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 ) ___________________________________) COMME NTS OF THE A LLIANCE FOR COMMUNITY MEDIA, ALLIA NCE FOR COMMUNICATIONS DEMOCRACY, CONSU MER FEDERATION OF AMERICA, CONSU MER PROJECT ON TECHNOLOGY, CENTE R FOR MEDIA EDUCATION, AND PEOPL E FOR THE AMERICAN WAY Of Counsel: Gigi B. Sohn Jeffrey Hops Andrew Jay Schwartzman Director of Government Relations Media Access Project Alliance for Community Media 2000 M Street, N.W. 666 11th Street, N.W., Suite 806 Washington, D.C. 20036 Washington, D.C. 20001-4542 (202) 232-4300 (202) 393-2650 Karen Edwards John Podesta Graduate Fellow, Georgetown Institute for Public Representation University Law Center Georgetown University Law Center 600 New Jersey Avenue, N.W. Washington, D.C. 20001 Darrell Perry, Law Student (202) 662-9535 Georgetown University James N. Horwood, Esq. Spiegel & McDiarmid 1350 New York Ave., N.W. Washington, D.C. 20005 (202) 879-4000 EXECUTIVE SUMMARY The Alliance for Community Media, Alliance for Communications Democracy, Consumer Federation of America, Consumer Project on Technology, Center for Media Education, and People for the American Way ( the Coalition ) firmly believe that the development of truly open multi-programmer platforms will benefit consumers and bring a greater diversity of voices to the video programming marketplace, while still promoting Congress s goals of flexible market entry, enhanced competition, streamlined regulation, diversity of programming choices, investment in infrastructure and technology, and increased consumer choice. The Telecommunications Act of 1996, with its promotion of competition in the video delivery marketplace, gives the Commission the ability to ensure that mechanisms like public, educational and governmental access requirements imposed on calbe operators are updated for the emerging media environment. The Act also affords the Commission the tools to correct the problems of the past--like exorbitant rates for leased-access in cable--that have effectively kept non-profit and unaffiliated programmers off cable. The Coalition believes that this opportunity must not be missed and that the regulatory framework for open video systems must ensure that the commercial marketplace is not allowed to operate to silence the diverse non-profit programming that is critical to many communities in this country. In enacting the new Part V of Title VI of the Communication Act of 1934 (section 302 of the Telecommunications Act of 1996 (the 1996 Act )), and in repealing the telephone-cable cross-ownership rule and permitting telephone companies the option of entering the video programming market through a number of regulatory paths, Congress has stated an intention to foster more inter-system competition. In enacting Section 653, establishing a new regulatory framework for open video systems ( OVS ), Congress created an attractive alternative for spurring telephone company entry into the video programming market. OVS also has the potential to further public interest goals beyond simply providing head to head inter-system competition with the cable television industry. If properly implemented, OVS can further greater diversity of programming, increased consumer choice, lower consumer rates, and increased investment in high-end infrastructure, through the vehicle of an open multi-programmer platform, thus creating a video programming delivery market that operates in the public interest. Using a carrot rather than a stick, Congress has offered telephone companies relief from some regulatory requirements in exchange for providing intra-system competition and proper support for and allocation of channels for schools and universities, churches, non- profits and local governments. Congress clearly intended to use this model as a means of fostering a system that would provide the public with the benefits of programming diversity which ought to flow from a platform open to unaffiliated programmers seeking to reach consumers. Congress has offered telephone companies the quid of reduced regulation and has delegated to the Commission the difficult task of setting forth the quo of responsibilities that will fall on telephone companies to prevent improper subsidization, preserve rights of carriage for education, governmental, and other non-profit groups and preclude non-affiliated programmers from being improperly denied carriage through unfair rates and conditions. In submitting these comments, the Coalition is aware that this proceeding presents the Commission with the difficult but critical task of steering a narrow course through two obstacles. If the Commission creates too many regulatory disincentives to offering services as an OVS operator, telephone companies can simply abandon OVS and choose to enter the television programming market as cable operators, a strategy many have chosen to pursue rather than continuing to pursue video dialtone. Alternatively, if the Commission does not provide an effective regulatory framework, OVS may simply become cable-lite -- a single programmer, the telephone company, will control the vast percentage of the channel capacity, while simultaneously receiving the benefit of reduced regulation. We submit these comments in the belief that such a course can be found. To that end, we urge the Commission to adopt rules which: -- require LEC s to offer video programming on an open video system only through a fully separated subsidiary; -- direct LEC s to comply with strict cost allocation procedures as a prerequisite to OVS ceritification; -- ensure that OVS platforms provide the same access and support to public, education and governmental entities as cable operators provide; -- require that OVS operators set rates for not-for-profit programmers discounted sufficiently to attract a broad diversity of programming to the video marketplace; -- adopt market-based regulatory mechanisms to ensure fair rates and access that are not unjustly discriminatory, and failing that, impose reasonable rate formulas based on an operators incremental costs; -- ensure allocation of channel capacity that is fair and reasonable and not unjustly discriminatory, through requirements of public notice of rates, terms and conditions; a minimum number of unaffiliated programmers; and a requirement that OVS operators build out their systems to meet demand; -- provide effective dispute resolution mechanisms to resolve questions of rates and terms and conditions of carriage; and -- prohibit cable operators from becoming OVS platform operators. TABLE OF CONTENTS Introduction I. Local Exchange Carriers Should Be Required to Offer Video Programming Through a Fully Separate Subsidiary and Comply with Strict Cost Allocation Procedures as a Prerequisite for Certification. . . . . . . . . . . . . .2 A. The Likelihood of Cross-subsidization by LECs is Substantial and its Harms Well-Documented. . . . . . . .3 B. Congress Intended that the Commission Would Act to Protect Consumers Against Harms of Cross-subsidization. . . . . . . . . . . . . . . . . .4 C. The Commission Has Imposed a Separate Subsidiary . . . Requirement in Similar Circumstances.. . . . . . . . .5 D. A Separate Subsidiary Requirement Will Also Further the Goals of Ensuring Reasonable Rates and Non-discriminatory Access. . . . . . . . . . . . .7 II. Implementation of Public, Educational, and Governmental Access on Open Video Systems Must Allow Substantive Platform Access for Schools, Churches, Universities, Charities, Local Institutions and Individuals.. . . . . . . . . . . . . . . . . . . . . . . .7 A. The Telecommunications Act of 1996 Requires That PEG Access on OVS Provide the Same Level of Services . and Support to the Nation's Communities as PEG Access On Cable Systems. . . . . . . . . . . . . . . .8 B. Wherever Cable PEG Access Exists, OVS Interconnection with Existing Cable PEG Access Centers Should Be Required. . . . . . . . .8 C. Where There Are No Incumbent PEG Access Requirements, OVSPOs May Be Required, Upon the Request of the Franchise Authority or the Commission, to Offer PEG Access.. . . . . . . . . . . . . . . . . . . . . 12 III. The Commission Should Issue Bright Line Rules to Guarantee Fair and Reasonable Rates and Non-Discriminatory Access.. . . . . . . . . . . . . . . . 13 A. The Commission Should Not Rely on the Voluntary Efforts of OVS Operators to Provide Non-discriminatory Access. . . . . . . . . . . . . . 15 B. The Commission Should Adopt a Market-based Regulatory Mechanism for Third-Party Access. . . . . 15 1. Full disclosure of terms of carriage. . . . . . 16 2. Reasonable rate benchmark based on the amount of capacity occupied by unaffiliated . . . programmers . . . . . . . . . . . . . . . . . . 17 3. Presumption based on rate comparison to incremental cost. . . . . . . . . . . . . . . . 17 4. Dispute resolution mechanism. . . . . . . . . . 18 C. If Necessary, the Commission Should Adopt a Reasonable Rate Formula. . . . . . . . . . . . . . . 19 IV. The Commission Should Require OVS Operators to Set Lower Rates for Not-for-profit Programmers. . . . . . . . 20 V. The FCC Should Establish Guidelines for the Non-discriminatory Allocation of Channel Capacity.. . . . 22 A. Operators Should Be Required to Notify the Commission of Their Intent to Establish an Open Video System and to File a Copy of Their Terms of Affiliated Carriage.. . . . . . . . . . . . 24 B. Final Calculation of "Demand" for Allocation Purposes Should Not Take Place Until at Least Four Unaffiliated Programmers Have Applied for Space on the System and Have Concluded Arms-length Negotiations.. . . . . . . . . . . . . . 25 C. During Initial Allocation, Each Multi-Channel Programmer Should Only Be Granted a Proportion of its Application If There Is Excess Demand, Reserving a Percentage of Channels to be Offered on an a la Carte Basis. . . . . . . . . . . . . . . . . 26 D. When channel demand exceeds capacity for an operating OVS, the Commission should favor increased capacity over channel reallocation.. . . . 28 E. OVS Operators Cannot Be Permitted to Use Capacity Formatting to Frustrate Non-discriminatory Access. . . . . . . . . . . . . . 29 VI. PEG Access Must Be Delivered on a Franchise-Specific Basis.. . . . . . . . . . . . . . . . . . . . . . . . . . 30 A. OVS Providers must Deliver Franchise-specific PEG Programming and Comply with the Commission's Exclusivity and Non-duplication Rules. . . . . . . . . . . . . . . . . . . . . . . . 30 B. All Subscribers to OVS Must be Able to Find and Watch PEG Access Channels. . . . . . . . . . . . . . 34 C. The OVSPOs Must Provide Advertising and Promotional Support When the Relevant Agreement Requires It, or If Failure to Provide it is Discriminatory.. . . . . . . . . . . . 35 VII. Cable Operators Should Not Be Permitted to Operate OVS Platforms.. . . . . . . . . . . . . . . . . . . . . . 36 A. The 1996 Telecommunications Act Prohibits Cable Operators from Becoming OVSPOs.. . . . . . . . . . . 36 B. Section 651(c) Gives Cable Operators the Option of Using OVS Platforms, not of Being a Platform . . . Operator.. . . . . . . . . . . . . . . . . . . . . . 37 C. To Maintain a Level Playing Field, OVSPO Fees in Lieu of Franchise Fees Should be Imposed on the Gross Revenue of the Video Pipeline, not just the OVSPO s Programming Affiliate. . . . . . . . . . 37 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . 38 The Alliance for Community Media, Alliance for Communications Democracy, Consumer Federation of America, Consumer Project on Technology, Center for Media Education, and People for the American Way, members of the Coalition, have actively participated in the Commission s past proceedings in video dialtone ( VDT ) and submit the following comments in response to the Report and Order and Notice of Proposed Rulemaking, FCC 96-99, in the above- captioned proceeding, released March 11, 1996 ( NPRM or Notice ), in which the Commission seeks comment on how it should implement the requirements of the open video system ( OVS ) framework. I. Local Exchange Carriers Should Be Required to Offer Video Programming Through a Fully Separate Subsidiary and Comply with Strict Cost Allocation Procedures as a Prerequisite for Certification. At para. 70 of the Notice the Commission asks whether local exchange carriers ( LECs ), as a prerequisite to certification under sec. 653(a)(1), should be required to establish procedures for allocating costs between regulated telecommunications services and the unregulated provision of video programming over an open video system ( OVS ). LECs have enormous incentives to cross-subsidize their entry into the video programming market. Without effective prohibitions, cross-subsidization will result in artificially inflated rates for consumers of regulated telecommunications services. Therefore, the Coalition submits that the Commission must implement all regulations necessary to advance Congress' goal of fair competition, and prevent anti-competitive rate manipulation. Specifically, the Commission should not only strictly apply the cost allocation procedures of Part 64 as a prerequisite to certification, but also require that LECs provide video programming through a fully separate subsidiary. A. The Likelihood of Cross-subsidization by LECs Is Substantial and its Harms Well-documented. The Telecommunications Act of 1996 holds out the promise of effective competition in the local loop. But for the foreseeable future, a dominant LEC will remain the monopoly provider of local exchange service in its region and will generate substantial monopoly profits from its local exchange services. LECs will have an enormous incentive to channel those revenues into the provision of video programming, since doing so shifts the costs of entry into the unregulated video programming market onto consumers of telephone services, so that the true cost of the unregulated service need not be covered in its price. The result will almost certainly be that some telephone customers will subsidize video programming services to which they may not even subscribe. The documented history of cross-subsidization by local exchange carriers demonstrates the likelihood of abuses when LECs provide video services. For example, in 1990, a regulated subsidiary of NYNEX was found to have been overcharged $18 million by an unregulated NYNEX subsidiary for equipment, supplies and services; the inflated costs were recouped through the rate making process. Other anti-competitive abuses by the local exchange monopolies are well-documented. B. Congress intended that the FCC would act to protect consumers against the harms of cross-subsidization. The legislative history of the Act clearly indicates that Congress wanted to protect consumers against these harms. Indeed, Congress recognized the likelihood that cross- subsidization would frustrate its ultimate goal of vigorous and open competition in the provision of video programming services, and acknowledged the need for effective, pro- competitive regulatory safeguards. Both the House and Senate bills had provisions addressing these issues, but the language was in conflict. The conference committe resolved these conflicts by deferring to the Commission s experienced judgment in determining what mechanism would best protect consumers. The Act clearly vests authority in the Commission to regulate the operation of OVS and to deny certification to LECs which do not comply with those regulations. Congress expected that the Commission would impose safeguards to ensure that an OVS entrant would not engage in anti-competitive practices or cost-shifting. The only effective way to do so is to require a separate subsidiary. C. The Commission has imposed a separate subsidiary requirement in similar circumstances. The Commission has recognized the danger of cross- subsidization in other contexts where the harm to consumers and the damage to notions of full and fair competition was similar to the dangers present here. Under the 1996 Act Act, Regional Bell Operating Companies ( RBOCs ) have been authorized to provide out-of-region interstate and interexchange services and RBOCs which provide such services face regulation as dominant or non- dominant carriers. Though not specifically required by the Act, the Commission advocates a separate affiliate requirement for BOCs which seek regulation as non-dominant carriers, in order to prevent cost shifting and anti-competitive conduct. The substantial likelihood of LECs engaging in like conduct when establishing open video platforms requires that the Commission impose a rule that before entering the video market as OVS operators, LECs establish a fully separate subsidiary for the provision of video programming and certify their compliance with the cost allocation procedures of Part 64. Although LECs, nominally, will be new market entrants, they have a large subscriber base and great financial strength, and will still occupy their place as the dominant telecommunications services provider in their regions. Requiring safeguards prior to certification will help ensure a level playing field among providers of video programming. Therefore, we urge the Commission to implement this effective and efficient regulatory approach. In a climate of streamlined government, adopting a pre-certification, separate- subsidiary requirement will prospectively relieve the Commission of much of the burden of adjudicating individual cost and rate manipulation complaints. D. A Separate Subsidiary Requirement Will Also Further the Goals of Ensuring Reasonable Rates and Non- discriminatory Access. As explained in section III infra, the most effective means of policing the statutory requirements continued in section 653(b)(1)(A) that the rates, terms, and conditions of carriage are just and reasonable and not unjustly or unreasonably discriminatory are to require an arms-length contract between the OVSPO and its affiliated programmer, the public filing of such contract and the opportunity for unaffiliated programmers to access the OVS with the same rates, terms and conditions as the affiliated programmer. The requirement of a fully separate subsidiary is necessary to implement this important requirement of the statute. II. Implementation of Public, Educational, and Governmental Access on Open Video Systems must Allow Meaningful Platform Access for Schools, Churches, Universities, Charities, Local Institutions and Individuals. A. The Telecommunications Act of 1996 Requires That PEG Access on OVS Provide the Same Level of Services and Support to the Nation's Communities as PEG Access on Cable Systems. When Congress passed the 1996 Act, it specifically required that section 611 of the 1984 Cable Act (47 U.S.C.  531) be applied to open video system platform operators ("OVSPOs"). Section 611 permits franchise authorities to ask for and receive PEG access capacity, equipment, facilities and services from cable operators. The new law therefore requires OVSPOs to provide similar capacity, equipment, facilities and services to PEG access operations in a like manner. The Act states that "the Commission shall, to the extent possible, impose obligations that are no greater or lesser than the obligations contained, inter alia, in the PEG access provisions of section 611. The Coalition urges the Commission to provide for equivalent obligations on OVSPOs and cable operators in order to encourage the further growth of PEG access. B. Wherever Cable PEG Access Exists, OVS Interconnection with Existing Cable PEG Access Centers Should Be Required. To effectuate the purposes of the 1996 Act, the Coalition recommends that the Commission adopt the following principles. In jurisdictions where there are already-existing cable PEG-access entities, OVSPOs should duplicate the cable operator's activities, according to the exact terms of each locality's franchise agreement. The OVSPO should be required to interconnect with the existing PEG channels, and provide financial support, services, equipment and facilities equal to services provided by the incumbent cable operator. The OVSPO should be obligated to perform all activities and provide all such facilities as are required by the franchise agreement that may be necessary to effectuate such carriage. These activities should include, at minimum, carrying signals from the PEG access centers or cable operator's headend to the OVSPO's, and providing any translation and/or interconnection equipment necessary to adapt from the cable operator's format to the OVSPO's. We urge the Commission to prohibit OVSPOs from imposing costs on entities managing PEG access centers by hiding them in "incidental" but vital services, such as menu listings, conversion services and carriage to the headend. If the OVSPO is unwilling to comply with the terms of the franchise agreement's PEG provisions as written, the franchise authority, the cable operator and the OVSPO should be permitted to negotiate an arrangement to share PEG access responsibilities. If the cable operator, the OVSPO and the franchise authority are unable to reach an accord on the joint provision of PEG access facilities, equipment and services, then either (a) the OVSPO should be required to either create its own PEG services according to the terms of the franchise agreement or a negotiated package equivalent to the cable operator's franchise obligations; or (b) an independent auditor chosen jointly by the franchise authority and the OVSPO should be used to determine a cash equivalent to the cable operator's total commitment. That cash equivalent should be paid by the OVSPO to support PEG access. The OVSPO should be required either to attach the outstanding franchise agreement, or a separate agreement between the OVSPO and the franchise authority, signed by both parties, with the OVSPO's certification application. In a case where an OVS provider interconnets with a cable operator that maintains its own internal PEG access operations, the cable operator should be required to keep separate books and create a separate corporate identity for the PEG access entity. Ideally, cable operators should be required to transfer their PEG operations to an independent non-profit organization, local school or governmental agency. Transferring these responsibilities to a separate non-profit entity will guarantee that cash and in-kind support from an OVSPO for an interconnected PEG access center will be used for PEG access. In any dispute between the cable operator and the OVSPO regarding any joint and several responsibilities under their PEG access provision agreement, the franchise authority may be permitted to act as an arbitrator. Any decisions of the franchise authority may be appealed to the Commission. Upon request of the franchise authority, the Commission could order an OVSPO to show cause why it should not be decertified for failure to fulfill its obligation to the franchise authority. Anyone, including managers of PEG access centers, unaffiliated programmers, or cable subscribers, who is aggrieved by the failure of an OVSPO to fulfill the terms of PEG carriage and/or the failure of a franchise authority to enforce the terms of an agreement, should be permitted to take a complaint directly to the Commission. Upon a determination by the Commission that the OVSPO is not in compliance with the terms of the franchise agreement, the Commission may order the OVSPO decertified. An OVSPO may be decertified until the Commission has determined that the breach has been remedied. The Commission may, in conjunction with the OVSPO and the franchise authority, also appoint an independent arbitrator whose determination shall be final. The Commission should not preempt the right of a third party to apply state law remedies, if any, requiring enforcement of agreements on behalf of taxpayer third-party beneficiaries (including any injunctive relief). C. Where There Are No Incumbent PEG Access Requirements, OVSPOs Should Be Required, upon the Request of the Franchise Authority or the Commission, to Offer PEG Access. In those jurisdictions in which there may be no incumbent cable operator, the Coalition supports a rule that would require OVSPOs to allocate capacity and resources to PEG access even when there is no parallel cable operator. The Coalition would support a rule in this situation requiring the OVSPO to provide PEG according to the terms of the nearest operating cable system that does have a commitment to provide PEG access, facilities, services and equipment. If the OVSPO has bought out an existing cable system and intends to operate it as an OVS, the analogous situation could be created. Cable systems purchased by LECs should, therefore, be required either to abide by the terms of the franchise agreement at the time the system was purchased, or with terms agreed to thereafter by the franchise authority. Finally, if the cable operator is not required to provide PEG access, at the time it is purchased by a LEC, the franchise authority should nonetheless be given the authority to request that the OVSPO voluntarily provide carriage and financial support for PEG access, or to request that the OVSPO tie into the facilities of a neighboring jurisdiction on a voluntary basis. If a franchise authority declines to exercise any option it may have to request PEG access channels on the local OVS system where no PEG exists on the incumbent cable system, such waiver of right should be in writing and included as part of the OVSPO's request for certification under Section 653. If, contrary to the Coalition's view, the Commission were to permit a cable system to convert to OVS, the existing PEG access terms should become permanent unless the franchise authority agreed to changes via the normal, local political process (i.e., local resolution or ordinance). III. The Commission Should Issue Bright Line Rules to Guarantee Fair and Reasonable Rates and Nondiscriminatory Access. Section 653 of the 1996 Act directs the Commission to prescribe regulations that ensure non-discriminatory access to open video systems, at rates, and under terms and conditions that are just and reasonable, and [that] are not unjustly or unreasonably discriminatory. At the same time, Congress wanted to promote the entry of local exchange carriers into the video market and therefore, expressed the intention that OVS operators not be subject to Title II-like regulation. The Commission seeks comment on how to reconcile these seemingly contradictory mandates. The Coalition submits that there is no contradiction--that the two mandates are consistent. We believe that by lifting both the non-discrimination principle and non-discrimination language from Title II, Congress signaled the importance of the principle itself, and merely cautioned the Commission not to use its regulatory authority to impose a comprehensive common carrier regulatory framework on OVS operators. Regulation prohibiting discrimination among video programming providers is central to Congress s goal of achieving diversity of programming sources and increasing consumer choice through intra-system competition. Without this clear attention to the principle of non- discrimination, we believe that open video systems operators will have the incentive to maximize profits by keeping unaffiliated and independent programmers off their systems. As with other potential enforcement mechanisms in this proceeding, the best means of enforcement is to require entities to make a showing before they are certified, that they have complied with the nondiscriminatory access requirements. Specifically, the Coalition urges the Commission to: (1) not rely on the voluntary efforts of OVS operators; (2) establish a market-based regulatory mechanism, or if the market-based mechanisms fail, set reasonable rates for programmer access; (3) look to its experience with non-discriminatory access in the cable leased access area; and (4) require that OVS operators establish reduced rates for not-for-profit programming. A. The Commission Should Not Rely on the Voluntary Efforts of OVS Operators to Provide Non-discriminatory Access. The obvious incentive for OVS operators to hoard capacity and to maximize profits, and the Commission s own experience with leased access on the cable systems indicate that relying on the voluntary efforts of OVS operators to establish just and reasonable rates will frustrate the congressional goals of diversity of programming sources and increased consumer choice. Clearly, an OVS operator would make the greatest profit by imposing excessive rates and prohibitive terms and conditions on unaffiliated programmers: Unaffiliated programming would be kept off the system and affiliated programming could thus be made more attractive to advertisers. Moreover, the Act itself may create a perverse incentive for OVS operators to keep demand by unaffiliated programmers low so that the one-third limit on affiliated programming is not triggered. B. The Commission Should Adopt a Market-based Regulatory Mechanism for Third-party Access. The Coalition urges the Commission to adopt a market-based regulatory mechanism, to monitor the effectiveness of that mechanism, and, if those market mechanisms fail to achieve the goals of diversity and increased consumer choice, to set rates based on the incremental cost of providing access. It is important to note that the Coalition s proposal is quite different from simply relying on market incentives and competition with cable operators to ensure that rates are just and reasonable. Rather, the Coalition s proposal is a proactive mechanism that uses market factors to gauge reasonableness; it requires: (a) full disclosure of the terms of carriage; (b) a presumption of reasonable rates based on the amount of capacity occupied by programmers who are unaffiliated with the OVS operator; (c) a presumption that if the rate is ten percent higher than the incremental cost of providing the service, the rate is discriminatory; and (d) an effective dispute resolution mechanism. 1. Full disclosure of terms of carriage. First, the Commission should require that OVS operators disclose all rates, terms and conditions for carriage by making their contracts with both affiliated and unaffiliated programmers public. Public disclosure of contract terms will help prevent discrimination and allow programmers to assess the reasonableness of proposed carriage rates and terms. Any platform contract that an OVS operator negotiates with its own affiliate could serve as a benchmark, both as to terms and conditions of carriage and reasonable rates. The OVSPO's failure to offer its affiliate s or an unaffiliated programmer s contract terms (including bundled services, promotion and advertisement, "bill and keep," and pass-through terms) to any other unaffiliated programmer would be considered presumptively discriminatory. The Coalition also endorses the idea that unaffiliated programmers have the right to insist on pro-rata terms for any quantifiable terms within the OVSPO-affiliate contract. 2. Reasonable rate benchmark based on the amount of capacity occupied by unaffiliated programmers Second, the Coalition proposes that the presence of unaffiliated programmers on twenty-five percent of capacity (excluding non-must carry channels) would provide an appropriate reasonable rate benchmark. We believe that the Commission s alternative proposal of measuring reasonableness in terms of the number of unaffiliated programmers is less desirable when system growth is taken into consideration. However, should the Commission decide to determine reasonableness by the number of programmers on the system, the presence of at least four (again, excluding must carry channels) would provide an appropriate benchmark at the beginning of the OVSP s service. 3. Presumption based on rate comparison to incremental cost While the OVSPO should always have the burden of showing reasonableness, as an additional safeguard, a strong presumption should be created that any access rate that is ten percent higher than the incremental cost of providing the service is unreasonable. As we discussed in section III(A) supra, an OVS operator has a tremendous incentive to charge excessive rates to unaffiliated programmers, thereby retaining the maximum amount of system capacity for affiliated programming. Adopting a percentage of capacity purchased benchmark as well as an incremental cost-based presumption will help deter OVS operators from charging access rates that are artificially inflated. 4. Dispute resolution mechanism. A non-affiliated programmer, upon filing a complaint with the Commission stating that it has been subjected to unfair rates and terms or other unjustified discriminatory access requirements, should have the right to expedited review. The complaint should set forth the particulars of the claimed discrimination, and be served on the the OVSPO. Upon receipt, the Commission should make an initial examination of the party s claim, utilizing the aforementioned market-based tests. If an OVS fails to meet the 25 percent amount of capacity test (or the minimum-number test, if adopted instead) or if its rates are more than ten-percent higher than incremental cost, the Commission should issue an order to show cause why the Commission should not find the OVSPO s rates or conditions unfair or discriminatory and impose sanctions. The sanctions could include required carriage of the aggrieved party at a rate and on terms ordered by the Commission, as well as restrictions on the percentage of capacity an OVSPO could program at their next scheduled capacity increase. C. If Necessary, the Commission Should Adopt a Reasonable Rate Formula. Under a largely voluntary regulatory structure, cable system operators thoroughly frustrated the ability of unaffiliated programmers to lease channels. As such, the results and findings of the recently issued leased access Report and Order are central to the Commission s consideration of an appropriate regulatory structure to promote non-discriminatory access to OVS platforms. The core finding of the latest Leased Access Order is that section 612 of the Cable Act, as amended by the 1992 Cable Act, overcompensates cable operators in most instances. We strongly urge the Commission not to repeat the mistakes of the past. Assuming that a market-based regulatory mechanism does not yield non-discriminatory access, we urge the Commission to impose access rate standards on an incremental cost basis. IV. The Commis sion Should Requir e OVS Operat ors to Set Lower Rates for Not- for- profit Progra mmers. One of the great shortcomin gs of the current cable television regulatory regime is that access rates have inhibited carriage opportunit ies for not-for- profit programmin g. Because a vast library of not-for- profit programmin g, including programmin g produced by national non-profit organizati ons, cannot be provided either through PEG access or through traditiona l public broadcasti ng outlets, Congress s goal of diverse sources of programmin g has not been realized in the cable arena. The Commission must ensure that this experience is not repeated under the OVS model by requiring that carriage of not- for-profit programmer s by OVS operators is affordably priced. The Coalition supports basing the reasonable rate for not-for- profit access on an incrementa l cost formula. The Commission s proceeding s on leased access to cable channels is a crucial example of how the public may be denied the benefit of diverse sources of programmin g if the rates for not-for- profit carriage are not set at an affordable level. Leased access was designed to increase diversity in programmin g over cable systems by requiring the system operator to offer a certain amount of channels for lease over which they exercised no editorial control. However, cable operators prevented third-party access to the channels by setting discriminatory rates and terms. Subsequent attempts to revise the scheme for access to cable systems have largely been unsuccessful, and continue today. Now, with the OVS entry option into the video market, the Commission has the opportunity to implement regulations that ensure will genuninely function to make carriage possible for not-for-profit programmers. The Commission s authority to ensure just and reasonable, and not unjust or unreasonably discriminatory rates implicitly allows some level of just discrimination in determining rates. Whereas setting a lower reasonable rate for not-for-profit programming than the rates for like-types of programming is discriminatory, this is exactly the sort of just discrimination that the Act contemplates, as a previously inaccessible diverse source of programming may now receive carriage. In order to ensure that not-for-profit rates are affordable and serve to advance Congress goals for OVS, the annual incremental costs incurred by an OVS operator in providing a channel for access should be the basis of the rate. By using this calculation, not-for-profits would be able to afford carriage on an OVS while covering the operator s annual cost of operating the channel, so as not to receive an unreasonable subsidy from the operator. This discounted price is based on a neutral and rational basis, and therefore fits within the boundaries of reasonable discrimination in determining the access rate for not-for-profits under the Act. V. The Commission Should Establish Guidelines for the Non- discriminatory Allocation of Channel Capacity. In meeting the Act s requirement that allocation of capacity on OVS platforms be nondiscriminatory, the Commission seeks comment on whether it should allow OVS operators to design their own channel allocation policies, or whether it should establish channel allocation regulations. The primary rationale for the creation of open video systems--and the only justification for abandoning a host of public policy protections which currently protect consumers and viewers from cable industry abuses--is the potential for third-party programmers to have fair, reasonable, and meaningful access to OVS platforms. The Commission must guarantee that the procedures allowing third party access are likewise just, reasonable and meaningful. Consequently, perhaps the most important determination in this proceeding is defining the "demand" for purposes of section 653(b)(1)(B). Failure to define "demand" in a way that encourages independent third parties to make such demand will nullify the congressionally imposed safeguard that affiliated programmers can control no more than one-third of the activated channels where demand exceeds capacity. This could result in the creation of a regulatory system which replicates the editorial bottleneck of cable operators, while exempting OVSPOs from the public interest regulatory requirements that govern the cable industry. OVS operators have a tremendous incentive to discriminate in favor of their programming affiliates if allowed to design their own channel allocation policies. We urge the Commission to prescribe regulations, particularly in the following areas: notice requirements, capacity measurement, allocation where demand exceeds capacity, and changes in demand after the initial allocation of capacity. A. Operators Should Be Required to Notify the Commission of Their Intent to Establish an OVS and File a Copy of Their Terms of Affiliated Carriage. The Coalition recommends that, as a first step toward obtaining an OVS certification, the OVSPO applicant file with the Commission, with the state PUCs, and with all franchise authorities within its proposed service area a notice of intention to apply for an OVS permit, describing with particularity the service area and services to be offered. The notice of intent should also include a showing of compliance with all procedures established to prevent cross-subsidization. At the same time, the OVSPO may file a copy of its OVSPO-affiliate contract with the Commission, PUC, and with each relevant franchise authority. If no OVSPO-affiliate contract is filed with the Commission, the OVSPO must certify that no affiliated programmers will be transmitting, and state in its notice that the entire capacity is available for use. In such a case, it must submit a pro forma contract in the form of a tariff approved by the state's PUC. Within ten days of such filing, the Commission should issue a public notice which includes the appropriate OVS contact personnel for information, and a 90-day open enrollment period during which programmers may negotiate for carriage. If at the end of 90 days, three or less unaffiliated entities have failed to reach agreement for capacity on the system, the price will be presumed discriminatory, and the operator must refile its pro-forma tariff and begin another 90-day waiting period. The terms will be deemed discriminatory until at least four unaffiliated programmers have contracted for capacity. B. Final Calculation of "Demand" for Allocation Purposes Should Not Take Place until at Least Four Unaffiliated Programmers Have Applied for Space on the System and Have Concluded Arms-length Negotiations. The Coalition recommends that "demand" be calculated using the 90-day window subsequent to the Commission's issuance of its notice that an entity plans on creating an OVS system (along with the appropriate contract and PUC documentation). Programmers demanding one channel or more pursuant to the OVSPOs public notice, shall send a letter to the OVSPO's official contact address, and send a copy of a letter requesting space to the Commission and to the state PUC. Any entity requesting one channel or more shall be required to file a "good faith" bond of $100,000, which shall revert to the Commission if the requester has not sought a contract negotiation with the OVSPO within the 90-day period. A finding by the Commission of a failure by an OVSPO applicant to negotiate in good faith will terminate its certification application. At the end of 90 days, the unaffiliated programmer will have the opportunity to either adopt the affiliate's contract or the pro-forma contract approved by the PUC, or may terminate negotiations. If there are not at least four unaffiliated programmers who have signed a contract, the OVSPO must file a new pro-forma contract with the PUC's approval, and the 90-day procedure will begin again. C. During Initial Allocation, Each Multi-Channel Programmer Should Only Be Granted a Proportion of its Application If There Is Excess Demand, Reserving a Percentage of Channels to be Offered on an a la Carte Basis. When demand exceeds capacity, system capacity should be allocated on a proportional basis, as opposed to by lottery or on a first-come, first-served basis. Both lottery and first-come, first-served procedures would exclude some programmers from carriage by allowing some programmers to win carriage and others to lose the opportunity for carriage. This is detrimental to Congress goals that there be diversity of programming sources and increased consumer choice. Both procedures would also have to be run twice, once for affiliated programming and once again for unaffiliated programming, which is contrary to Congress goal that regulation be streamlined. The proportional allotment method of capacity allocation allows all programmers access, and helps to provide diversity to OVS programming. Also, proportional allocation requires only one proceeding where demand is assessed and allocated, with the operators affiliates getting a proportional amount of its one- third allotment and unaffiliated programming receiving proportional allotments of the remaining capacity. We urge the Commission to proportionally allocate the majority of the channel capacity reserved for unaffiliated programmers to multichannel programmers, while holding 20% of the channel space in reserve for a la carte selection by single channel programmers. This method of allocation provides for even distribution amongst the larger-scale programmers while allowing the small programmer an opportunity for carriage on the OVS, which also helps to increase diversity of sources of programming and increased consumer choice. OVSPOs should be prohibited from mandating channel bundling beyond that necessary to implement must-carry and PEG requirements. Customers must always have the option of purchasing any given video programming service separately, down to even one channel (although must-carry and PEG are required by law to constitute a quasi-"basic tier" which all OVS platform subscribers will receive, even if they only wish to subscribe to one additional programming service). D. When Channel Demand Exceeds Capacity for an Operating OVS, the Commission Should Favor Increased Capacity over Channel Reallocation. When demand exceeds the capacity of an OVS after the initial allocation of channel capacity, the Act requires the Commission to address how the OVS operator will conform to the restriction that he may only select programming on one-third of the system. The Notice suggested a method of scheduling enrollment periods for reallocating channel capacity from the operator s affiliates to unaffiliated programmers, which would satisfy the requirements of the Act. But Congress goals of increasing diversity of sources of programming and consumer choices would be best met if the Commission built time into the enrollment period for the OVS operator to increase capacity to meet demand. Under this plan the operator s subscribers would be assured that they were receiving a stable programming package, while the capacity of the OVS would be increased, provided the operator meets the demands for increased capacity within a prescribed, reasonable time period. This approach would not deter OVS operators investment in programming, and it would provide stability to the market by not forcing operators to relinquish channel space and disrupt services to customers. An OVSPO should be required to fill any request for capacity within one year. In the reverse situation where an OVS operator finds additional capacity has become available on the platform but not as the result of a system upgrade, that capacity should be allocable first to unaffiliated programmers. E. OVS Providers Cannot Be Permitted to Use Capacity Formatting to Frustrate Nondiscriminatory Access. Over the next few years, both OVS and cable systems may begin to transmit signals in a number of different formats on a market trial basis -- indeed, some proposals for digital market trials had already been proposed in conjunction with implementation of video dialtone. The OVSPO cannot be permitted to configure its system in a way that will have the result of giving it exclusive control over programming. Arbitrary classification by OVSPOs that a certain percentage of their signal is digital only may be used to deny access to a range of unaffiliated programmers and PEG centers. By tailoring the preferred format space, OVSPOs can keep a range of programmers off by insisting that they adopt an undesired format. This result is not what Congress intended when it created "open video systems." The only way to avoid this outcome is to treat digital and analog capacity separately, as if each were a separate OVS system. Therefore, we recommend that the Commission measure the total capacity of an OVS by the least expansive method, as this will provide operators with incentives to increase capacity and advance the goal of diversity of programming choices. VI. PEG Access Must Be Delivered on a Franchise-Specific Basis. A. OVS Providers must Deliver Franchise-specific PEG Programming and Comply with the Commission's Exclusivity and Non-duplication Rules. PEG must carry rules on cable systems require operators to configure signal delivery to comply with the various contractual requirements of the franchisor. When the franchising authority requests PEG access, it generally requires only that PEG access programming be distributed within that franchise area. Consequently, all currently-operating cable systems are by definition already configured to provide specific programming to a franchise authority - or even units smaller than a franchise authority. At the same time, cable systems are also required to comply with geographic transmission limitations imposed by the Commission's sports exclusivity, network non-duplication and syndicated exclusivity rules. The 1996 Telecommunications Act requires OVSPOs to do no less. As indicated in the declarations attached as Exhibits B and C, cable operators with clustered systems are already providing signals on a franchise authority-by-franchise authority basis, even when the remainder of their platform is transmitted from a single regional headend. As the declaration made by Gregory R. Vawter notes, the equipment necessary to allow such transmission is technologically simple -- simple enough that currently existing cable franchises are offering the ability to narrowcast as an inducement for cities to renew the incumbent's franchise. During the debate of the legislation, some RBOCs claimed to be unable to provide such "narrowcasting," even though cable systems are offering this capability to potential advertisers -- and to franchise authorities, when necessary. There is no reason that OVSPOs should not be required to do what is clearly well within their technological capabilities. And the objection that such requirements are too financially onerous are not supportable in an environment where cable systems that are already in compliance have proven their overall profitability. The Commission should not accept the provably false contentions of the industry that a franchise-by-franchise PEG access requirement will force unjustifiable financial burdens on the OVS industry. Moreover, technological improvements to the platform suggest that overbuilds, utilizing hybrid-fiber-coaxial or fiber-optic cable, and/or switched networks, will make it significantly easier for OVSPOs to configure their systems to permit franchise-specific programming. Both hybrid fiber-coaxial cable ("HFC") and fiber optic cable vastly increase the carrying capacity of trunk lines to enable the system to carry information from multiple franchise areas simultaneously. With the advent of switched networks, consumers will be able to have a direct switched link to programmers, including PEG access centers, such that the overall capacity demand for the system would be driven by subscribers rather than programmers. Finally, and most importantly, regardless of the system, all improvements will require nodes or transmission stations where location specific signals can be inserted without having an impact on the carrying capacity of the overall system more than the actual number of signals demanded in that franchise area. Thus, the Commission should not ease regulatory requirements at the very moment when advances in technology are making those requirements simpler and more cost-effective to meet. The declaration prepared for the Alliance for Community Media by Dale Hatfield is particularly informative. Mr. Hatfield indicates that "Fiber to the Curb" and "Fiber to the Home" technologies are the future of telecommunications, advances which will make it signifcantly easier and less expensive to narrowcast programming on a sub-franchise authority basis. PEG access are intended serve the areas recognized by the franchise authority, because the public policy behind PEG access is to encourage localism and expression by non-profit and non-commercial entities. A Commission policy that results in the same PEG channel serving an entire state would subvert both the letter and intent of 653(c)(1)(B) -- it is both significantly less than what cable operators are required to provide under  611 of the Cable Act, and contradicts the public policy behind  611, which is to guarantee that local voices and local concerns can find a place on the NII without having to be commercially profitable. B. All Subscribers to OVS must Be Able to Find and Watch PEG Access Channels. The Commission should not dictate the precise terms for implementing menus, channel order, or navigational devices unless necessary to achieve fairness and meaningful non-discriminatory access. However, such intervention may be necessary if the industry does not act in good faith. Menus may allow viewers to reach more directly reach the programming or information services they desire by being able to access it through a subject classification. Menus may enable OVS viewers to receive sets of niche programming, without having to wade through significant amounts of irrelevant information. Perhaps more importantly, the menu-driven scheme may, when combined with switched digital systems, offer significantly more flexibility in allowing subscribers to access video programming. Systems could be menu driven and ordinal simultaneously. Local PEG access centers should be listed on the same menu or placed in the same area of the dial as local broadcast stations. Placing PEG on the quasi-"basic tier" would offer a sensible structure for presenting these channels to all OVS subscribers, regardless of how other programmers, whether affiliated or unaffiliated, would be using the system. C. The OVSPOs must Provide Advertising and Promotional Support When the Relevant Agreement Requires It, or If Failure to Provide It Is Discriminatory. OVSPOs must provide marketing, advertising and other promotional support to PEG access when the franchise of the incumbent cable operator requires the cable operator to do so. In the absence of a contractual obligation, the OVSPO should provide these channels with the same amenities and services that it is providing to any other unaffiliated programmer, and not be permitted to treat PEG access channels in a manner inferior to similarly situated commercial channels. The OVSPO's ability to allocate channels or menus without regulatory guidance from the Commission or a local regulatory body may encourage OVSPOs to abuse their discretion by burying PEG channels. Section 611 of the 1984 Act creates an incentive to undercut community support for PEG access by permitting unused PEG channels to be reclaimed by the operator. Consequently, listing all local services together on the same menu or sub-menu, labeling them "local programmers," will protect the long-term viability of local public, educational and governmental access programming. The Commission should not allow OVSPOs to describe PEG programming in such a way as to undercut the likelihood that it will be viewed. Design and implementation of navigational devices should occur only with the express approval of all unaffiliated programmers, and the pre-certification documentation should indicate clearly that the independent and non-affiliated programmers are satisfied with all rates, terms conditions and procedures for access offered by the OVSPO. Programmers should be given the opportunity to decide how they will be placed on the system, instead of allowing the OVSPO to potentially sabotage competitors' programming by prohibiting unaffiliated programmers from describing their services in the manner they choose. VII. Cable Operators Should not be Permitted to Operate OVS Platforms. A. The 1996 Telecommunications Act Prohibits Cable Operators from Becoming OVSPOs. The structure and legislative history of the 1996 Telecommunications Act provides conclusive evidence that Congress intended that only common carriers could become OVSPOs. First, Section 653 was included in Part V or Title VI of the Communications Act, added by Section 302 of the 1996 Act. The introductory clause of section 302 specifically limits its applicability to cable service provided by telephone companies. The title of Part V also indicates the intent of Congress that it only govern video programming services by telephone companies. Likewise, in relevant part, the legislative history provides: "New section 651 of the Communications Act specifically addresses the regulatory treatment of video programming services provided by telephone companies. Recognizing that there can be different strategies, services and technologies for entering video markets, the conferees agree to multiple entry options to promote competition, to encourage investment in new technologies and to maximize consumer choice of services... " Congress' reasoning in creating "open video systems," like the Commission's rationale in creating "video dialtone," was that telephone companies needed a modified regulatory regime to draw them into the business of providing video programming services. B. Section 651(c) Gives Cable Operators the Option of Using OVS Platforms, Not of Being a Platform Operator. The legislative history of the Act offers cable operators an opportunity to use an OVS platform to offer cable services to customers instead of, or in addition to using their own facilities. The logic of this provision is clearly a response to instances in which VDT operators attempted to persuade the Commission that the VDT platform operator had the right to exclude an incumbent cable operator from space on their system. The 1996 Act was meant to draw telephone companies into the video programming market, not to allow already existing cable operators to escape their responsibilities to the public interest by providing a convenient exit from rate regulation and local public oversight. C. To Maintain a Level Playing Field, OVSPO Fees in Lieu of Franchise Fees Should be Imposed on the Gross Revenue of the Video Pipeline, not just the OVSPO s Programming Affiliate. In keeping with the law's requirement that the fees maintain an equivalency to the fees imposed by franchise authorities on cable operators, the fees must be imposed on the gross revenue of the pipeline, not just of the OVSPO s programming affiliate. Calculations of a fee on this basis will maintain a level playing field between OVSPOs and cable operators. In this regard, the Coalition endorses comments being filed in this proceeding by the National League of Cities, the National Association of Counties, the National Association of Telecommunications Officers and Advisors, et al. We share their view that franchise authorities should continue to be able to exercise their traditional legal rights to control and administer public rights-of-way even in the context of OVS. The continued exercise of these rights is vital to protect OVS consumers and unaffiliated programmers who wish to use OVS platforms. Conclusion For the foregoing reasons, the Coalition urges the Commission to adopt rules requiring telephone companies to offer video programming on an open video system only through a fully separated subsdiary, ensuring PEG centers access to, and support on, OVS platforms, establishing market-based regulatory mechanisms to ensure rates and access terms that are fair and reasonable and not unjustly discriminatory, establishing discounted rates for not-for-profit programmers based on an operator s incremental cost, and prohibiting cable operators from becoming OVS platform operators. Respectfully submitted, Of Counsel: ________________________________ Gigi B. Sohn Jeffrey Hops Andrew Jay Schwartzmann Director of Government Relations Media Access Project Alliance for Community Media 2000 M Street, N.W. 666 11th Street, N.W., Suite 806 Washington, D.C. 20036 Washington, D.C. 20001-4542 (202) 232-4300 (202) 393-2650 Karen Edwards John Podesta Graduate Fellow, Georgetown Institute for Public Representation University Law Center Georgetown University Law Center 600 New Jersey Avenue, N.W. Washington, D.C. 20001 Darrell Perry, Law Student (202) 662-9535 Georgetown University James N. Horwood, Esq. Spiegel & McDiarmid 1350 New York Ave., N.W. Washington, D.C. 20005 (202) 879-4000