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File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ************************************************************************* 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 ) THIRD REPORT AND ORDER AND SECOND ORDER ON RECONSIDERATION Adopted: August 7, 1996 Released: August 8, 1996 By the Commission: Commissioner Quello issuing a separate statement. Table of Contents Paragraph I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 II. Third Report and Order -- Definition of "Affiliate". . . . . . . . .4 III. Second Order on Reconsideration. . . . . . . . . . . . . . . . . . 17 A. Qualifications to be an Open Video System Operator . . . . . 17 B. Certification Process. . . . . . . . . . . . . . . . . . . . 29 C. Carriage of Video Programming Providers. . . . . . . . . . . 36 D Rates, Terms, and Conditions of Carriage . . . . . . . . . . 75 E. Gross Revenues Fee . . . . . . . . . . . . . . . . . . . . .115 F. Applicability of Title VI Provisions . . . . . . . . . . . .123 1. Public, Educational and Governmental Access Channels . . . .123 2. Must-Carry and Retransmission Consent. . . . . . . . . . . .148 3. Program Access . . . . . . . . . . . . . . . . . . . . . . .160 4. Sports Exclusivity, Network Non-Duplication and Syndicated Exclusivity. . . . . . . . . . . . . . . . . . . . . . . . . . . .175 5. Local Franchising Requirements . . . . . . . . . . . . . . .185 G. Information Provided to Subscribers. . . . . . . . . . . . .198 H. Dispute Resolution . . . . . . . . . . . . . . . . . . . . .207 I. Joint Marketing, Bundling and Structural Separation. . . . .212 IV. Regulatory Flexibility Act Analysis. . . . . . . . . . . . . . . .223 V. Paperwork Reduction Act of 1995 Analysis . . . . . . . . . . . . .242 VI. Ordering Clauses . . . . . . . . . . . . . . . . . . . . . . . . .244 Appendix A: List of Parties Filing Petitions for Reconsideration and Oppositions to Petitions for Reconsideration Appendix B: Rule Changes Appendix C: FCC Form 1275 -- Open Video System Certification of Compliance I. INTRODUCTION 1. The Telecommunications Act of 1996 added Section 653 to the Communications Act, establishing open video systems as a new framework for entry into the video programming marketplace. Section 653 required that the Commission, within six months after the date of enactment of the 1996 Act, "complete all actions necessary (including any reconsideration) to prescribe regulations" to govern the operation of open video systems. Accordingly, on March 11, 1996, the Commission issued a Notice of Proposed Rulemaking regarding open video systems. Based on the extensive record submitted in response to the Notice, on May 31, 1996, the Commission adopted a Second Report and Order in which we prescribed rules and policies for governing the establishment and operation of open video systems. 2. As designed by Congress and implemented by the Commission, open video systems provide an option, particularly to local exchange carriers ("LECs"), for the distribution of video programming to consumers other than as a traditional cable television system regulated under Title VI. In the Second Report and Order, the Commission sought to fulfill Congress' intent by establishing streamlined regulations that provide telephone companies with the flexibility to establish and operate open video systems. We determined that such flexibility would encourage these and other entities to enter the video programming distribution market by deploying open video systems, thereby fostering competition to incumbent cable operators. We further ensured that, as required under Section 653, open video system operators provide unaffiliated video programming providers with non-discriminatory access to their systems. 3. We received 19 petitions for reconsideration of the Second Report and Order. In this Second Order on Reconsideration, we address issues raised in these filings, and modify or clarify our regulations accordingly. In addition, in the Order and Notice of Proposed Rulemaking in CS Docket No. 96-85 ("Cable Reform Proceeding"), we sought comment on the definition of "affiliate" in the context of open video systems. In light of the six-month deadline set by Congress for the Commission to establish final open video system regulations, we address the affiliate issue in this Third Report and Order. II. THIRD REPORT AND ORDER -- DEFINITION OF "AFFILIATE" A. Background 4. In the Cable Reform Proceeding, we amended certain of our rules to conform with the clear, self-effectuating provisions of the 1996 Act and sought comment on proposed rules to the extent necessary to implement various provisions of the 1996 Act. We specifically sought comment regarding the definition of "affiliate" in the context of the new statutory provisions governing open video systems. We noted that Congress added a new definition of "affiliate" in Section 3 of Title I of the Communications Act. This new provision defined "affiliate" for purposes of the Act, unless the context otherwise requires, as: a person that (directly or indirectly) owns or controls, is owned or controlled by, or is under common ownership or control with, another person. For purposes of this paragraph, the term "own" means to "own an equity interest (or the equivalent thereof) of more than 10 percent. We noted also, however, that Congress did not alter the separate definition of "affiliate" set forth under Title VI. Under Title VI, the term "affiliate" is defined, when used in relation to any person, to mean "another person who owns or controls, is owned or controlled by, or is under common ownership or control with, such person." We sought comment regarding the definition of the term "affiliate" in the context of the new statutory provisions for open video systems. 5. BellSouth maintains that the existing affiliate definition under Title VI should continue to apply in open video systems. BellSouth contends that the Commission should assume that Congress was satisfied with the existing definition in Title VI since had it believed the existing definition inadequate, it could have amended the definition in Title VI as easily as it added the definition of affiliate in Title I. Further, BellSouth cites to 47 C.F.R.  76.5(z) (definition of "affiliate") as already containing a definition of affiliate that follows the Title VI definition exactly. RCN also concludes that Congress did not intend the Commission to apply a different definition of "affiliate" to LEC systems under Title VI than that applicable to Title VI generally and maintains that the existing Title VI definition of affiliate should be applicable to all provisions of the Title. 6. Some commenters contend that the definition of "affiliate" should focus on common ownership or control between the subject entities. These parties assert that the Title VI definition of affiliate based on control is consistent with Congressional intent because it will lessen the regulatory burden on open video system providers and not duplicate the overly intrusive and burdensome regulatory structure of video dialtone. USTA states that Congress provided for reduced regulatory burdens for an open video system operator and a definition of affiliation premised upon control will further this end. According to USTA, such limited regulation will permit the proper functioning of market forces and competition making an arbitrary percentage determination of ownership unnecessary. Bell Atlantic contends that finding common ownership or control at low levels of equity ownership or non-equity interests could impede the ability of telephone companies and cable operators to construct pro-competitive business arrangements. For example, Bell Atlantic suggests that where a single person owns a majority interest in a particular entity, the other owner(s) should not be deemed to have "control" over the entity, even if their interests exceed a specific threshold. 7. In its comments, Time Warner acknowledges that the 1996 Act's addition of a general definition of "affiliate" under Title I, while retaining the preexisting affiliate definition contained in Title VI, provides the Commission discretion to fashion different affiliation tests to effectuate the varying policy goals in each specific context. Time Warner urges the Commission to apply the Title VI definition in the context of the statutory provisions for open video systems, as embodied in the notes accompanying Section 76.501 (cross-ownership) of the Commission's rules. Section 76.501 reflects the broadcast attribution rules contained in the notes to Section 73.3555 of our rules. Time Warner contends that two provisions of the statute -- the statutory prohibition on open video system operators not to discriminate against video programming providers with respect to carriage and the channel occupancy restrictions in the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") -- are based on the same policy of ensuring that facilities operators affiliated with video programmers do not favor such programmers in determining carriage on their facilities. Because the Commission adopted an attribution standard for the 1992 Cable Act's channel occupancy restrictions based on the notes to Section 73.3555, Time Warner argues that the same definition should be used to accomplish the non-discriminatory requirements that are at the heart of open video systems. 8. City and County of Denver, Colorado states in its comments that the Title VI definition of "affiliate" should be used to determine interest because Congress did not intend for more than one definition of "affiliate" to be used as it regards the provision of cable services and the new Title I definition of "affiliate" would not recognize Congressional intent. In applying Title VI, however, the City and County of Denver asserts that the Commission does not have the discretion to add a percentage of ownership interest to the federally-developed Title VI affiliation standard, and submits that in this regard, any ownership interest constitutes an affiliation between the cable service provider and another entity. 9. According to some commenters, the Commission must define any relationship exceeding the carrier-user relationship as "affiliation" for open video system purposes. The National League of Cities, et al. propose that the Commission define "affiliate" broadly in a way that encompasses the variety of equity and non-equity relationships through which an open video system operator might seek effectively to control program selection. The National League of Cities, et al. argue that any relationship between an open video system operator and an ostensibly non-equity related programmer other than that of carrier and user inherently poses a substantial risk that the open video system operator will exercise control over programming, or will have an incentive for discrimination in rates, terms, or conditions. The National League of Cities, et al. contend that all relationships between the open video system operator and a video programmer that exceed a carrier-user relationship must be considered to involve "control" and be counted as "affiliation" for purposes of the open video system capacity limitations. To truly limit "unaffiliated" programmers to a carrier-user relationship, the National League of Cities, et al. propose that the ownership criterion be limited to 1%. 10. Alliance for Community Media, et al. state that the definition of "affiliate" should be broad enough to prevent an open video system operator from exercising editorial and financial control over entities that are formally "unaffiliated" for purposes of this provision. Alliance for Community Media, et al. urge the Commission to adopt regulations which recognize that contractual arrangements through unaffiliated companies may hide affiliations which are not revealed by an "equity" ownership test. Alliance for Community Media, et al. do not believe the "affiliate" definition found in Section 3 of the 1996 Act, which defines ownership as an equity interest of 10%, sufficiently protects would be unaffiliated programmers from manipulation of the system by open video system providers, claiming that there is a significant danger of abuse because the open video system operator may still be able to favor some "unaffiliated" programmers over others for editorial and/or marketing purposes. In order to prevent such potential abuse, Alliance for Community Media, et al. recommend that in every circumstance where an open video system operator has contracted with an entity it certifies as unaffiliated, the Commission should examine that contract and any additional contracts between the operator and the provider. 11. Similarly, TCI and Rainbow have urged the Commission to define the term "affiliate" to include all entities who have any financial or business relationship with the open video system operator, whether by contract or otherwise, directly or indirectly other than the carrier-user relationship. In comments to the Notice, these parties submit that this definition would capture all relevant relationships between the LEC and users of its open video system facilities and would encompass the existence of any ownership or financial interest, affiliation, contingent interest, or other agreement. These parties claim that such a definition is necessary because otherwise a LEC would be able to favor video programming providers with whom it has a close relationship without violating the statutory proscription on discrimination. TCI notes that the 1996 Act did not change the special definition of affiliate applicable to Title VI, which does not reference any particular ownership interest but speaks in terms of "ownership or control." TCI contends that the Commission remains free to fashion various applications of this term appropriate to the particular policy goals at issue in a particular context. In response, U S West argues that the Commission should reject TCI and Rainbow's expanded definition of the term "affiliate" because it would make practically every video programming provider over an open video system an affiliate of the open video system operator. B. Discussion 12. As an initial matter, we agree with those commenters that argue that the new definition of "affiliate" in Title I does not apply to matters under Title VI since Title VI contains a separate definition of that term that does not set a percentage threshold as to what constitutes ownership. For our purposes, therefore, we must determine the point at which an open video system operator's ownership or control of another entity, or another entity's ownership or control of the open video system operator, makes that entity an affiliate for purposes of Section 653. This determination is an important element of Congress' open video system framework. For instance, where demand for carriage exceeds system capacity, Section 653(b)(1)(B) prohibits an open video system operator "and its affiliates" from selecting the video programming services for carriage on more than one-third of the activated channel capacity. Thus, if we set the threshold too high, and fail to designate as "affiliates" those entities that are in fact controlled by the open video system operator, it could conflict with Congress' intent that open video system operators be permitted to control the programming selection on no more than one-third of the activated channel capacity. On the other hand, if we set the threshold too low, we run the risk of unduly restricting the flow of capital and other beneficial arrangements at levels that pose no threat of actual or effective control by the open video system operator. 13. In defining "affiliate" for purposes of Section 653, we will adopt the attribution standard that we use in the program access context. Thus, as we do in the program access context, we will apply the definitions contained in the notes to 47 C.F.R.  76.501 (which reflect the broadcast attribution rules contained in the notes to 47 C.F.R.  73.3555), with certain modifications. For instance, in contrast to the broadcast attribution rules: (a) we will consider an entity to be an open video system operator's "affiliate" if the open video system operator holds 5% or more of the entity's stock, whether voting or non-voting; (b) we will not adopt a single majority shareholder exception; and (c) all limited partnership interests of 5% or greater will qualify, regardless of insulation. In addition, as with both the program access standard and the broadcast attribution rules, actual working control, in whatever manner exercised, will also be deemed a cognizable interest. 14. We decline Time Warner's suggestion that we adopt an affiliation standard identical to the attribution standard applied to the mass media multiple ownership rules, as set forth in the notes to 47 C.F.R.  76.501. The mass media multiple ownership rules are intended primarily to ensure diversity of information sources to the American public. Section 653, in addition to promoting diversity of video programming sources, also is designed to reduce the likelihood that open video system operators will discriminate against or otherwise disfavor unaffiliated programming providers. This anti-discrimination objective is analogous to the purpose of the program access rules. These dual objectives warrant adoption of a definition of "affiliate" that is similar to the program access attribution standard. Moreover, by adopting our program access attribution standard, we avoid the possibility that a video programming provider will be considered an affiliate of the open video system operator for one purpose but not for the other. 15. We believe that the certainty provided by the definition we adopt above is preferable to the ad hoc inquiries into ownership or control suggested by some of the commenters. In addition, to the extent these commenters are proposing a majority ownership standard, we believe, as noted above, that interests well below 50% ownership are sufficient to provide open video system operators with the incentive to favor an affiliated programming provider over a competing provider with which the operator has no affiliation. Similarly, we decline to adopt the Title I definition of "affiliate." As described above, we believe that our program access standard is the appropriate standard for identifying the interests at issue here. No commenter has proposed that we adopt the Title I standard, or provided any record evidence that would support such a standard. We have no basis to find that the Title I standard would identify the interests at issue as well as our program access standard. 16. We also decline to define "affiliate" as a 1% ownership interest or as any relationship exceeding a carrier-user relationship, as suggested by certain commenters. In essence, many of these commenters argue that a strict standard is necessary because of the inherent risk that an open video system operator would favor a programming provider with which it has any relationship beyond carrier-user. We decline to depart from the focus in Section 602(2) on ownership or control, and believe that the definition we adopt today will permit us to make such determinations. In addition to being inconsistent with Title VI, we believe that these restrictive definitions could unnecessarily restrict the flow of capital to unaffiliated programming providers, and could unduly hamper the effective functioning of the platform. For instance, a carrier-user relationship standard could prevent an open video system operator from providing billing and collection services to programming providers, or from entering into co-packaging arrangements. We decline to impose a standard that implicates such relationships. III. SECOND ORDER ON RECONSIDERATION A. Qualifications to be an Open Video System Operator 1. Background 17. New Section 653(a)(1) of the Communications Act 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 the Second Report and Order, we concluded that the second sentence of Section 653(a)(1) authorizes the Commission to allow non-LECs to operate open video systems and to allow LECs to operate open video systems outside of their telephone service areas when the public interest, convenience, and necessity are served. We found that it would serve the public interest, convenience and necessity to permit other entities, besides LECs, to become open video system operators. With respect to cable operators within their cable franchise areas, we concluded that it would serve the public interest, convenience, and necessity to allow a cable operator to operate an open video system in its cable franchise area if it is subject to "effective competition" under Section 623(l)(1) in the franchise area. This condition applies even if a cable operator also provides local exchange service within the franchise area. In addition, we provided an exception for cable operators that are not subject to effective competition within their cable franchise areas if they can demonstrate that the entry of a facilities-based competitor into the cable franchise area would likely be infeasible. We also stated that our decision to allow cable operators to become open video system operators under the above circumstances shall not be construed to affect the terms of any existing franchise agreements or other contractual agreements. 18. Several petitioners contend that a cable operator should not be allowed to convert its cable system into an open video system, regardless of the circumstances. Metropolitan Dade County asserts that effective competition is not an adequate precondition to ensure consumers are offered a real choice and that the open video system alternative was created to stimulate competition in the video marketplace, not to enable cable operators to escape the cable franchising process. Michigan Cities, et al. argue that permitting non-LEC entry into the open video system marketplace will discourage competition because LECs will have less incentive to enter the market if all competitors receive the same regulatory benefits. Michigan Cities, et al. also oppose the exception provided for certain cable systems not subject to effective competition, arguing that the exception is overly broad because there are a variety of reasons why facilities- based competition may be unlikely to develop in a particular cable franchise area. 19. Michigan Cities, et al. claim that various references to "common carriers," "local exchange carriers," and "telephone companies" in the statute and its legislative history demonstrate Congress' intent to limit the open video system option to LECs. According to Michigan Cities, et al., allowing non-LECs to become open video system operators is inconsistent with the plain language of the 1996 Act, and thus the Commission incorrectly concluded that it had the authority under Section 4(i) to permit such a result. The National League of Cities, et al. assert that Congress could not have intended cable operators to become open video system operators because it would defeat the purposes of certain provisions of the Communications Act. For example, they argue that conversion to an open video system would enable a cable operator: (a) to avoid a franchise renewal agreement with updated public, educational, and governmental ("PEG") requirements; (b) to evade the cable-telco buyout restrictions; and (c) to circumvent a local franchising authority's decision to deny the renewal of the cable operator's franchise. The National League of Cities, et al. also argues that the Commission's decision is inconsistent with the statute's use of cable operators' PEG and franchise fee obligations as a yardstick for open video system operators. 20. U S West urges the Commission to clarify that cable operators may become open video system operators upon the termination of their franchise agreements, even in the absence of effective competition. U S West argues that the Commission's contractual concerns would not apply once a franchise agreement has terminated. The National League of Cities, et al., on the other hand, is concerned that cable operators will simply declare themselves open video system operators upon the expiration of their franchise agreements, rather than seek renewal. 21. Other petitioners claim that all cable operators, without limitation, should be allowed to convert their cable systems to open video systems. NCTA and Cox petition the Commission to eliminate its general restriction that cable operators may not become open video system operators within their cable franchise areas until they are subject to effective competition. NCTA asserts that the inherent design of an open video system, allowing multiple programming providers to compete for subscribers, obviates the need for an effective competition requirement. NCTA argues that Congress would have limited the open video system option to areas already served by franchised cable operators if it had intended open video systems to exist only in areas served by more than one provider. Cox argues that it is inconsistent to preclude cable operators that may eventually become subject to effective competition from converting to an open video system, while allowing an exception for cable operators that can demonstrate that facilities-based competition is infeasible in their franchise areas. Cox reasons that, by allowing this exception, the Commission implicitly recognizes that the primary reason for reduced regulatory burdens for open video systems is not to foster facilities-based competition, but to foster competition among competing programmers on an open platform. Cox further contends that there are no countervailing public policy reasons for imposing an artificial disadvantage upon incumbent cable operators in contradiction of the Commission's acknowledgement that the same options generally should be available to all entities. 22. Comcast argues that the Commission's decision to permit cable operators that are subject to effective competition to convert to open video systems is rendered meaningless by the qualification that the terms of an existing local franchise agreement remain enforceable until the termination of the agreement. Comcast claims that this restriction eliminates the primary incentive for operating an open video system, i.e., relief from many of the Title VI obligations and regulations. Comcast reasons that, when a cable operator converts its cable system to an open video system, local franchising authorities lose their authority under Section 624 to enforce certain franchise requirements, since that provision is inapplicable to open video systems. In response, Alliance for Community Media, et al. assert that there is "no legal principle which permits unilateral abrogation of existing contractual commitments to permit an entity to take advantage of an elective deregulatory option." Alliance for Community Media, et al. further argue that, because Title VI has not been rescinded, the enforcement powers of local franchising authorities under Section 624 remain intact. NATOA claims that exempting cable operators from their franchise obligations would constitute a taking of local government property. 23. Cox and NCTA assert that the Commission incorrectly concluded that Section 653(a)(1) authorizes it to restrict the ability of cable operators that also provide local exchange service within their cable franchise areas to convert to open video. Cox asserts that this conclusion contradicts the Commission's determination that the first sentence of Section 653(a)(1) permits LECs to operate open video systems in their telephone service areas "without qualification." Cox argues that the Commission's interpretation of the second sentence of Section 653(a)(1) would lead to the false conclusion that the Commission could also determine when "any other person" that is providing local exchange service could become an open video system operator. Cox claims that the Commission wrongly views the second sentence as providing an exception limiting which LECs can operate open video systems without qualification, while the more reasonable construction is that the second sentence permits other entities, in addition to LECs, to operate open video systems when deemed by the Commission to serve the public interest, convenience, and necessity. In response, Sprint asserts that Cox and NCTA's argument is based on the incorrect premise that a cable operator that becomes a LEC somehow loses its identity as a cable operator, even though it continues to provide cable services. 2. Discussion 24. We decline to modify our decision in the Second Report and Order to allow non- LECs to operate open video systems, and to allow cable operators that are subject to effective competition in their cable franchise areas to convert their cable systems to open video systems. As discussed at length in the Second Report and Order, we disagree with Michigan Cities, et al. that our decision allowing non-LECs to operate open video systems is inconsistent with the plain language of the 1996 Act or the Act's legislative history. As we explained in the Second Report and Order, permitting non-LECs to become open video system operators is not only a permissible reading of the statute, but is most consistent with Congress' goal of opening all telecommunications markets to competition. Because our decision is consistent with the statute, we also disagree that the Commission does not have the authority under Section 4(i) to permit non-LECs to become open video system operators. In addition, we disagree with the argument of the National League of Cities, et al. that our decision to permit cable operators to convert to open video may defeat the purposes of other Title VI requirements that apply to cable operators. Congress established cable and open video systems as two distinct video delivery models, each offering a particular combination of regulatory benefits and burdens. That an entity, by assuming the regulatory responsibilities of an open video system, may be relieved of regulatory responsibilities relating to cable is neither novel nor improper. 25. While we believe that cable operators should be allowed to operate open video systems, we also decline to alter our decision that cable operators may do so in their existing cable franchise areas only if they are subject to "effective competition." As we stated in the Second Report and Order, the underlying premise of Section 653 is that open video system operators would be new entrants in established markets, competing directly with an incumbent cable operator. We believe that Congress exempted open video system operators from much of Title VI regulation because, in the vast majority of cases, they will be competing with incumbent cable operators for subscribers. Our effective competition restriction implements Congress' intent by ensuring that, where it is the incumbent cable operator itself that seeks to enter the marketplace as an open video system operator, there is at least one other multichannel video programming provider competing in the market (or, if the cable operator enters under the "low penetration" test for effective competition, that it does not possess a level of market power that Congress believed requires regulation). 26. We are not convinced, as NCTA argues, that the potential presence of multiple video programming providers on open video systems obviates the need for an effective competition requirement. There is no assurance that any particular system will generate sufficient competition between providers of "comparable" video programming services to qualify as a meaningful stand-in for effective facilities-based competition. Nor do we find significant the fact that Congress did not specify that open video systems may operate only in areas currently served by cable. Given that cable passes approximately 96% of all television households nationwide, we do not believe that any purposeful intent can be inferred from the fact that Congress did not limit open video systems to only those areas already served by franchised cable operators. 27. Moreover, the underlying competitive premise of Section 653 is not dependent on the contractual nature of the cable operator's franchise agreement. While we agree with U S West that the expiration of a franchise agreement may remove a contractual impediment to a cable operator's conversion to an open video system, the public interest rationale that gave rise to the effective competition restriction remains. So long as a cable operator has the ability to exercise market power -- i.e., is not subject to effective competition -- it has not met the necessary pre-condition for operating an open video system. Thus, in response to U S West, we find that it would not serve the public interest to allow incumbent cable operators, in the absence of effective competition, to become open video system operators upon the termination of their franchise agreements. 28. We also continue to disagree with Cox's argument that the Commission has no authority to determine whether cable operators that are also LECs may operate open video systems. As explained in the Second Report and Order, the second sentence of Section 653(a)(1) authorizes the Commission to determine whether any cable operator may convert to open video, regardless of other services it may also provide, including local exchange service. The Commission retains its authority over cable operators that also become LECs because, as Sprint notes, a cable operator does not lose its identity as a cable operator simply by offering additional types of services. Finally, we disagree with Comcast that, since Title VI franchise agreements are unenforceable against open video system operators, conversion to open video should preempt the terms of a valid franchise agreement. Comcast cites no basis for its belief that Congress intended to give cable operators the discretion to revoke their franchise agreements at will, or that requiring cable operators to abide by their valid agreements would be contrary to Congress' open video system framework. To the contrary, cable operators may operate open video systems only to the extent the Commission finds it serves the public interest, convenience and necessity. We do not believe that it would be in the public interest to permit cable operators to abrogate their otherwise valid and enforceable franchise agreements in order to become open video system operators. B. Certification Process 1. Background 29. Section 653(a)(1) requires open video system operators to certify compliance with the Commission's regulations under Section 653(b). The Commission must publish notice of receipt of a certification filing and must approve or disapprove the certification within ten days of receipt. In the Second Report and Order, the Commission found that Congress intended the certification process to be streamlined and declined to impose extensive pre-certification requirements. For example, open video system operators are not required to revise their cost allocation manuals prior to certification, but must certify that they will file changes to their manuals at least 60 days before the commencement of service. Comments or oppositions to a certification filing must be filed within five days of the Commission's receipt of the certification. Any certification filings that the Commission does not disapprove within ten days of receipt will be deemed approved. 30. Several petitioners reiterate previous arguments that the Commission should require an open video system operator, as a precondition to certification: (a) to obtain the consent of local governments for use of public rights-of-way; (b) to obtain approval from local franchising authorities regarding the manner in which PEG obligations will be fulfilled; (c) to file a revised cost allocation manual; and (d) to create a separate subsidiary to operate its open video systems. Alliance for Community Media, et al. are concerned that using the dispute resolution process to resolve conflicts involving these issues will be unnecessarily cumbersome and difficult. NCTA asserts that open video system operators must demonstrate compliance with specific rules governing channel allocation and carriage rates, and the Commission must make "affirmative findings compliance" within the ten-day review period. In response to these petitions, several parties expressed their opposition to pre-certification requirements. 31. The Telephone Joint Petitioners ask the Commission to reconsider its decision to require open video system operators to obtain Commission approval of their certifications prior to the commencement of construction, when new physical plant is required. These petitioners argue that it is not the Commission's responsibility to "ensure that the public rights-of-way are disrupted only by those who are authorized to operate open video systems." They contend that permission to use rights-of-way is a matter for local governments and the owners of any private property that may be involved, and that cable operators are not required to obtain federal certification before constructing in public rights-of-way. 32. Several petitioners claim that the Commission did not establish adequate procedures for providing notice of certification filings. The National League of Cities, et al. seek a requirement that certifications specify which local governments are affected and are served on those local governments. Failure to require adequate notice, they allege, violates due process and hinders the ability of local authorities to apply the necessary management conditions over public rights-of-way. Municipal Services, et al. argue that, in order to provide municipalities a meaningful opportunity to respond within the five-day period for comments and oppositions, an open video system operator must simultaneously notify a municipality that it is requesting a certification within the municipality's jurisdiction. In response, MFS Communications claims that these notice proposals are unnecessary because local governments will learn of any proposed open video system well in advance of its operation when the operator negotiates its PEG obligations and obtains any necessary rights-of-way permits. 2. Discussion 33. The Second Report and Order fully explains our reasons for not imposing pre- certification requirements regarding public rights-of-way, PEG obligations, revisions to cost allocation manuals, or separate subsidiaries. Petitioners have presented no new evidence or arguments that would cause us to change our earlier conclusion. 34. In addition, we will maintain our rule that certification filings will be deemed approved unless disapproved by the Commission within ten days. Petitioners have not demonstrated that affirmative approval is necessary to provide notice to outside parties or to assure adequate Commission review. Also, because certification precedes the operator's actual implementation of the Commission's rules, we disagree with NCTA that the Commission is required, at this stage of the process, to do more than obtain adequate representations that the applicant will comply with the Commission's requirements. Further, we believe that any conflicts that arise regarding the operator's conduct can be addressed more fully in the 180-day dispute resolution process than in the ten-day certification process. Finally, we will not modify our rule that, if new physical plant is required, open video system operators must obtain Commission approval of their certification prior to the commencement of construction. This requirement poses no significant additional burden on operators and will inform local authorities which entities have been granted enforceable rights to use the public rights-of-way. 35. We do believe, however, that it is appropriate for a local government to have a reasonable opportunity to respond to a certification filing that implicates its community. We therefore will revise FCC Form 1275, our proposed certification form, to require applicants to list the names of the local communities in which they intend to operate, rather than describe them generally. This modification will reduce the potential for confusion or ambiguity by providing more useful and precise information to local communities. Because some local communities may not have ready access to the Internet or to the Commission's public notices, we will also require applicants for certification to serve a copy of their FCC Form 1275 filing on the clerk or other designated official of all affected local communities on or before the date on which it is filed with the Commission. Service by mail is complete upon mailing, but if mailed, the served documents must be postmarked at least three days prior to the filing of the FCC Form 1275 with the Commission. Applicants also must inform the local communities that any oppositions and comments must be filed with the Commission within five days of an applicant's filing and must be served on the applicant. C. Carriage of Video Programming Providers 1. Notification and Enrollment of Video Programming Providers a. Background 36. In the Second Report and Order, we stated that the Commission will: (a) issue a Public Notice to announce receipt of an open video system operator's "Notice of Intent" to establish an open video system; (b) list the Public Notice in the Commission's Daily Digest; (c) place the Notice of Intent on the Commission's Internet site; (d) make the Notice of Intent available for inspection in the Cable Services Bureau's Reference Room; and (e) require that the Notice of Intent be served on all local cable television franchising authorities located in the anticipated service area of the open video system. In so doing, we specifically rejected suggestions that an open video system operator's notice be disseminated directly to community information providers, local newspapers, trade publications and the local media, among others. We found that any benefits of additional distribution would be outweighed by the costs and that the Commission's Public Notice process will disseminate the information. 37. On reconsideration, the Alliance for Community Media, et al. urge the Commission to require an open video system operator to provide local notice of its intent to establish an open video system by placing the Notice of Intent in local newspapers and in telephone bill inserts, if the system operator is also a telephone company. They argue that the current requirements are insufficient for local and non-profit program services because many people still do not have access to the Internet and those with access may not check the Commission's Internet site on a regular basis. Contrary to the Commission's finding, these parties assert that the additional cost imposed on an open video system operator of disseminating notice as they urge will not outweigh the public interest benefits resulting from the increased diversity of programming provided by these services. b. Discussion 38. In the Second Report and Order we fully considered the costs and benefits of requiring an open video system operator to provide local notice of its intent to establish an open video system. The Alliance for Community Media, et al. do not provide additional evidence concerning these costs or benefits. We reiterate our finding that dissemination of the Notice of Intent as required under the Second Report and Order will be a sufficient means for an entity to notify the public of its intention to establish an open video system. 2. Open Video System Operator Discretion Regarding Video Programming Providers a. Background 39. In the Second Report and Order, we found that it would serve the public interest, convenience and necessity to permit an open video system operator to limit the ability of a competing, in-region cable operator, or a video programming provider affiliated with such a cable operator, to obtain capacity on the open video system. We stated, however, that we will consider petitions from competing, in-region cable operators showing that facilities-based competition will not be significantly impeded in their particular circumstances, such that the cable operator should be granted access to the open video system. In this regard, we provided a specific exception for the situation where: (a) the competing, in-region cable operator and affiliated systems offer service to less than 20% of the households passed by the open video system; and (b) the competing, in-region cable operator and affiliated systems provide cable service to a total of less than 17,000 subscribers within the open video system's service area. 40. On reconsideration, NCTA states that Section 653(b)(1)(a) directs the Commission to promulgate rules that "prohibit an operator of an open video system from discriminating among video programming providers with regard to carriage on its open video system." NCTA argues that this provision requires the unqualified non-discriminatory treatment of video programming providers by open video system operators, and that the Commission therefore erred in allowing an open video system operator to discriminate against one particular class of entities seeking access, namely, cable operators. 41. In addition, NCTA and Cox dispute the Commission's reliance on Section 653(a)(1) in distinguishing between cable operators and other potential video programming providers. Cox asserts that Section 653 only addresses who may operate an open video system and, that contrary to the Commission's findings, "has nothing to do with who may obtain capacity on an [open video] system." Cox argues that, if Congress had intended the provision to address the access rights of video programming providers, it would have placed it with the other exceptions to the general prohibition against discrimination among video programming providers (e.g., PEG and must-carry obligations), rather than in the section regarding the certification process. 42. Third, NCTA and Cox dispute the Commission's finding that an open video system operator may limit the access of a cable operator but not other potential video programming providers. Cox states that the Commission's finding in the Second Report and Order that, given Section 653(a)(1)'s reference to "any other person," the Commission erred in not permitting an open video system operator to also deny access to other multichannel video programming distributors, such as direct broadcast satellite ("DBS") services and wireless cable service providers. NCTA states that the Commission's reasoning that allowing an open video system operator to limit access by cable operators would foster facilities-based competition compels the Commission to allow system operators to also limit access by DBS and wireless providers. 43. Finally, NCTA argues that, having found in Section 653(a)(1) the discretion to decide when cable operators may obtain open video system capacity, the Commission erred in delegating this decision to the open video system operator. NCTA contends that it violates basic administrative law for a government agency to delegate its statutory authority to private parties absent express authority to do so. 44. In its opposition to these cable operators' petitions, MFS argues that Congress, in enacting Section 653(a)(1), specifically authorized the Commission to limit cable operators' use of open video systems to instances that are "consistent with the public interest, convenience and necessity." MFS states that, until open video system operators can establish meaningful competition for cable operators, it would not be in the public interest to force these start-up entities to provide access to their competitors because: (a) it would allow cable operators to tie up capacity on an open video system without any reciprocal ability of the open video system operator to use the cable operator's facilities; (b) it would allow the cable operator to avoid its own construction costs; and (c) it would give cable operators access to confidential business plans or information. 45. Tele-TV disputes the cable operators' arguments that the 1996 Act gives incumbent cable operators an "unqualified" right to use open video systems. Tele-TV argues that Section 653(b)(1)(A) must be read in conjunction with Section 653(a)(1), such that the discrimination "among video programming providers" forbidden under Section 653(b)(1)(A) must be discrimination among only those entities eligible to "provide video programming" under Section 653(a)(1). Second, Tele-TV rejects NCTA's assertion that the Commission erred in "delegating" its authority under Section 653(a)(1) to open video system operators. Tele-TV states that the Commission has not delegated any statutory authority; rather, it has merely established a specific exception to the general rule concerning cable operators' access to open video systems, which Tele-TV contends is within the Commission's rulemaking authority. 46. The Staff of the FTC and DOJ Antitrust Division also dispute cable operators' assertions, stating that the Commission's approach is consistent with well established legal and economic principles. For example, the FTC and DOJ Antitrust Division state the Supreme Court has held that a restraint on competition, such as the Commission's rule permitting open video system operators to preclude access by cable operators, is reasonable if it enhances consumer welfare. They assert that the Commission's approach will enhance consumer welfare by fostering competition among cable and telephone companies, which likely will reduce prices and increase quality of service. The FTC and DOJ Antitrust Division also reject NCTA's argument that the Commission should have extended an open video system operator's ability to preclude access by cable operators to cover DBS and wireless service providers. The FTC and DOJ Antitrust Division explain that only cable operators possess market power in multichannel video programming distribution, and therefore may have different incentives than DBS and wireless providers, such as using open video mainly as a means to protect the market power of cable systems rather than as a means of expanding their penetration. The FTC and DOJ Antitrust Division emphasize that only an open video system, independent from competitors with market power, will provide consumers with the benefits of competition. 47. The petitions of the Telephone Joint Petitioners generally support our rules concerning cable operators' access to open video systems. They seek clarification of the second prong of the exception to this general rule, where a competing, in-region cable system and its affiliated systems provide cable service to a total of less than 17,000 subscribers within the open video system's service area. Specifically, the Telephone Joint Petitioners urge the Commission to clarify that this exception coincides with an exception to the cable-telephone buy-out restriction in the 1996 Act, which applies only to small, rural cable systems that have no more than 17,000 subscribers in total and that are not owned by one of the 50 largest multiple cable system operators ("MSOs"). These parties assert that our present rules may require an open video system operator whose system overlaps with a small portion of a cable system to allow a cable operator to gain access to the open video system even though the cable operator is owned by large MSO, and even though the large MSO in question also owns the incumbent cable system that might overlap a majority of the open video system's service area. The Joint Telephone Petitioners believe that this approach will ensure that an open video system operator must lease capacity only to truly small, rural cable systems. b. Discussion 48. We find that the Second Report and Order fully considered most of the arguments and evidence raised on reconsideration by NCTA and Cox, as described above. We explained in the Second Report and Order that Section 653(a)(1) specifically permits the Commission, "consistent with the public interest, convenience and necessity" to determine when a cable operator may provide programming through an open video system. We also fully explained our construction of Section 653(b)(1)(A), which gives the Commission the discretion to determine when it is in the public interest, convenience and necessity for a cable operator either to become an open video system operator or to provide video programming over another entity's open video system. In the latter context, we determined that, because Section 653(a)(1) specifically addresses a cable operator's provision of video programming, the provision allows the Commission to determine when to permit a cable operator to provide such programming, notwithstanding the 1996 Act's general non-discrimination requirements contained in Section 653(b)(1)(A). We therefore deny the petitions of NCTA and Cox to the extent they raise these particular contentions. 49. We also reject the cable operators' argument concerning access to open video systems by DBS and wireless service providers. As explained in the Second Report and Order, and expanded upon by the Staff of the FTC and DOJ Antitrust Division, the 1996 Act expressed a clear preference for facilities-based competition between cable operators and telephone companies, and allowing an open video system operator generally to limit the ability of a competing, in-region cable operator to obtain capacity on its system would encourage cable operators to develop and upgrade their own wireline systems. In addition, as the Staff of the FTC and DOJ Antitrust Division argue, cable operators possess substantial market power, and because these markets have been protected by high entry barriers, cable operators have been able to maintain prices above the level that would prevail if the market were competitive. Because of this market power, cable operators may have different incentives for seeking open video system capacity than would MVPDs that do not have such market power, such as DBS and wireless cable providers. For instance, a cable operator may have an incentive to see that the open video system is not successful, and thus may seek to obtain capacity merely to protect and continue to exploit its market power. 50. As the Staff of the FTC and DOJ Antitrust Division also point out, enabling a cable operator to obtain open video system capacity means that less capacity will be available for use by the system operator and for other entities. The open video system therefore could become a less attractive alternative for consumers, which would help preserve the cable operator's market power. We believe that these rationales currently do not apply to DBS or wireless cable providers because these MVPDs do not enjoy substantial market power. We therefore reaffirm our conclusion in the Second Report and Order. However, at such time that DBS or wireless cable providers possess sufficient market power to raise concerns similar to those associated with existing in-region, competing cable operators, we will reexamine this conclusion. 51. We also disagree with NCTA's argument that the Commission impermissibly delegated to open video system operators the discretion to preclude cable operators from obtaining capacity on the system. In determining that Section 653(a)(1) allows the Commission to determine when a cable operator may access an open video system, we merely interpreted the statute to allow the Commission to prescribe regulations to govern this situation. As aptly characterized by Tele-TV, we adopted regulations that set forth the parameters for where a competing, in-region cable operator's access to an open video system may be limited, and for where access may not be limited. In any case, we will modify our regulations to emphasize our decision that, pursuant to the second sentence of Section 653(a)(1), the public interest, convenience and necessity is served by generally prohibiting a competing, in-region cable operator from obtaining capacity on an open video system. As described in the Second Report and Order, we believe that this approach will foster facilities-based competition and encourage competing, in-region cable operators to develop its own system rather than occupy open video system capacity that could be used by another entity. 52. We clarify that there are two exceptions to this general rule. First, a competing, in-region cable operator may access an open video system when the open video system operator determines that it is in its interests to grant access. For example, as the Staff of the FTC and Antitrust Division state, an open video system operator may have less incentive to exclude a cable operator that is the most efficient provider of programming in part of the open video system's service area. Moreover, an 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. Second, a competing, in-region cable operator will be granted access to an open video system when such access will not significantly impede facilities-based competition. As previously determined, one situation in which facilities-based competition will be deemed not to be significantly impeded is where: (a) the competing, in-region cable operator and affiliated systems offer service to less than 20% of the households passed by the open video system; and (b) the competing, in-region cable operator and affiliated systems provide cable service to a total of less than 17,000 subscribers within the open video system's service area. We believe that this slightly modified approach continues to provide broad flexibility to administer the open video system and to allow market forces to emerge as determinatives, thereby encouraging entities to deploy open video systems. 53. Finally, in response to the Telephone Joint Petitioners' petition, we clarify the specific exception under which a competing, in-region cable operator may access an open video system. These parties argue that the exception may require an open video system operator whose system overlaps with a small portion of a cable system to allow that cable system to obtain capacity on the open video system even though the cable system might be owned by a large MSO that also operates the cable system covering a majority of the open video system's service area. We believe that the Telephone Joint Petitioners misunderstand when the exception will apply. We reiterate that, in order for a competing, in-region cable operator to fit within the exception, such a cable operator and its affiliated systems must serve a total of less than 17,000 subscribers within the open video system's service area, regardless of whether the systems are owned by or affiliated with one of the 50 largest MSOs. Under the scenario posited by the Telephone Joint Petitioners, the cable system that overlaps the open video system service area only to a small degree would not have to be granted carriage on the open video system because that cable operator's subscribership, when combined with the subscribership of the affiliated cable system serving a majority of the open video system's service area, presumably would exceed 17,000. 3. Allocation of Open Video System Channel Capacity to Unaffiliated Video Programming Providers a. General Approach (1) Background 54. In the Second Report and Order, we permitted an open video system operator to implement its own method for allocating channel capacity to unaffiliated video programming providers, so long as capacity is allocated in an open, fair, non-discriminatory manner. We stated that the process must be verifiable and insulated from any bias by the system operator. 55. On reconsideration, NCTA reiterates arguments contained in its earlier comments that the Commission should adopt uniform rules for the allocation of open video system capacity because this approach will allow video programming providers to avoid an increase in their costs of doing business by having to learn the allocation procedures in each jurisdiction where they seek access. NCTA adds that uniform rules also will relieve aggrieved programmers of the "dual burdens" of initiating the complaint process and suffering any competitive imbalance while such a complaint is pending. 56. NYNEX rejects NCTA's approach as unsupported by any evidence that it would benefit any party. NYNEX states that, even under NCTA's approach, parties still would have many issues to discuss, and that a "real and substantial loss" would result from the delay required for the Commission to determine national standards. NYNEX believes that NCTA would have the Commission stifle creativity among new entrants. 57. The Telephone Joint Petitioners also refute NCTA's argument that uniform allocation rules will decrease video programming providers' costs of doing business. They argue that the existing primary outlet for video programming are cable systems, all of which have varying practices for obtaining programming. The Telephone Joint Petitioners thus assert that programming vendors already incur the costs of accommodating multiplicity in pursuing access to multichannel video programming distribution systems, and that there is no reason to believe that dealing with open video system operators will be any more costly than dealing with cable operators. (2) Discussion 58. NCTA's arguments were fully considered and addressed in the Second Report and Order. NCTA offers no additional facts or arguments to support their position. Accordingly, we decline to reconsider our previous conclusion. b. Reallocation of Channel Capacity (1) Background 59. In the Second Report and Order, we required open video system operators to allocate open capacity, if any is available, at least once every three years. On reconsideration, the Joint Telephone Petitioners urge the Commission to increase this period to at least once every five years. They state that it typically takes at least five years for a new programming service to become viable, and that such new services thus have sought carriage arrangements on cable systems of between five and ten years in duration. The Joint Telephone Petitioners state that, if an open video system operator knows it may have to reduce the number of channels it controls on its system in three years in order to accommodate additional demand for carriage from other video programming providers, it will be unlikely to offer these new, independent channels a carriage agreement of longer than three years. (2) Discussion 60. Other parties urged the Commission to adopt a five-year period in the record for the Second Report and Order. In requiring that an open video system operator reallocate open capacity at least every three years, we stated that requiring reallocation every three years will permit an open video system operator to sufficiently accommodate subsequent requests for carriage by video programming providers, while not causing unreasonable disruption to the system. The Telephone Joint Petitioners do not provide evidence that would compel the Commission to reconsider that conclusion. We note in this regard that no new programming service, which the Telephone Joint Petitioners assert would favor a longer reallocation period, have filed for reconsideration in this proceeding. c. Channel Positioning (1) Background 61. In the Second Report and Order, we permitted an open video system operator to assign channel positions, subject to Section 653's non-discrimination requirements. On reconsideration, the Alliance for Community Media, et al. state that an open video system operator still may discriminate against an unaffiliated video programming provider by offering a provider an unattractive channel or block of channels. They urge the Commission to reconsider its decision to allow an open video system operator to assign channel positions and require the involvement of an independent office or board to impartially assign channel positions. (2) Discussion 62. In the Second Report and Order we determined that the statute and our implementing regulations will prevent discrimination against unaffiliated video programming providers, notwithstanding an open video system operator's participation in the channel allocation process. We specifically rejected the assertions of commenters that an open video system operator should be required to delegate responsibility for channel capacity allocation to an independent entity. The Alliance for Community Media, et al. do not present new facts or arguments to support the mandatory involvement of an independent entity. Accordingly, we decline the Alliance for Community Media's request for reconsideration. 4. Channel Sharing a. Background 63. In the Second Report and Order, we found that the statute permits an open video system operator to administer channel sharing on its system, and to determine whether to create shared channels for some or all of the duplicative programming on the system. We further clarified that each video programming provider offering a programming service that is placed on a shared channel must reach its own agreement with the programming service to offer that service to subscribers. We stated that, once the programming service has reached agreements with all of the relevant providers, additional consent of the programming service is not necessary for the open video system operator to place the programming service on a shared channel. 64. On reconsideration, Alliance for Community Media, et al. argue that our channel sharing rules, taken in combination with our regulations governing carriage rates charged by an open video system operator, will allow an open video system operator to exercise unreasonable control over the programming on the platform. They assert that our rules will permit a system operator to refuse to place a programming service carried by an unaffiliated video programming provider on a shared channel, thereby requiring that provider to lease a full channel instead of only a pro-rata share of a channel if the programming was placed on a shared channel. The Alliance for Community Media, et al. believe that this could make it impossible for unaffiliated video programming providers to compete, and urges the Commission to modify its rules to ensure that an unaffiliated provider can avail itself of the benefits of channel sharing at its own request. 65. ESPN argues on reconsideration that the Commission erred in not conditioning the placement of a programming service on a shared channel upon the consent of the programming service. ESPN believes that all video programming providers must have the explicit permission of a programming service in order to participate in a channel sharing arrangement with an open video system operator. If each provider has obtained such consent from the programming service, ESPN states that it would be unnecessary for the system operator to obtain additional consent from the programming service in order to place the service on a shared channel. 66. NCTA urges the Commission to state that any advertising availabilities ("ad avails") be shared on a proportional basis among all video programming providers carrying that programming service. NCTA states that the revenue from the sale of these time slots is an increasingly important source of income for cable operators, and that if an open video system operator or its affiliates are able to receive all such revenues they will have a significant financial advantage over other video programming providers offering that programming service. 67. Both USTA and the Telephone Joint Petitioners reject ESPN's argument that programming services should be allowed to approve channel sharing arrangements. While USTA believes that a video programming vendor should have the protections provided for in law, USTA believes that an open video system operator would not be the appropriate party "to become enmeshed in any potential dispute" between a programming vendor and a video programming provider. USTA states, that in practice, an open video system operator will need to be able to rely on the representations of a video programming provider that it may enter into channel sharing arrangements. The Telephone Joint Petitioners state that ESPN's approach would give programming services veto power over an open video system operator's decision to use shared channels, which would contravene the plain language of Section 653(b)(1)(C). b. Discussion 68. In response to the Alliance for Community Media, et al.'s petition, we first clarify that there is no requirement that a system operator charge a video programming provider a pro- rata fee because a programming service carried by that provider is placed on a shared channel. Thus, even if a video programming provider's programming service is placed on a shared channel, the video programming provider may be required to pay the same rate as if the programming service was placed on a non-shared channel. We think this clarification addresses the Alliance for Community Media, et al.'s concern that an open video system operator will engage in rate discrimination by placing favored video programming providers' programming services on shared channels. We decline the Alliance for Community Media's request for reconsideration on this issue. 69. Second, ESPN argued that channel sharing should be conditioned on the approval of programming services in its reply comments to the Notice. We fully considered those views in the Second Report and Order, where we stated that so long as each video programming provider has the contractual right to offer a particular program service to subscribers, it is unnecessary for the open video system operator to obtain the consent of the programming service in order to place that service on a shared channel. In addition, we note that a programming service will be placed on a shared channel only if more than one video programming provider secures the rights to offer the particular programming service to subscribers as part of their package of programming. We reiterate that channel sharing is merely a technical method by which an open video system operator may enhance the efficiency of its system by using only one channel to carry programming offered by multiple video programming providers, and again decline to adopt ESPN's proposal. 70. We agree with NCTA that ad avails associated with a programming service carried by both the open video system operator or its affiliated video programming provider and an unaffiliated provider must be shared in an equitable manner. Examples of acceptable methods of sharing ad avails include apportioning the revenues from such ad avails on a per subscriber basis or apportioning the rights to sell the avails themselves. We will clarify that arrangements with regard to ad avails will be considered a term or condition of carriage, and an open video system operator must comply with Section 653(b)(1)(A) in negotiating their apportionment. 5. Open Video System Operator Co-Packaging of Video Programming Selected by Unaffiliated Video Programming Providers a. Background 71. In the Second Report and Order we concluded that Section 653(b)(1)(B), which states that nothing in that section should be construed to limit "the number of channels that the carrier and its affiliates may offer to provide directly to subscribers," permits an open video system operator to enter into agreements to co-package the video programming selected by unaffiliated video programming providers with the operator's selected programming, and market the combined offerings as one package to subscribers. In addition, we determined that an unaffiliated video programming provider may enter into such agreements with other unaffiliated providers. We also noted that Congress applied Section 616 of the Communications Act governing the regulation of carriage agreements to open video system operators, and that under this section, an open video system operator may not generally engage in anti-competitive behavior with respect to unaffiliated video programming providers and programming services. 72. ESPN argues on reconsideration that the Commission should require that co- packaging arrangements be conditioned on the consent of any programming services involved. ESPN states that program license agreements frequently contain negotiated terms related to the marketing of a programming service, including packaging parameters and trademark use guidelines. In addition, programming services themselves often are under contractual restraints as to the use of program vendor trademarks and the names or likenesses of persons appearing in programs. ESPN therefore argues that programming services must be able to approve co- packaging arrangements in order to comply with their license agreements. 73. The Joint Telephone Petitioners respond that the Commission's rules do not, and could not, alter the copyright laws. They argue merely that any programmer wishing to enter into a co-packaging arrangement will have an obligation to ensure that any copyright or trademark restrictions to which it is subject are not violated, regardless of whether the Commission takes action as ESPN requests. b. Discussion 74. We decline to adopt ESPN's proposal to require the consent of any programming services involved before a video programming provider may enter into a co-packaging agreement. We recognize ESPN's legitimate concerns that its program license agreements frequently contain negotiated terms related to the marketing of a programming service, including packaging parameters and trademark use guidelines. However, these are contractual matters that we believe are best left to the individual negotiations between the parties involved. If a video programming provider enters into a co-packaging arrangement that breaches its contractual obligations, we believe that ESPN and other such programming services already possess adequate remedies at law. Nothing in our rules should be construed to infringe upon the rights of programming services with respect to their program license obligations. D. Rates, Terms, and Conditions of Carriage 1. Just and Reasonable Carriage Rates a. Background 75. Section 653 (b)(1)(A) requires that rates for carriage on open video systems be just and reasonable and not unjustly or unreasonably discriminatory. In the Second Report and Order we noted that this provision reflects the goal of affording unaffiliated video programming providers access to, and fair treatment on, open video systems, while at the same time preserving for open video system operators the ability to realize a return on the economic value of their investment. Our rules in this area are intended to preserve the incentive of open video system operators to enter and compete with existing video programming distributors. Consistent with this goal, we eschewed traditional common carrier-style rate regulation approaches in favor of a two-step approach intended to balance the public interest in promoting competition for the provision of video programming services against the statutory requirement that we ensure just and reasonable open video system carriage rates. In general, the approach provides that rates are presumed reasonable where specified conditions are met; and, upon the filing of a complaint where the presumption conditions are not present, the burden is on the open video system operator to demonstrate that the contested carriage rate is no greater than a carriage rate imputed to the operator's affiliated video programming provider under a specified formula. 76. The just and reasonable presumption attaches to open video system carriage rates where at least one unaffiliated video programming provider, or unaffiliated programming providers as a group, occupy capacity equal to the lesser of one-third of the system capacity or that occupied by the open video system operator and its affiliates, and where the rate complained of is no higher than the average of the rates paid by unaffiliated programmers receiving carriage from the open video system operator. We further concluded that the mathematical average rate may be adjusted to account for legitimate variances in rates, such as discounts given for volume, contract length, creditworthiness, or the number of subscribers reached. These elements were not intended to be exclusive. 77. Once the open video system operator demonstrates that the presumption conditions are present, the burden shifts to the complainant to demonstrate that the rate is not just and reasonable. This presumption of reasonableness permits the open video system operator to implement its carriage rates and provide service without prior regulatory rate filings or review. We further concluded that this structure would provide the open video system operator with flexibility and an incentive to attract unaffiliated programming providers to the system, and would reduce litigation and administrative expenses associated with prior rate review processes. In addition, the Second Report and Order found that these conclusions also apply when a group of unaffiliated programming providers negotiate and obtain capacity equal to that of the open video system operator and its affiliates, if the operator or affiliate occupies less than one-third capacity. 78. Where the presumption conditions are not met, and a potential video programming provider files a complaint with the Commission, the Second Report and Order placed the burden on the open video system operator to demonstrate that the contested carriage rate is no greater than a carriage rate that could be imputed to the operator's affiliated video programming. The Second Report and Order required the operator to show that it charges the unaffiliated programmer no more for carriage than it earns from carrying its own affiliates' programming, and treated analog and digital channel capacity separately for this purpose. It stated that the imputed rate approach provides a legitimate basis to fulfill the law's requirement that the rate be just and reasonable, and explains that, in principle, the method chosen to arrive at the imputed carriage rate was an application of the efficient component pricing rule ("ECPR") to open video systems. 79. A number of parties filed petitions for reconsideration or clarification of these open video system carriage rate requirements. In general, incumbent LECs supported the overall approach, but challenged the use of the imputed rate formula, where the presumption conditions are not met, as too regulatory. In contrast, cable companies, local authorities, and other competitors argue that the procedures established are too cumbersome from a procedural perspective, and fail to protect adequately both unaffiliated programmers and LEC telephone rate payers. 80. National League of Cities, et al. critique the pricing rules as inadequate to fulfill the statutory requirements of ensuring open access, nondiscrimination, and reasonable rates. It argues that the presumption approach places an undue financial and regulatory burden on the unaffiliated programmer to determine whether the LEC's terms are fair; that the Commission's rules will encourage the routine filing of carriage complaints by all video programmers that will "flood" the Commission; and that the presumption's conditions fail to protect unaffiliated programming providers. National League of Cities, et al. maintain that the criteria related to average rates is largely meaningless since only the LEC has the necessary information to make such a determination and the average may be adjusted in a variety of ways left totally indeterminate under the Commission's rules. 81. MCI contends that the rules fail to establish a mechanism that prevents incumbent LECs from pricing open video system carriage rates below incremental cost due to the transfer, by means of improper cost allocation, of video-related costs to their telephone customers. MCI argues further that the Commission has recognized that incumbent LECs have an incentive and opportunity to shift costs from unregulated to regulated services. MCI submits that the likelihood that open video system carriage rates will be set below incremental costs nearly guarantees that one-third of open video system capacity will be occupied by parties not affiliated with the incumbent LECs that are unlikely to complain about the carriage rates, for they will share in the cross-subsidy provided by the incumbent LEC's telephone customers. National League of Cities, et al. also argue that the presumption approach permits a LEC to control effectively two- thirds of the capacity directly, and one-third indirectly, by finding and favoring a single "unaffiliated" programmer so as to meet the presumption conditions. 82. MCI also contends that the open video system pricing rules will permit incumbent LECs to charge discriminatory rates once one-third of their open video system capacity is occupied by non-affiliates. MCI argues that the large amount of common telephone and open video system costs will result in a gap between the below-incremental cost rate (resulting from cross-subsidies) offered to existing non-affiliated programmers and a rate equal to incremental cost plus common costs. MCI contends that the Commission has compounded this problem by unilaterally excluding the parties harmed by the possibility of this cross-subsidization from challenging open video system carriage rates by bringing complaints against the presumptive reasonableness of the rates. MCI argues, therefore, that the Commission should: (a) permit any party potentially affected by an open video system carriage rate to file a complaint with the Commission; and (b) require telephone companies seeking open video system status to publicly file incremental and stand alone telephone and video cost studies, along with appropriate subscriber and usage data as part of their open video system applications. 83. In response, LECs generally urge the Commission to reject requests to reconsider the open video system pricing rules based on allegations of the potential for discriminatory pricing. They state that MCI's request that the Commission reverse many of the key determinations made in crafting a rate regulation scheme suited to open video systems as new entrants without any market share or power, is simply a rehash of MCI's earlier unsuccessful advocacy of Title II-like regulation for open video systems, which should be rejected by the Commission on reconsideration. USTA contends that competition would be disserved by requiring LECs to file incremental and stand-alone telephone and video cost studies with the Commission along with subscriber and usage data as MCI requests. USTA claims that the only result of such requirements would be to hamper LEC market entry, delay competition and increase costs for the LECs. Similarly, RCN supports the Commission's goal of avoiding the imposition of barriers to entry similar to those that have hindered the development of competition in the multichannel video distribution market thus far. RCN notes that the Commission has long recognized, with respect to the non-dominant new entrants in the long distance and local telephone market, and in other telecommunications markets where competition exists, that Title II-type rate and entry regulation is (a) not necessary to protect consumers or to assure just and reasonable rates, and (b) likely to impair the ability of open video system operators to compete effectively in the market by "stifl[ing] price competition and service and marketing innovation." 84. The Telephone Joint Petitioners also respond that there is no possibility that an open video system operator who charges one group of programmers below cost rates, and then seeks to charge another programmer a discriminatorily high rate, will escape detection by the Commission when it compares the latter programmer's rate to the weighted average rate of the first group. They strongly disagree with MCI's request that third-parties be permitted to bring complaints regarding open video system carriage rates, as well as MCI's request that open video system operators be required to produce stand alone cost studies for telephony and video. The Telephone Joint Petitioners also urge the Commission to reject MCI's requests on grounds that such requirements would recreate the type of tariff proceedings that the Commission conducted under the video dialtone regime. NYNEX argues that permitting third-party complaints would lead to the same results that the Commission obtained in the video dialtone process, where most, if not all, challenges against video dialtone were raised by incumbent cable interests and their affiliated programmers, rather than by unaffiliated programmers. NYNEX states that the Commission's open video system rate scheme properly focuses on that latter, rather than the former, group, and that the Commission should not countenance the regulatory tactics of competitors seeking to impede open video system. 85. In their petition, the Telephone Joint Petitioners request that the Commission modify the requirements for applying the presumption. They argue that the Commission's threshold capacity requirement is unrelated to whether carriage rates are just and reasonable and will penalize open video system operators using advanced technologies. For example, the Telephone Joint Petitioners assert, operators of switched-digital open video systems will be unable to show that unaffiliated video programming providers occupy a threshold amount of capacity and will be unable to meet the presumption conditions. The Telephone Joint Petitioners suggest that the Commission remove the minimum capacity requirement and instead find that the presumption applies when two unaffiliated programmers purchase any level of capacity on an open video system. USTA supports the Commission's commitment to flexibility, and urges that it be extended further to permit and encourage the introduction of new technologies by focusing on the presence of unaffiliated programmers, rather than the use of an arbitrary percentage of capacity utilitization before allowing LECs the safe-harbor of the presumption of just and reasonable rates. 86. The Telephone Joint Petitioners further argue that the phrase "unaffiliated programmers as a group" in our presumption conditions could be interpreted as a requirement that the unaffiliated programmers market their programming as a package in competition with the open video system operator and its affiliates to meet the presumption conditions. The Telephone Joint Petitioners suggest that the Commission clarify that the presumption applies whether the unaffiliated programmers market their programming in competition or in cooperation with the open video system operator's programming. 87. While the Telephone Joint Petitioners agree as a general matter that the Commission's imputed rate approach is preferable to more overtly regulatory prescriptions for setting prices, they argue that the Commission has not properly applied the ECPR methodology, and that computing an imputed rate is not necessary for the purpose of establishing just and reasonable open video system carriage rates. The Telephone Joint Petitioners include with their petition a "Declaration of William E. Taylor," one of the authors of an economics article on ECPR cited in the Second Report and Order. Taylor's declaration discusses several ways in which the Second Report and Order allegedly misstates and misapplies the ECPR, including the premise that open video system carriage is an essential input. It generally concludes that the circumstances of the evolving video programming marketplace will not warrant the search for ECPR-based pricing standards, and urges that the marketplace itself should be able to determine the proper rates for open video system carriage. The Telephone Joint Petitioners suggest that if the pricing methodology is retained, the Commission should clarify its use of the imputed rate approach and how ECPR is to apply to open video system carriage rates. The Telephone Joint Petitioners argue that the imputed rate will set an artificially low ceiling on carriage rates because it omits the incremental cost of carriage, and that a ceiling on carriage rates based on the ECPR is inappropriate because open video system operators are new entrants that will compete with incumbent cable operators and other video programming distributors. They also suggest that the use of the terms "earn" and "profit allowance" require clarification. 88. Other petitioners challenge the methodology as inadequate to protect unaffiliated programmers. The City of Indianapolis and the Alliance for Community Media, et al. object to the imputed rate formula on the ground that it improperly compensates the open video system operator for lost subscribers. They argue that unaffiliated programmers will pay higher carriage rates than affiliated programmers, and this will cause unaffiliated programming provision to be unprofitable. The National League of Cities, et al. interpret the imputed rate formula as improperly permitting open video system operators to charge unaffiliated programming providers a price for carriage equal to the price they charge subscribers for affiliated programming. 89. MCI contends that the Commission may not use ECPR as a means of ensuring nondiscriminatory open video system carriage rates, because there is no practical method of determining whether an open video system carriage rate is greater than the rate that would be established by the ECPR. According to MCI, this is due in part to the Commission's inability to determine a carrier's actual opportunity cost. MCI instead proposes that the incumbent LECs be required to charge video carriage rates in excess of the incremental cost of providing video services. In response, USTA urges the Commission to dismiss MCI's efforts to increase LEC regulatory burdens by urging that video carriage rates must be delivered in excess of incremental cost. b. Discussion 90. In the Second Report and Order we specifically noted MCI's concerns as to the need for effective cost accounting and auditing procedures to ensure that incumbent LECs do not engage in the allocation of excessive costs to their regulated telephone services. We stated that the substantive cost allocation requirements are being addressed in a separate rulemaking. In its petition, MCI has provided no new facts or arguments to justify reconsideration of these concerns in the instant proceeding. We also decline to impose the other pre-certification and reporting requirements MCI seeks. We believe that these requirements are inconsistent with our flexible regulatory approach to the provision of open video system, and are not necessary to protect either unaffiliated programmers or the public in general. In addition, we decline to require open video system operators to base their carriage rates on detailed studies of incremental and stand alone cost and estimates of actual opportunity cost, as suggested by MCI, because of the 1996 Act's direction that Title II requirements not be applied to open video systems, and the limited time allowed for the review of certifications and complaints. Instead, as we discuss below, we reaffirm our imputed rate approach for determining whether carriage rates are just and reasonable where the presumption conditions are not present. 91. We also decline to adopt MCI's proposal to allow parties other than potential video programming providers seeking carriage on the open video system to file complaints with the Commission regarding the carriage rates offered by the system operator. We think that such a rule would inevitably result in the filing of numerous complaints by parties with no direct interest in providing programming over open video systems, and thus delay the initiation of open video system service. We therefore reaffirm our decision to allow only potential video programming providers to file complaints regarding open video system carriage rates. This decision does not leave other parties who claim to be adversely affected by an open video system operator's carriage rate without remedies. For example, a party seeking to challenge a rate it pays for common carrier services provided by that operator on the ground of improper cost-shifting from an open video system, retains its rights under section 208 of the Communications Act to file a complaint. These statutory rights afford adequate protection in the event that third parties believe open video system operators are improperly shifting costs relating to video carriage at the expense of telephone customers. 92. We disagree with the general assertion by the National League of Cities, et al. that our presumption conditions will not provide adequate protection to unaffiliated video programming providers. As we noted in the Second Report and Order, where the presumption conditions are met, there is sufficient reason to conclude that the open video system is accessible and the negotiated carriage rates are just and reasonable. The National League of Cities et al. have presented no new arguments or data to refute this conclusion. Moreover, we disagree with National League of Cities et al.'s contention that the presumption approach places a undue financial and regulatory burden on the unaffiliated programmer to determine whether the operators' rates are fair. Our presumption approach strikes an appropriate balance between the interests of the open video system operator in establishing service to end users quickly, without undue regulatory intervention by competitors, and the interests of unaffiliated programmers in obtaining just and reasonable carriage rates. To the extent National League of Cities, et al.'s argument is directed at the pre-complaint rate disclosure process, we further clarify the rights of unaffiliated programmers to obtain preliminary rate estimates, and the information these estimates must contain, infra in Section III.H., Dispute Resolution. 93. The National League of Cities, et al. also expressed the specific concern that the presumption conditions will allow the average rate paid by the unaffiliated programming providers receiving carriage to be "weighted" or adjusted, but that only the open video system operator will possess the information necessary to calculate the average or to "weight" the average. We clarify that, as part of its burden of showing that the presumption conditions are met, an open video system operator will be required to make available to a complainant all information needed to calculate the average rate paid by the unaffiliated programming providers receiving carriage on its system, including the information needed for any weighting of the individual carriage rates that the operator has included in the average rate. The complainant may challenge the weighting methodology used by the open video system operator as part of its case. Requests for confidential treatment of particular information shall be addressed consistent with our rules concerning proprietary information. 94. The Telephone Joint Petitioners have reiterated their original request that carriage rates be presumed just and reasonable even if a small number of unaffiliated video programming providers occupied only one channel each. We again reject their suggestion on the grounds, stated in the Second Report and Order, that the presence of one or more unaffiliated programmers on a diminutive portion of an open video system's channel capacity is not sufficient to show that its carriage rates are just and reasonable. We agree with the Telephone Joint Petitioners that the one-third threshold capacity requirement may not be appropriate in the future when advanced technologies that are under development, such as switched digital video, may be deployed. Because these technologies have not yet been deployed, however, we will not now modify the requirement. We will consider requests to waive or otherwise modify the threshold capacity requirement to reflect the special circumstances of such advanced systems. 95. Moreover, the presumption requirement is met not only when unaffiliated programmers occupy one-third of capacity, but also when unaffiliated programmers occupy the same amount of capacity as the open video system operator or its affiliate. Take, for example, the case of a system that has a theoretical capacity of 1,000 channels, and assume that the open video system operator and its affiliate choose to occupy 100 of these channels. Under these conditions, it will not be necessary for unaffiliated programmers to occupy 333 channels (one- third of system capacity) to meet the presumption requirements. Rather, the open video system operator will meet the presumption requirements if unaffiliated programmers occupy 100 channels. This factor may eliminate the problems that the Telephone Joint Petitioners foresee. 96. In response to the Telephone Joint Petitioners' request, we clarify that in the Second Report and Order, the phrase "unaffiliated programmers as a group" does not impose a requirement that the programmers market their programming in competition with the operator. Rather, the phrase is used to give open video system operators greater flexibility in meeting the presumption conditions. It allows operators to meet the requirement by providing carriage to several unaffiliated programmers that in total occupy the threshold capacity requirement. 97. We reaffirm our basic imputed rate approach for ensuring just and reasonable open video system carriage rates where the presumption conditions are not met, but clarify our use of certain terminology. We structured the imputed rate in the Second Report and Order to reflect what the open video system operator, or its affiliate, effectively "pays" for its own carriage of programming over the system by starting with the revenues received from the end user subscriber, and subtracting the costs avoided by the open video system operator by permitting another programming provider to serve that subscriber. No petitioner has convinced us that an imputed rate approach is not suitable to the circumstances of open video system carriage, where a new market entrant (the open video system operator) will, in the majority of areas, face competition from an established incumbent (the cable operator). We continue to believe that, under these circumstances, the imputed rate approach will produce carriage rates that encourage market entry and therefore result in greater competitive choices for video programming customers. Therefore, we reaffirm that the imputed carriage rate established in the Second Report and Order, which equals the revenues received from subscribers for the open video system operator's programming package, minus the cost to the operator of creating the package, provides a sound basis for comparison to the challenged carriage rate offered the unaffiliated programmer. 98. Telephone Joint Petitioners have instead urged us to let the market set the rates for carriage. We do not, however, find that market conditions alone are sufficiently competitive to produce just and reasonable carriage rates for unaffiliated programmers. One of the premises of the open video system is that it will be providing independent programmers an alternative video carriage outlet that will encourage multiple programming sources. Today, independent programmers have limited ability to obtain carriage on cable systems on an open basis. Other alternatives to the open video system, e.g., DBS and wireless cable, currently serve approximately 9% of the market. Accordingly, these alternatives similarly appear to offer limited opportunities for carriage on an open basis for unaffiliated programmers. We therefore reject the position of the Joint Telephone Petitioners that the market alone will ensure just and reasonable carriage rates. We believe that the imputed rate approach will encourage entry by open video systems, while ensuring that video carriage rates are just and reasonable for unaffiliated programmers. 99. As we noted in the Second Report and Order, open video systems are essentially a combination of: (a) the creative development and production of programming, (b) the packaging of various programs for the open video system operator's offering, and (c) the creation and maintenance of infrastructure for the carriage of both the operator's affiliated programming and unaffiliated programming. Our rules are intended to ensure that unaffiliated programming providers pay a rate for carriage that is no more than the carriage price that can be fairly imputed for the carriage of the operator's affiliated programming packages. In so doing we seek to attain an important result of the ECPR, which is that the price the operator charges unaffiliated programming providers for carriage must be no higher than the sum of its incremental cost of carriage and the contribution to fixed infrastructure costs in its retail price of programming. 100. We disagree with the assertion by the Telephone Joint Petitioners that the Commission errs by using an ECPR methodology to establish carriage pricing on open video systems, where it is not appropriate, while declining to use ECPR to establish LEC interconnection pricing in situations where they assert it is appropriate. Like ECPR, our imputed rate approach will provide the open video system operator the same return when it carries unaffiliated programming as when it carries its own programming. We believe that in the case of open video systems, application of an ECPR methodology provides full economic incentives for LEC entry into video in competition with incumbent cable providers. 101. By contrast, in the case of interconnection to the local telephone network, application of ECPR would reduce the incentives for entry into local exchange services by enabling incumbent LECs to charge higher rates for interconnection than would result from a forward-looking economic cost model. In this latter case, application of the ECPR for network interconnection under sections 251 and 252 of the 1996 Act would be inappropriate, and we have therefore declined to use it. More specifically, the Commission has concluded that the ECPR is not appropriate in the pricing of unbundled local telephone network elements for the purposes of interconnection. There are significant differences in the market circumstances open video systems will face, as compared to the pricing of unbundled local telephone network elements. As we have noted, open video systems, as the new market entrant, will face competition from the established incumbent cable operator. By contrast, existing end user rates in local telecommunications services are not competitively set. In the Commission's interconnection proceeding under section 251, we noted the ECPR's potential to permit higher rates than those established by a forward-looking economic cost model, to limit competitive entry, and to preserve pricing inefficiencies. 102. We disagree also with the assertion by the Telephone Joint Petitioners that the imputed price omits the incremental cost of carriage. Under normal market conditions, the imputed price of carriage will exceed the open video system operator's incremental cost of carriage (which is greater than zero) and make a contribution to the fixed infrastructure cost of the open video system. For this reason, we reject the Telephone Joint Petitioners' assertion that the imputed rate approach will produce a carriage rate of zero or less. The imputed rate is based in part on the price charged by the open video system operator or its affiliate to end-user subscribers. The price charged the subscriber will generally be greater than the incremental cost of carriage. In addition, the imputed rate subtracts out the costs of developing the programming and creating the package, which removes the costs avoided when unaffiliated programming is carried. After subtracting these costs, the imputed rate will correspond to the carriage rate that the open video system operator "pays" to carry its own programming. The imputed rate approach is designed to give the open video system operator the same economic return when it sells carriage to unaffiliated programming providers as when it "sells" carriage to its own programming. Consequently, we would expect the use of the ECPR approach to minimize any disincentives the open video system operator may have to carry unaffiliated programming. 103. We believe that this result of the imputed rate approach should be achieved even under the competitive conditions assumed by the Telephone Joint Petitioners in their petition. Even assuming that, at the outset of open video system operations, competition lowered the retail price of video programming to subscribers to the point that the open video system operator incurred losses, this would not justify the operator's shifting the burden of such losses to unaffiliated video programming providers by charging them a higher carriage rate than the rate that it effectively "charges" itself. The unaffiliated programming providers would also face lower retail prices for their programming under the competitive conditions assumed by the Telephone Joint Petitioners. We disagree with the Telephone Joint Petitioners' assertion that unaffiliated programmers would be largely unaffected by retail price competition. Unaffiliated programming providers would be offering services to subscribers in the same area as the open video system operator and would, as a result, face essentially the same competitive conditions faced by the operator. 104. The imputed rate approach was chosen as a flexible regulatory approach for determining what are just and reasonable carriage rates in an imperfectly competitive carriage market. However, it may not be the sole means of establishing just and reasonable carriage rates. There may be alternative, market-based approaches to demonstrating that a challenged rate is just and reasonable, that may also be useful in particular cases. We would consider such an argument in response to a complaint regarding a carriage rate. The open video system operator would be required to demonstrate that its carriage service is subject to sufficiently strong competitive forces to ensure that its carriage rates are just and reasonable, or that it has computed its rate using a methodology that aims to produce or replicate the working of a competitive carriage market. 105. In addition, on reconsideration, we find that certain aspects of our explanation and use of terminology should be clarified. As we stated above, under our approach, the imputed price of carriage for an affiliated programming package equals the price of the package delivered to a subscriber minus the cost of creating the package. To clarify the terms identified by the Telephone Joint Petitioners, in the Second Report and Order we use the term "earning" to refer to the difference between the price of the package delivered to a subscriber and the cost of creating the package. We use the term "profit allowance" to refer to one type of cost of creating the programming package, namely the cost of capital used to create the package. We also clarify Section 76.1504 of the rules to indicate more clearly the types of avoided costs that must be subtracted by an open video system operator in calculating the imputed rate. 106. We also clarify in response to the National League of Cities, et al. that the imputed rate formula will not allow open video system operators to charge unaffiliated programming providers a price for carriage equal to the price they charge subscribers for affiliated programming. The imputed rate formula, as we have discussed, requires open video system operators to subtract the cost of creating affiliated programming from the price of the programming. The carriage rate that unaffiliated programming providers pay will be less than the price subscribers pay for affiliated programming. 107. The concerns of the City of Indianapolis and the Alliance for Community Media, et al. regarding how subscriber losses will affect the imputed carriage rate are overstated because they do not reflect the effects of subscriber gains. We wish to clarify that the imputed carriage rate will recognize both losses and gains in the number of subscribers to the open video system operator's programming package resulting from carrying unaffiliated programming. Increases in subscribers may occur because unaffiliated programming attracts subscribers to the open video system from cable or broadcast television. Decreases in subscribers may occur because unaffiliated programming attracts subscribers away from affiliated programming on the open video system. The average of these individual channel effects, which may be an increase or a decrease, is the one that will be recognized by the imputed carriage rate. 108. We also wish to clarify that, contrary to MCI's suggestion, our imputed rate approach does not require that we determine an open video system operator's actual opportunity cost. Because it is computed by averaging costs over all channels carrying affiliated programming, the imputed carriage rate will include an estimate of the average opportunity cost resulting from the carriage of unaffiliated programming. This average is adequate to achieve the goal of ensuring that the operator's carriage rates are just and reasonable, without determining the operator's actual opportunity cost. 2. Open Video System Carriage Rates Must Not be Unjustly or Unreasonably Discriminatory a. Background 109. In the Second Report and Order, we concluded that some level of open video system carriage rate differentiation is permissible, provided that the bases for the differences are not unjust or unreasonable. We suggested that some legitimate, objective factors on which rate differences could be based are volume discounts, differences in creditworthiness and financial stability, differences in the number of subscribers reached, and preferential rates for not-for-profit programming providers. 110. NCTA challenges the sufficiency of the presumption approach to protect unaffiliated programmers from discrimination, and requests that it be changed. NCTA states that the scheme leaves opportunities for open video system operators to "game the system" to discriminate against selected programmers. NCTA submits that the simplest and most effective means of preventing such discrimination is to require, unless open video system operators can justify the difference, that each programmer be charged the same rate. NCTA contends that the Commission should not place the burden of proof on the programmer alleging a violation of section 653(b)(1)(A) standard; rather, open video system operators should always bear the burden of demonstrating that rate differences are justified by the circumstances. 111. MCI argues that would be complainants will be unable to ensure that open video system carriage rates are nondiscriminatory because there is no practical method of determining whether a rate is greater than the rate that would be established by ECPR. The Alliance for Community Media, et al. argues that the Commission should require open video system operators to charge non-profit video programming providers a reduced carriage rate. b. Discussion 112. The petitioners' concerns about whether open video system rates are nondiscriminatory ignores the wording of the 1996 Act, which prohibits rate differences only when unjust or unreasonable. As we noted in the Second Report and Order, we decided to permit carriage rate differentiation because requiring open video system operators to charge all programming providers the same carriage rate would exclude providers whose programming has a low market value. Neither NCTA nor MCI has offered new factual or legal arguments to refute this reasoning. We will continue to permit open video system operators to charge different rates based on objective factors. 113. MCI's rate discrimination concern arising from our use of an ECPR pricing model to compute an imputed rate is misplaced. In the Second Report and Order, we decided to rely on the complaint process to ensure that open video system carriage rates are not unjustly or unreasonably discriminatory. If a rate discrimination complaint is filed, the challenged rate difference will have to be justified by legitimate, objective factors. We have heard no new argument that demonstrates that the complaint process will fail to ensure that differences in open video system carriage rates have just and reasonable bases. 114. We disagree with the Alliance for Community Media, et al., that open video system operators should be required to charge reduced carriage rates to non-profit programming providers. In the Second Report and Order, we identified not-for-profit status as one of the legitimate, objective factors on which open video system operators could base reduced rates. We also cited comments that identified PEG channels as a source of carriage for non-profit programmers. We note that the Alliance for Community Media, et al. recognize the significant contribution that PEG requirements will make. Moreover, we are concerned about the impact of mandatory reduced carriage rates on a new entrant in the markets for video carriage and distribution. Our decision to allow preferred carriage rates for non-profit programmers on a voluntary basis reflects our goals of promoting open video system entry and competition with incumbent cable systems, while providing access to carriage by unaffiliated programming providers. We will stand by our decision not to make reduced rates for non-profit programmers mandatory. E. Gross Revenues Fee 1. Background 115. Section 653(c)(2)(B) provides that an open video system operator shall be subject to a fee on the gross revenues of its cable service, "in lieu of" the cable franchise fee under Section 622. In the Second Report and Order, we concluded that the gross revenues fee should be based on all revenues received by an open video system operator or its affiliate relating to its provision of video services (including all subscriber revenues and all carriage revenues received from unaffiliated programming providers), but should exclude the gross revenues of unaffiliated video programming providers. 116. On reconsideration, some local governments argue that the gross revenues fee should be applied to a broader revenue base than that specified in the Second Report and Order. The Village of Schaumburg and Metropolitan Dade County argue that the fee should be applied to all revenues derived from the operation of open video systems, regardless of whether they are received by the open video system operator, the operator's affiliate, or an unaffiliated video programming provider. These petitioners assert that the Commission's formulation of the gross revenues fee will reduce the amount of fees collected by local authorities. Metropolitan Dade County speculates that this "could lead to claims of discrimination from existing cable operators to be released from cable franchises to the extent that OVS operators have lesser fiscal burdens." The National League of Cities, et al. and NATOA argue that the Commission's gross revenues fee fails to adequately compensate local governments for the use of public rights-of- way. In addition, the National League of Cities, et al. and Municipal Services, et al. assert that the Commission has not made it clear that local governments have a positive authority to charge and receive the fee. Finally, NATOA requests that we clarify that advertising revenues received by an open video system operator or its affiliate should be included in the fee calculation. 117. By contrast, telephone companies generally argue that the gross revenues fee should be applied to a narrower revenue base than the base specified in the Second Report and Order. In their petitions, the Telephone Joint Petitioners and NYNEX argue that, on its face, Section 653(c)(2)(B) applies only to the gross revenues of the open video system operator and not the operator's affiliate. These petitioners differ, however, regarding which operator revenues should be included in the fee calculation. The Telephone Joint Petitioners argue that the fee should be based only on the open video system operator's revenues from subscribers, and should exclude carriage revenues from unaffiliated video programming providers. NYNEX, on the other hand, argues that the fee should be based only on the operator's carriage revenues from affiliated and unaffiliated programming providers, and should exclude all subscriber revenues. Finally, NYNEX and U S West are concerned that collecting a fee solely from the open video system operator and its affiliates will discriminate in favor of unaffiliated programming providers, which will not be burdened by a similar fee. U S West proposes that open video system operators be permitted to include a portion of the gross revenues fee on the bills of all subscribers to an open video system -- not just those receiving programming directly from the operator or its affiliates. 118. In response, NATOA argues that excluding the open video system operator affiliate's revenues from the gross revenues fee calculation would defeat the entire purpose of the fee, and would permit an open video system operator to pay far less than a cable operator by the simple expedient of creating a corporate subsidiary. Similarly, Michigan Cities, et al. argue that excluding the affiliate's revenues would thwart Congress' goal of ensuring equal treatment among video providers, and would permit an operator to engage in a corporate "shell game" in which the operator provided essentially no services and had all revenue-generating activities provided by its affiliates. In addition, NCTA argues that the Telephone Joint Petitioners' proposal to exclude carriage revenues from the fee calculation "is simply beyond the pale, as it would allow LECs to avoid paying any gross revenue fee by the simple expedient of providing "cable" service through an affiliate. Conversely, NCTA and the Alliance for Community Media, et al. argue that NYNEX's proposal to include only those revenues derived from carriage in the fee calculation would understate the revenues derived from open video service, ignores the significance of the statute's use of the term "cable service" instead of carriage, and would create a fee that is not nearly equivalent to the franchise fee imposed on cable operators. 2. Discussion 119. We generally reaffirm our conclusions in the Second Report and Order. We continue to believe that our interpretation represents the best reading of Section 653(c)(2)(B). We will, however, clarify our rule to make clear our intent that local governments have the authority to charge and receive the gross revenue fee. In addition, consistent with Congress' intent of ensuring "parity among video providers," we will clarify that any advertising revenues received by an open video system operator or its affiliates in connection with the provision of video programming should be included in the fee calculation, where such revenues are included in the incumbent cable operator's franchise fee calculation. 120. Those petitioners seeking to include the gross revenues of unaffiliated programming providers in the fee calculation have largely repeated arguments made by the National League of Cities, et al. earlier. In our view, those arguments fail to account for the clear statutory language that the gross revenues fee applies to the open video system operator's revenues relating to its provision of cable service. We also disagree with these petitioners that our formulation necessarily will result in lost revenues to local governments. Petitioners assume that an entity would build the same system, whether it was going to provide cable service or open video service. This may not be accurate. For example, an open video system operator may have additional incentives to build a large capacity system in order to be assured of a sufficient number of channels to compete head-to-head with the incumbent cable operator. Similarly, whether the fee that a local government receives is greater or lesser than the incumbent cable operator pays will vary depending upon the relative channel capacity of the systems, the amount of channel capacity occupied by the open video system operator, and the carriage rates the operator is able to negotiate with unaffiliated providers. 121. On the other hand, we do not agree with the Telephone Joint Petitioners and NYNEX that the revenues of an open video system operator's affiliates should be excluded from the calculation of the gross revenue fee. Section 653(c)(2)(B) applies to gross revenues attributable to an open video system operator's "provision of cable service." Under the Communications Act, "cable service" is defined as "the one-way transmission to subscribers of (i) video programming, or (ii) other programming service . . . " Thus, to the extent that an open video system operator employs an affiliate to provide video programming to subscribers, the revenues that its affiliate receives from subscribers are subject to the gross revenues fee. To hold otherwise would place form over substance and would create a disparity between open video system operators that use affiliates to provide video programming and those that provide programming themselves. The Telephone Joint Petitioner's proposal to exclude carriage revenues from the fee calculation would widen this potential difference. There is no indication in Section 653(c)(2)(B) that Congress intended to limit "gross revenues of the operator" to those revenues derived solely from the sale of its own programming. Indeed, the Telephone Joint Petitioner's proposal could result in an open video system operator that provided its programming through an affiliate paying little or no fee, contrary to Congress' intent "to ensure parity among video providers." 122. Finally, we agree with NYNEX and U S West that the application of the gross revenues fee provision should not disadvantage any particular video programming provider. Like the costs of PEG and must-carry, we believe that the gross revenues fee is a cost of the platform -- in this case, the cost of using the rights-of-way -- that should be shared equitably among all users of the system. We therefore will permit open video system operators to recover the gross revenues fee from all video programming providers on a proportional basis as an element of the carriage rate. F. Applicability of Title VI Provisions 1. Public, Educational and Governmental Access Channels a. Establishing Open Video System PEG Access Obligations (1) Background 123. In the Second Report and Order, the Commission found that open video system operators should in the first instance be permitted to negotiate their PEG access obligations with the relevant local franchising authority and, if the parties so desire, the local cable operator. We also provided a default mechanism in case an agreement cannot be reached, whereby the open video system operator will be required to satisfy the same PEG access obligations as the local cable operator. We stated that this could be accomplished through connection to the local cable operator's PEG access channel feeds and by sharing the costs directly related to supporting PEG access, including the costs of PEG equipment and facilities, and equipment necessary to achieve the connection. 124. Alliance for Community Media, et al. state that the Commission must require the open video system operator to add PEG resources to those provided by the existing cable operator as opposed to cutting those resources in half and forcing entities providing PEG access to perform more services on existing budgets. National League of Cities, et al. claim that because a cable operator's PEG access obligations are established by franchise agreement, the Commission may not reduce them. Furthermore, according to National League of Cities, et al., the Commission mistakenly assumes that a community has obtained all the PEG support it needs from the cable operator. National League of Cities, et al. claim that the local franchising authority has the right to obtain additional compensation in the form of PEG from the open video system operator. 125. Telephone Joint Petitioners assert that the Commission's approach may remove a local franchising authority's incentive to negotiate PEG access obligations that do not match or exceed those of the incumbent cable operator. In addition, Telephone Joint Petitioners claim that the Commission's approach may give local franchising authorities the power to demand other obligations from open video system operators. According to Telephone Joint Petitioners, if no agreement with the local franchising au