evolving nature of LEC networks.
60. State commissions, of course, bear the primary responsibility
for ensuring that intrastate rates are reasonable. We emphasize that
neither our decisions in this proceeding nor our actions on the various
video dialtone Section 214 applications preempt the State commissions
from disallowing from local telephone service rates any video dialtone-
related costs that do not meet their own standards for inclusion in
rates.
61. Finally, some parties contend that Section 410(c) of the
Communications Act legally compels us to refer all separations issues,
including use of common plant for video dialtone, to a Joint Board.
Although Section 410(c) requires the Commission to refer separations
issues to a Joint Board upon instituting a notice and comment
rulemaking proceeding, we are not proposing to modify any separations
rules here but are simply applying our existing rules. We conclude that
we have the authority to apply existing jurisdictional separations
rules during the initial phase of video dialtone service deployment.
Our initial determinations regarding implementation of existing
jurisdictional separations to video dialtone are, of course, subject to
revision as we gain further experience with video dialtone.
5. Part 69--Access Charge-Cost Allocations and Rate Structure
62. We conclude that access to the basic video dialtone platform is
a form of interstate access to the extent it is used to route
interstate video programming to end users. We also conclude that a
separate access charge category for video dialtone may be desirable to
help ensure that interstate video dialtone costs are not recovered
through charges for access services provided to interexchange carriers.
63. We decline, however, to prescribe a new rate element or to
initiate a notice of proposed rulemaking at this time. We recognize
that the access charge rules define rate elements established for
traditional telephone facilities. Video dialtone may use both new and
existing network facilities to deliver services in ways not
contemplated at the time the Part 69 rules were written. Because video
dialtone is a nascent service, though, and in light of the wide variety
of possible video dialtone architectures LECs may employ, we find that
there is a significant risk that any uniform rate structure we would
prescribe now would fail to produce rate elements that logically match
each carrier's video dialtone offering.
64. Instead, as the Commission has done in the past with other new
services, we will require local telephone companies that wish to offer
video dialtone services to file petitions for waiver of our Part 69
rules prior to the establishment of a permanent video dialtone rate
structure. The waiver process, as an interim solution, will afford all
interested parties an opportunity to participate, and challenge or
support the rate structure proposed by the local telephone company. The
waiver process will also provide a forum for reviewing the cost
allocation proposals of ROR and optional incentive plan carriers.
6. Part 61--Price Cap Treatment
65. We conclude that price cap local telephone companies should
continue to be subject to the existing price cap rules for their
provision of video dialtone services.
66. We also conclude that video dialtone service is a ``new
service'' under our price cap rules. New services are services that
``add to the range of options already available to customers.'' In
contrast to restructured services, which involve the rearrangement of
existing services, video dialtone adds to the range of options for
customers because multiple video programmers will have access to a
basic common carrier platform for the first time. Video dialtone thus
differs from a carriers's provision of channel service or other video
transport services.
67. Local telephone companies will be required to make a cost-based
showing under the price caps new services test to establish initial
video dialtone prices. As explained below, this test, as applied in
established tariff review processes, provides an adequate vehicle for
full consideration of the reasonableness of proposed video dialtone
rates. We therefore find it unnecessary to initiate a rulemaking to
develop new, video dialtone-specific tariffing requirements. We also
conclude that, given our current dearth of experience with video
dialtone tariffs, it would be both premature and counterproductive to
attempt to promulgate such rules at this time. The first few tariff
proceedings will provide a far more concrete and realistic factual
context for future decision making than would be developed in a general
rulemaking proceeding.
68. Application of the LEC Price Cap New Services Test. We decline
to amend the new services test specifically for video dialtone
services. The Commission currently has generally applicable rules in
place that specify the cost support that must be submitted with any new
service tariff, including a video dialtone tariff. Pursuant to these
rules, carriers must submit engineering studies, time and wage studies,
or other cost accounting studies to identify the direct costs of video
dialtone. LECs have proposed a number of different network
architectures for video dialtone, and there are wide variations in the
manner in which, and the degree to which, LECs are proposing to
integrate their video dialtone systems with their telephone networks.
This diversity and experimentation, which we view as beneficial to the
development of a modern telecommunications infrastructure, precludes us
from adopting a one-size-fits-all rule for the identification of video
dialtone direct costs. The tariff review process, which includes the
possibility of tariff investigations under Section 204(a), will allow
close examination of each LEC proposal and enable us to require such
cost information as may be necessary to evaluate each proposal. If the
application of our existing rules has unintended consequences, or if
the process reveals systematic problems, we will revisit our
determination to rely on existing procedures.
69. We conclude, however, that it is important that we provide more
specific guidance regarding the identification of direct costs in video
dialtone tariffs than is ordinarily given. LECs may, over time, make
large investments to upgrade their networks for video dialtone and
other broadband services. The large amounts of investment involved, and
the serious concerns about cross-subsidization expressed in the record
of the instant proceeding, suggest that video dialtone rates will be
subject to intense scrutiny. We conclude that the video dialtone tariff
review process will proceed more smoothly, and LECs and interested
parties will be able to participate more constructively, if they better
understand our expectations in advance of tariff filings.
70. Because video dialtone is an essential component of a
multichannel video service that will compete directly with cable
television operators and other multichannel video programming
providers, LECs may have an incentive to understate the direct costs of
the service in order to set unreasonably low prices and engage in
cross-subsidization. Therefore, as explained below, we will require the
LECs to submit with their video dialtone tariffs a more detailed and
complete identification of direct costs than we have generally required
in other new services filings.
71. Under our established practice, direct costs include the costs
and cost components associated with the primary plant investment that
is used to provide the service. In the case of video dialtone, some of
these plant costs will be incremental costs associated with plant
dedicated to video dialtone service. The direct costs of video dialtone
will also include any incremental costs that are associated with shared
plant used to provide video dialtone and other services, that is, costs
of shared plant that are caused by the carrier's decision to offer
video dialtone service. In reviewing video dialtone tariffs, we will
scrutinize the basis on which those costs are identified and included
in the proposed charges for video dialtone services. We recognize and
accept the challenges inherent in determining which costs are truly the
consequences of a carrier's decision to provide video dialtone service,
i.e., are incremental costs.
72. Moreover, we expect LECs to include in direct costs a
reasonable allocation of other costs that are associated with shared
plant used to provide video dialtone and other services. We will
scrutinize the basis on which those costs are identified and included
in the proposed charges. An LEC allocating an extremely low proportion
of these other costs of shared plant to video dialtone will be expected
to provide a strong justification for that approach, and we do not
anticipate accepting a 0% allocation of the common costs of shared
plant as reasonable.
73. Ordinarily carriers decide, in the first instance, whether to
include in their direct cost studies any categories of costs
(investment and expenses) in addition to primary plant. For video
dialtone, however, we direct carriers to treat costs in other accounts
as direct costs if those costs are reasonably identifiable as
incremental costs of video dialtone service. Examples of accounts that
might include reasonably identifiable incremental costs of video
dialtone are those to which carriers book costs associated with land,
buildings, network administration, testing, engineering, plant
operations administration, product management, sales, advertising,
customer services, and legal.
74. For purposes of the new services test, all costs not treated as
direct costs are classified as overheads. Carriers bear the burden of
justifying why their overhead loadings do not produce a final rate that
is unreasonably high. As with shared plant, we will also require a
strong justification for allocation of extremely low overheads to video
dialtone service, and would not anticipate accepting a 0% allocation of
overhead as reasonable. At the same time, we emphasize that we are not
seeking to saddle video dialtone with an unreasonable proportion of
overheads and other common costs. We hope and expect that video
dialtone will be a successful service in the marketplace, and therefore
contribute to the recovery of common costs. We recognize that imposing
excessive cost burdens on video dialtone could diminish demand and
possibly overall revenues and thereby thwart these objectives.
Accordingly, the effects of price changes on video dialtone demand
should be given due consideration in determining what constitutes a
reasonable allocation of common costs and overheads. In this regard, we
will scrutinize the basis for claims and projections of demand
elasticities submitted in support of proposed video dialtone rates.
And, of course, our rules will provide interested parties ample
opportunity to comment on these claims and projections.
75. In implementing this specific guidance, we direct the Chief,
Common Carrier Bureau, to ensure that video dialtone carriers file all
the information necessary for purposes of evaluating the costs of
providing video dialtone service and the reasonableness of the proposed
cost allocations and overhead loadings. We further direct the Chief,
Common Carrier Bureau, to consider whether the Bureau should adopt
specific minimum requirements, including the possible use of
standardized formats, for the supporting documentation that video
dialtone providers must furnish with their proposed tariffs. We note
that the Bureau previously has adopted such requirements in connection
with the LECs' annual access tariff filings, as well as tariffs filed
to provide specific services, such as Open Network Architecture (ONA)
and Expanded Interconnection services. The goal of any such
requirements would be to make the review of video dialtone tariffs by
the Bureau and interested members of the public more expeditious and
less costly. In addition to making the tariff review process more
accessible to interested parties, the establishment of minimum standard
format and information requirements would facilitate their ability to
participate in a meaningful way.
76. We tentatively conclude that a separate price cap basket for
video dialtone would help prevent improper cross-subsidization by
preventing local telephone companies from offsetting a price reduction
for video dialtone service with an increase in rates for other
regulated interstate services. However, it is not necessary to
establish this basket now, on an interim basis. Because no tariffs for
permanent video dialtone service have yet been filed, it is unlikely
that any such tariff will go into effect prior to January 1, 1995. July
1, 1996 is thus the earliest date on which a video dialtone service
could be included in a price cap index. We therefore will seek comment
on establishing a separate price cap basket for video dialtone service
in a supplemental notice in the LEC Price Cap Performance Review.
77. At this time we will not address the merits of whether basket-
by-basket earnings calculation should be required. We recognize that
investment in video dialtone facilities may generate costs that will
have an impact on sharing. Issues regarding sharing, however, are being
examined in the LEC Price Cap Performance Review. In the near term, we
will continue to determine sharing and lower end adjustments on an
overall interstate basis.
I. Two-level Regulatory Framework and Application of Other Enhanced
Service Safeguards
78. We now affirm our decision in the Second Report and Order, to
adopt a two-level regulatory framework for video dialtone services and
to require the BOCs and GTE to comply with our existing enhanced
services safeguards. In adopting a two-level regulatory framework, we
noted that this dichotomy tracks our existing regulatory framework for
LEC basic and enhanced services. We do not think the public interest
would be well-served by adopting a different set of rules for video
dialtone services, particularly given that LECs will provide both video
and non-video offerings through these systems. Moreover, the two-level
framework should promote competition and broaden consumer choice. The
level-one common carrier platform will enable multiple video service
providers, for the first time, to obtain access on a nondiscriminatory
basis to the basic network functions that will allow such service
providers to distribute their services to consumers. Requiring LECs to
offer nonregulated services subject to existing safeguards for the
provision of such services will help ensure that LECs are not able to
compete unfairly with other enhanced service providers and that LECs
cannot bundle enhanced and nonregulated services with basic services in
order to impede competition.
79. We also affirm the Commission's decision to apply existing
enhanced service safeguards to BOC and GTE provision of nonregulated
level-two video dialtone services. No party offers any new evidence or
argument that would persuade us that this decision should be revised.
80. We also reject arguments that we should adopt more stringent
requirements at this time, such as requiring LECs to offer all level-
two services through a separate subsidiary. Here again, commenters have
raised no new issues or arguments. We have found that separate
subsidiary requirements for enhanced services impose inefficiencies and
other costs, and that discrimination and cross-subsidization can be
policed adequately through less onerous means. No party has shown that
provision of video-related enhanced services, which at this time do not
include video programming itself, is so fundamentally different from
provision of other enhanced services as to require a different
regulatory regime. We do, however, make one minor change to our
nonstructural safeguards. Currently, the BOCs and GTE must file
nondiscrimination reports on their installation and maintenance of 49
categories of basic services. To adapt this requirement to video
dialtone, we require the BOCs and GTE to add an additional service
category for video dialtone delivery service. We note that the United
States Court of Appeals for the Ninth Circuit recently vacated in part
and remanded the BOC Safeguards Order, on the ground that the
Commission had not adequately explained how, without full unbundling of
BOC networks under ONA, discrimination could be prevented in the
absence of structural safeguards. We delegate to the Common Carrier
Bureau authority to establish interim measures to govern BOC provision
of enhanced services, including video dialtone-related enhanced
services, if and when this decision becomes effective.
81. Finally, in the Second Report and Order, we stated that we
would review our video dialtone rules and policies in 1995. Such review
no longer appears to be necessary in light of the detailed examination
we have undertaken in the Memorandum Opinion and Order on
Reconsideration of those rules and policies, as well as our continuing
work on major video dialtone issues through the CPNI data request and
the Third Further Notice of Proposed Rulemaking. Indeed, we are
concerned that the regulatory uncertainty that could stem from another
comprehensive review of video dialtone rules and policies could
discourage video dialtone deployment pending that review. For these
reasons, we will not initiate a formal review of our video dialtone
rules and policies in 1995. Nevertheless, we will continue to monitor
the evolution of video dialtone and oversee its implementation in
specific applications through the Section 214 process and the tariff
review process. In addition, if in the future it becomes apparent that
we should modify aspects of our video dialtone rules and policies, we
will initiate a proceeding to do so.
J. Joint Marketing and Customer Proprietary Network Information
82. We affirm our decision to permit LECs to engage in joint
marketing of basic and enhanced video dialtone services, as well as of
basic video and nonvideo services. We also affirm our decision to apply
existing CPNI rules to video dialtone at this time. Nevertheless, we
direct the BOCs and GTE, the carriers to which our CPNI rules currently
apply, to provide us with additional information about the kinds of
CPNI to which they will have access as a result of providing video
dialtone service so that we may obtain a better record in assessing
whether existing CPNI rules best balance the various interests that are
implicated by the use of CPNI in the video dialtone context.
83. We permit LECs to engage in joint marketing of basic and
enhanced video services, and of basic video and nonvideo services,
because we believe that the benefits of permitting joint marketing
outweigh any adverse effect on competition. Joint marketing can offer
consumers the convenience of one-stop shopping both for basic telephone
and video dialtone services and for basic and enhanced video dialtone
services. Through joint marketing, LECs will be able to increase
customer awareness not only of the video dialtone system generally, but
of enhanced features and functions available on that system. This
awareness will benefit programmer-customers as well as end users and
result in greater usage of the video dialtone platform. At the same
time, LECs will be able to market video dialtone services in the most
efficient manner possible, avoiding the costs imposed by structural
separation.
84. The record in this proceeding does not support a finding that
joint marketing of video and telephony services will have an
anticompetitive impact on the provision of video programming services
to end users. While consumers moving to a new residence typically
arrange for telephone service prior to or immediately after the move,
they also will be arranging for other services at that time, including
video programming services. No one has shown that the first call placed
is necessarily to the telephone company. More significantly, the cable
operator, not the telephone company, will be the incumbent video
programming provider in the market. We believe that consumers today are
likely to be aware that they may order video programming services from
the local cable operator. We also believe that they will do so if the
cable operator's rates and programming are preferable to those offered
by programmers on the video dialtone network. Simply because telephone
companies may sometimes have an initial contact with consumers changing
residences in our view does not demonstrate a likely anticompetitive
effect or warrant a prohibition on joint marketing. We also note that
the extent to which LECs will market basic video dialtone service to
end users is unclear, particularly since in some video dialtone
applications, LECs have proposed to charge their programmer-customers,
but not end users, for basic video dialtone service. Moreover, since
telephone companies, as common carriers, are prohibited from favoring a
particular video programmer's product, the ability of LECs to market
video dialtone services to consumers will be constrained in any event.
By contrast, cable companies with authorization to provide telephone
service can jointly market video and telephony services without
restrictions on favoring particular video programmers.
85. We also apply to video dialtone, at this time, our existing
CPNI rules, which were recently upheld by the United States Court of
Appeals for the Ninth Circuit in California v. FCC. No party has
provided evidence that existing CPNI rules do not properly balance our
CPNI goals relating to privacy, efficiency, and competitive equity in
the video dialtone context. Nevertheless, because of the significant
privacy issues that are potentially implicated by video dialtone-
related CPNI, we believe we should obtain additional information about
such CPNI so that we may carefully assess whether existing CPNI rules
sufficiently protect customer privacy in the video dialtone context.
For example, we seek information as to whether LECs, in providing video
dialtone, will have access to information about the types of
programming that each customer views. This information would raise
greater privacy concerns than other CPNI, which does not generally
include information about the content of customer communications. We
are also interested in assessing the competitive value of CPNI obtained
from video dialtone, as well as the extent to which access to this
information promotes the efficient provision of regulated and
nonregulated services by LECs.
86. In order to obtain a better record for addressing these issues,
we direct each of the BOCs and GTE to file, within ninety days of
publication of a summary of the Memorandum Opinion and Order on
Reconsideration in the Federal Register, a detailed description of the
types of CPNI to which it anticipates having access as a provider of
video dialtone service. We also direct each to explain how it would
plan to use such information in marketing video dialtone services to
video programmers or consumers. Other interested parties, including,
but not limited to, independent LECs, may also file at that time any
information responsive to these issues. After this information is
filed, we will issue a public notice establishing a supplemental
pleading cycle that will give all interested parties the opportunity to
comment. Based on this record, we will then reassess whether the public
interest would be served by modifying existing CPNI rules for video
dialtone service and propose any changes in those rules that may be
warranted.
K. Preferential Access to Video Dialtone
87. In the Second Report and Order, we decided not to mandate
preferential treatment for certain classes of video programmers largely
because we concluded that mandatory preferential treatment is generally
inconsistent with a Title II common carrier regime, the cornerstone of
which is the provision of service to the public on the basis of rates,
terms, and conditions that are not unreasonably discriminatory. We
still have concerns about this issue. A system of discounts or free
access for certain video programmers could also introduce economic
distortions that would restrict demand for video dialtone service. For
these and other legal and policy reasons, mandating preferential rates
for any specific class of programmer may not be compatible with the
public interest. On the other hand, however, the continued availability
of diverse sources of programming clearly serves the public interest.
88. We have recognized exceptions to the general principle of
nondiscrimination in the provision of common carrier services. These
exceptions have been based upon a compelling showing of need and strong
public policy concerns. Based on our review of the record, we conclude
that we do not currently have a sound basis for determining whether a
similar exception should be made here, and if so, for which
programmers, and to what extent. In the Third Further Notice of
Proposed Rulemaking, we seek comment on these issues. We also seek
comment on whether a proposal by Bell Atlantic that seeks to permit
LECs voluntarily to provide preferential rates to certain classes of
programmers is or could be lawful.
L. Special Incentives
89. The petitioners have not presented any persuasive basis for the
Commission to modify its decision in the Second Report and Order,
regarding special incentives. In particular, they have not persuaded us
that our existing practices for prescribing depreciation rates pose an
impediment to the deployment of new technologies. Under our existing
rules, the Commission reviews the depreciation rates of each carrier on
a three year rotating cycle. Carriers may also seek interim updates of
their depreciation rates. Based on a review of a variety of service
life indicators, the Commission establishes depreciation rates for each
major category of plant designed to recover the carrier's investment
over the plant's projected remaining life. In the case of telephone
plant, based on the most recent (1993) depreciation represcription
order, the average remaining life is 9 years and approximately 40
percent of the original cost of those facilities has already been taken
as depreciation expense. We believe that our existing practices are
adequate to respond to any acceleration in the rate of technological
change in the provision of loop facilities. We also note that to date
we have received more than thirty video dialtone applications proposing
use of advanced broadband networks. These applications provide evidence
that the measures we have taken in this proceeding to eliminate
artificial regulatory constraints will by themselves promote investment
in broadband networks and that special incentives are unnecessary.
M. Recommendation to Congress
90. Although petitions for reconsideration do not lie against
reports to Congress, we nevertheless take this opportunity to affirm
our recommendation that Congress amend the 1984 Cable Act to permit
LECs to provide video programming directly to subscribers in their
telephone service areas, subject to appropriate safeguards. As we noted
in the Second Report and Order, the 1984 Cable Act's ban on LEC
provision of video programming was originally enacted to prevent LECs
from establishing a monopoly position in the provision of video
services. Given the enormous growth of the cable industry during the
past decade, the risk of telephone companies preemptively eliminating
competition in the video marketplace has lessened significantly. While
there remains some risk of anticompetitive behavior by the LECs, we
affirm our finding that this risk can and should instead be addressed
through our video dialtone framework and other appropriate regulatory
safeguards.
Final Regulatory Flexibility Analysis Statement
91. Pursuant to the Regulatory Flexibility Act of 1980, 5 U.S.C.
601-612, the Commission considered whether this decision could
disadvantage small non-vertically integrated cable systems, wireless
cable systems, and broadcasters because it could supplant these video
distribution mechanisms. The Commission also considered whether this
decision could threaten small businesses involved in the video rental
market by eliminating the current video distribution chain. On the
basis of the record, however, the Commission determined that the public
interest in a competitive video marketplace, increased opportunities
for development of an advanced infrastructure and the promotion of a
diversity of video services, would be best served by permitting local
telephone companies to offer video dialtone.
92. Copies of the final regulatory flexibility analysis are
available for inspection and copying, Monday through Friday, 9 a.m.-
4:30 p.m., in the FCC Dockets Reference Room (Room 239), 1919 M Street
NW., Washington, DC 20554. The added final regulatory flexibility
analysis may also be purchased, as part of the Memorandum Opinion and
Order on Reconsideration, from the Commission's copy contractor, ITS,
Inc., room 246, 1919 M St. NW., Washington, DC 20037. See 5 U.S.C.
604(b).
Ordering Clauses
93. It is ordered that, pursuant to sections 1, 4, 201-205, 214,
and 220 of the Communications Act of 1934, as amended, and Section 613
of the Cable Communications Policy Act of 1984, 47 U.S.C. 151, 154,
201-205, 214, 220, 533, the Memorandum Opinion and Order on
Reconsideration, affirming in part, and modifying in part, the Second
Report and Order is adopted.
94. It is further ordered that, the Petition for Rulemaking filed
by CFA and NCTA is denied in part and granted in part to the extent
indicated in the Memorandum Opinion and Order on Reconsideration.
List of Subjects in 47 CFR Part 63
Cable television, Communications common carriers, Reporting and
recordkeeping requirements, Telephone, Video Dialtone.
Final Rule Changes
Part 63 of Title 47 of the Code of Federal Regulations is amended
as follows:
PART 63--[AMENDED]
1. The authority citation for Part 63 is revised to read as
follows:
Authority: Sections 1, 4(i), 4(j), 201-205, 218, and 403 of the
Communications Act of 1934, as amended, and Section 613 of the Cable
Communications Policy Act of 1984, 47 U.S.C. secs. 151, 154(i),
15(j), 201-205, 218, 403, and 533 unless otherwise noted.
2. Section 63.54 is amended by revising paragraph (d), and adding
paragraphs (e)(5), (e)(6), (f), and (g), to read as follows:
Sec. 63.54 Facilities for provision of video programming by a
telephone common carrier in its telephone service area.
* * * * *
(d)(1) Except as provided in paragraph (d)(5) of this section,
nothing in this section shall be construed to prohibit the provision of
video dialtone services.
(2) Nothing in this section prohibits a telephone company from
exceeding the carrier-user relationship with a video programmer or
video programmers by providing services, and engaging in activities,
not related to the provision of video programming directly to
subscribers in its local exchange area.
(3) A telephone company may exceed the carrier-user relationship in
its local exchange area with a video programmer by providing enhanced
or other nonregulated services related to the provision of video
programming to such video programmer, provided that a basic video
platform is available to 70% of the households for which the video
programmer seeks such enhanced or nonregulated services and provided
that the telephone company does not:
(i) Determine how video programming is presented for sale to
subscribers in its local exchange service area, including making
decisions concerning the bundling or ``tiering,'' or the price, terms,
or conditions on which video programming is offered to subscribers in
that area; or
(ii) Have a cognizable financial interest in, or exercise direct or
indirect control over, any entity that performs any of the activities
listed in paragraph (d)(3)(i) of this section within the telephone
company's local exchange service area.
(4) A telephone company may exceed the carrier-user relationship
with a video programmer or video programmers by providing services, and
engaging in activities, related to the provision of video programming
(other than enhanced or other nonregulated services), provided that the
telephone company does not:
(i) Determine how video programming is presented for sale to
subscribers in its local exchange service area, including making
decisions concerning the bundling or ``tiering,'' or the price, terms,
or conditions on which video programming is offered to subscribers in
that area;
(ii) Have a cognizable financial interest in, or exercise direct or
indirect control over, any entity that performs any of the activities
listed in paragraph (d)(4)(i) of this section within the telephone
company's local exchange service area;
(iii) Permit any video programmer to participate in the operation
or management of basic video dialtone service, except as may be
authorized by the Commission; or
(iv) Exceed the carrier-user relationship with any franchised cable
operator in the telephone company's local exchange service area, or
affiliate of such cable operator, except to: lease cable drop wires, in
accordance with paragraph (d)(5) of this section, or to provide
enhanced or other nonregulated services, in accordance with paragraph
(d)(3) of this section.
(5) A telephone company may not acquire cable facilities in its
local exchange service area for use in providing video dialtone
service, or services related to the provision of video programming
directly to subscribers. Notwithstanding the above, a telephone company
may acquire cable facilities in its local exchange service area for use
in providing common carrier channel service, subject to Section 214
certification and compliance with the Commission's rules. A telephone
company may also lease drop wires from a franchised cable operator in
its local exchange service area, provided that:
(i) Such lease is for a nonrenewable term of three years or less;
and
(ii) The telephone company does not obtain exclusive rights to use
such drop wires, or otherwise unreasonably restrict the access of any
video programmer to any of the cable operator's drop wires.
(e) * * *
(5) Interests with rights of conversion to equity, including debt
instruments, warrants, convertible debentures, and options, shall not
be included in the determination of cognizable ownership interests
unless and until conversion is affected.
(6) Attribution of ownership interests in a video programmer that
are held indirectly by any party, other than an investment company,
through one or more intervening entities, will be determined by
successive multiplication of the ownership percentages for each link in
the vertical ownership chain, and application of the relevant benchmark
to the resulting product, except that wherever the ownership percentage
for any link in the chain exceeds 50%, it shall not be included for
purposes of this multiplication. (For example, if A owns 10% of company
X, which owns 60% of company Y, which owns 25% of a video programmer,
then X's interest in the video programmer would be 25% (the same as Y's
interest since X's interest in Y exceeds 50%), and A's interest in the
video programmer would be 2.5% (0.1 x 0.25)). Under the 5%
attribution benchmark, X's interest in video programmer would be
cognizable, while A's interest would not be cognizable. Paragraph
(e)(2) of this section governs stock ownership interests held by an
investment company in a corporation.
(f) Nothing in this section prohibits a telephone company from
providing video programming directly to subscribers outside its
telephone service area or from owning video programming that an
unaffiliated video programmer directly provides to subscribers in the
telephone company's service area.
(g) As used in this section, the term ``video programmer'' shall
mean any entity that provides video programming either directly or
indirectly through an affiliate, directly to subscribers. Any entity
shall be deemed to ``provide'' video programming if it determines how
video programming is presented for sale to subscribers, including
making decisions concerning the bundling or ``tiering,'' or the price,
terms, or conditions on which video programming is offered to
subscribers.
Federal Communications Commission.
William F. Caton,
Acting Secretary.
[FR Doc. 94-30241 Filed 12-9-94; 8:45 am]
BILLING CODE 6712-01-M