Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) Implementation of Section ) 302 of the Telecommunications ) CS Docket No. 96-46 Act of 1996 ) ) Open Video Systems ) ) JOINT COMMENTS OF CABLEVISION SYSTEMS CORPORATION AND THE CALIFORNIA CABLE TELEVISION ASSOCIATION Donna N. Lampert James J. Valentino Charon J. Harris MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C. 701 Pennsylvania Avenue, N.W. Suite 900 Washington, D.C. 20004 (202) 434-7300 Robert Lemle Alan J. Gardner Charles Forma Jerry Yanowitz Marti Green Jeffrey Sinsheimer CABLEVISION SYSTEMS CORPORATION CALIFORNIA CABLE TELEVISION One Media Crossways ASSOCIATION Woodbury, New York 11797 4341 Piedmont Avenue (516) 364-8450 Oakland, California 94611 (510) 428-2225 April 1, 1996 TABLE OF CONTENTS Page INTRODUCTION AND SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . 2 I. OVS IS INTENDED TO BE DIFFERENT FROM CABLE TELEVISION AND THEREFORE OVS PROVIDERS MUST ADHERE TO THE PRINCIPLE OF NONDISCRIMINATION TO QUALIFY FOR REDUCED REGULATORY OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . . 5 A. The Commission Must Ensure That Open Video Systems Do Not Become De Facto Cable Systems Subject to Reduced Regulation . 5 1. The Selection of Video Programmers and Allocation of Channel Capacity Must Be Nondiscriminatory, Prospective, and Verifiable. . . . . . . . . . . . . . . . . . . . . . . . 6 a. The Commission's Rules Must Promote Congress' Nondiscriminatory Vision for OVS. . . . . . . . 6 b. The Video Dialtone Experience Teaches That the LECs Will Discriminate Absent Specific Uniform Rules 7 c. OVS Operators Must Be Precluded from Controlling Over One Third of OVS Channel Capacity . . . . . . . 10 d. The Commission's Regulations Must Bar Preferential Treatment of Favored Programmers Even if They Are Not "Affiliates" . . . . . . . . . . . . . . . . . . 12 2. The Commission Must Ensure that OVS Operators Do Not Abuse Channel Sharing . . . . . . . . . . . . . . . . . . 14 3. The FCC Must Prevent the Provision of Marketing Services from Skewing Unfairly the Competitive Video Marketplace . 17 4. Rules Requiring An OVS Operator To Make Programming Contracts Public Will Reduce Discrimination . . . . . . . 20 B. REGULATORY PARITY DEMANDS THAT THE COMMISSION ENFORCE ALL TITLE VI OBLIGATIONS THAT ARE MANDATED BY THE ACT. . . . . . . . . . . . . . . . . . . . . . 20 1. OVS Operators Must Comply With PEG, Must-Carry, and Retransmission Consent Requirements . . . . . . . . . . . 21 2. OVS Operators Must Fulfill Other Mandated Requirements. . 23 3. The OVS Rules Must Not Undermine the Public Policies Underlying State Level Playing Field Statutes . . . . . . 24 II. THE STATUTORY OBLIGATION TO OFFER JUST AND REASONABLE RATES REQUIRES THAT RATES BE BASED ON COST CAUSATION PRINCIPLES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 III. THE PUBLIC INTEREST IN ROBUST VIDEO COMPETITION WILL BE SERVED BY PERMITTING NON-LOCAL EXCHANGE CARRIERS TO OPERATE AND UTILIZE OVS . . . . . . . . . . . . . . . . . . . . . . 31 A. Congress Contemplated That Cable Operators May Be Given the Option to Become OVS Operators . . . . . . . . . . . 31 B. There Is No Reasonable Basis to Conclude That Cable Operators And Their Affiliates Can Be Prevented From Becoming Video Programmers On An OVS. . . . . . . . . . . . . . . . . . 34 CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) Implementation of Section ) 302 of the Telecommunications ) CS Docket No. 96-46 Act of 1996 ) ) Open Video Systems ) ) JOINT COMMENTS OF CABLEVISION SYSTEMS CORPORATION AND THE CALIFORNIA CABLE TELEVISION ASSOCIATION Cablevision Systems Corporation ("Cablevision") and The California Cable Television Association ("CCTA"), (collectively "Joint Commenters") hereby submit these Comments in response to the Commission's Notice of Proposed Rulemaking in the above- captioned proceeding. INTRODUCTION AND SUMMARY The Telecommunications Act of 1996 (the "1996 Act") authorizes telephone common carriers to enter the video programming marketplace through a broad variety of strategies and technologies, including radio-based communication technologies regulated under Title III of the Communications Act, as common carriers regulated under Title II, as cable systems regulated under Title VI, or by means of open video systems ("OVS") as described in Section 653 of the 1996 Act. In creating OVS, Congress sought to create a new video services delivery mechanism to encourage the development of video competition in the marketplace and to provide consumers with a diversity of program choices. A principal feature that distinguishes OVS from cable television service is the tenet of nondiscrimination. Although not regulated under the Title II common carriage scheme, OVS, just as with video dialtone before it, seeks to achieve nondiscrimination goals by mandating open access and by ensuring the establishment of just and reasonable rates, terms, and conditions. In return for complying with these basic obligations, OVS operators qualify for reduced regulatory burdens under Title VI. Thus, although the LECs may utilize similar network facilities as cable operators, Congress intended that they act in a wholly different manner with respect to their basic programming obligations. Joint Commenters have considerable experience with both the promise and the pitfalls of video dialtone. The proposals for and deployment of video dialtone systems by the Southern New England Telephone Company ("SNET"), Pacific Bell ("Pacific"), Bell Atlantic and others have underscored the need for vigilant enforcement by the FCC of the bedrock nondiscrimination obligation, as the incentives of the local exchange carriers ("LECs") to act anticompetitively are powerful. Consequently, in crafting the regulations for OVS, the FCC must recall the lessons of video dialtone and act so as to ensure that the discriminatory and anticompetitive behavior of the past is not repeated in the future. Indeed, with OVS, the need for firm rules is even more compelling, because Congress has required the FCC to act on any certification request within 10 days. Failure to adopt and enforce clear rules at the outset to ensure that OVS operators do not engage in discriminatory behavior will frustrate competition and undermine Congressional goals. Specifically, to fulfill the promise of OVS to increase competition in the video marketplace and diversify programming choices for consumers, the Commission should: establish an open, verifiable, and prospective process for the selection of video programmers and for channel allocation; ensure that OVS operators do not utilize channel sharing mechanisms to undermine the Congressional goal of a new video services paradigm distinct from cable television; and enforce all Title VI obligations that are mandated by the 1996 Act. The Commission should also require OVS operators to demonstrate that the allocation of costs in joint use integrated networks is based upon sound economic principles. Here too, failure to ensure proper cost allocation will skew fair competition in the video marketplace to the ultimate detriment of both video and telephone consumers. All costs, including personnel and service costs, must be fairly allocated and reflected in OVS rates so that the OVS operations bear the burden of their true costs. Moreover, given the articulated public interest benefits of OVS, the Commission should permit cable operators to provide open video systems. Finally, the Commission should adhere to the statutory mandate that permits all video programmers, including cable operators and their affiliates, to utilize capacity on open video systems. I. OVS IS INTENDED TO BE DIFFERENT FROM CABLE TELEVISION AND THEREFORE OVS PROVIDERS MUST ADHERE TO THE PRINCIPLE OF NONDISCRIMINATION TO QUALIFY FOR REDUCED REGULATORY OBLIGATIONS A. The Commission Must Ensure That Open Video Systems Do Not Become De Facto Cable Systems Subject to Reduced Regulation With the adoption of a nondiscrimination requirement, Congress intended for OVS to be fundamentally different from cable television. If the Commission is to ensure that open video systems enhance competition in the video programming marketplace, it must both target the specific discriminatory practices that have occurred in the past and establish a guiding principle of fair and nondiscriminatory competition for the future. These regulations should prescribe: (i) the manner of selection of video programmers and allocation of capacity; (ii) the development of channel sharing plans; and (iii) the provision of marketing services and other critical aspects of the service. Moreover, if the Commission is to monitor compliance, and afford the public the means to detect abuses, it should also require OVS operators to make their contracts with programmers publicly available. 1. The Selection of Video Programmers and Allocation of Channel Capacity Must Be Nondiscriminatory, Prospective, and Verifiable a. The Commission's Rules Must Promote Congress' Nondiscriminatory Vision for OVS Section 653 of the 1996 Act directs the Commission to promulgate regulations that prohibit an operator of an open video system from selecting video programmers or allocating capacity on an open video system in a discriminatory fashion. By establishing this requirement, Congress sought to ensure an accessible system that provides consumers with the greatest possible diversity of program choices in a manner fundamentally different from cable television. Joint Commenters have had a multitude of experiences with LEC discriminatory practices in their deployment of video dialtone, which had a similar nondiscrimination requirement. The Joint Commenters assert that this pattern of behavior is not likely to change in the future simply because Congress has created a new regulatory structure. Thus, if the Commission is to fulfill the statutory vision for OVS, it must establish open, verifiable, and prospective regulations prescribing a selection process that: (i) includes a specific publicly-noticed time period of reasonable duration during which potential programmers may request capacity; (ii) allocates channels to programmers in a fair manner based upon the video programmers' initial requests when demand exceeds capacity; (iii) sets forth procedures to decide how channel positions will be determined among video programmers; and (iv) limits the percentage of channels that an affiliated programmer may reserve. Only by detailing the terms and conditions of enrollment, programmer selection, and capacity allocation in this manner can the FCC promote regulatory efficiency and serve the public interest by fulfilling the Congressional vision. b. The Video Dialtone Experience Teaches That the LECs Will Discriminate Absent Specific Uniform Rules In the history of video dialtone deployment, the LECs' demonstrated strategy was to discriminate in favor of a preferred video programmer which was utilizing all, or virtually all, of the platform's available capacity through individual discussions, closed negotiations, or discriminatory channel reservation plans. In California, for example, Pacific granted significant benefits and advantages to Anchor Pacific Corporation ("Anchor Pacific"), a company in which Pacific holds a conditional purchase option. Similarly, in Connecticut, SNET initially sought to allocate 49 of the 53 available broadcast channels to a single programmer with which it had a special relationship and refused to make capacity available to cable-affiliated entities. In fact, rather than establish a formal process to solicit capacity requests from potential video programmers, SNET, Pacific, US WEST, and, initially, Bell Atlantic, acted to ensure that their affiliated or favored programming entities, rather than truly independent video programmers, would secure the lion's share of capacity on their video dialtone platforms under preferential terms and conditions that were not available to unaffiliated providers. Unless the Commission's rules clearly bar such conduct, experience teaches it will flourish. Open, verifiable, and prospective rules will further Congress' goals to reduce regulation and promote nondiscrimination without repeating the shortcomings of the video dialtone regulatory process. First, such uniform regulation would provide OVS operators, video programmers, and competitors with easily understood and necessary guidance regarding those practices that the Commission finds are essential to compliance with the 1996 Act. Second, as demonstrated by certain aspects of Bell Atlantic's channel reservation process for video dialtone in Dover Township, such a plan can be relatively easy to establish and administer and should help provide interested programmers a framework from which to make business decisions regarding participation in OVS. Third, the rules would clearly define the nature of the obligations that OVS operators have and distill some of the key regulatory differences between OVS and cable. Finally, such regulations will ultimately reduce regulatory by eliminating the need for the Commission to entertain unnecessary proceedings to resolve the disputes that will otherwise arise if the Commission adopts only a general prohibition against discrimination, to be defined on a case-by-case basis. c. OVS Operators Must Be Precluded from Controlling Over One Third of OVS Channel Capacity Section 653 of the 1996 Act also requires the Commission to adopt regulations prohibiting OVS operators and their affiliates from selecting programming for more than one- third of the system capacity, if demand so dictates. Given this Congressional mandate, the FCC must limit OVS operators and affiliates to no more than one-third of the non-shared, non-PEG, activated capacity on an OVS platform and to relinquish capacity to the extent there is insufficient capacity to meet future demand. In addition, the Commission should prohibit OVS operators from prescribing minimum or maximum capacity requirements for unaffiliated programmers. Such restrictions on unaffiliated programmers are contrary to the pro-competitive nature of OVS, which is designed to minimize the considerable incentive that OVS operators have to discriminate in favor of themselves and their affiliates. Permitting OVS operators to impose minimum or maximum capacity restraints will likely enhance, not minimize, an OVS operator's ability to chill competition from unaffiliated video programmers. Accordingly, such limitations should be generally barred. The Commission should also recall its experience with video dialtone regarding the measurement of capacity on open video systems that employ "digital" and "switched video technology." Thus, the Commission should not attempt to answer this question in the abstract. On the whole, despite the rosy forecasts for digital and switched video systems, the fact is that such systems are a long way from being generally deployed. In the rare instances where they are deployed, such as Bell Atlantic's Dover Township system, the Commission can adhere to its generally applicable rule of nondiscrimination. What the Commission should not do, however, is allow OVS operators to deploy an analog system and use the promise of future digital capacity to frustrate nondiscrimination goals. In light of the realities of today's systems, therefore, the Joint Commenters urge the Commission to focus on the analog systems that are being planned and deployed today and postpone conclusions with respect to hypothetical future systems. d. The Commission's Regulations Must Bar Preferential Treatment of Favored Programmers Even if They Are Not "Affiliates" Finally, if the Commission is serious about promoting an open video system that embodies the dual goals of competition and nondiscrimination, the Joint Commenters assert that the Commission's rules must recognize that the definition of "affiliate" does not always include all entities on which OVS operators may nonetheless have a strong incentive to confer preferential treatment. Thus, for OVS purposes, the regulations regarding fair allocation of capacity and selection of programmers must address situations in which there is a clear financial incentive to act anticompetitively. As revealed time and again, video dialtone operators most often entered favored relationships with selected video programmers which were the antithesis of arms-length, nondiscriminatory transactions. That these programmers did not rise to the technical level of "affiliation" did not change these anticompetitive incentives. For example, under the carriage agreement between SNET and Connecticut Choice Television ("CCT"), SNET had a direct financial incentive to discriminate in favor of CCT at the expense of other programmers on the platform. SNET had a conditional purchase option in the bulk of CCT's capacity, a right to veto any potential third-party purchase of CCT, and a right to acquire CCT's business interest. Likewise, under Pacific's video dialtone structure, Pacific had conditional purchase options in two video programmers, Anchor Pacific and California Standard Television Corporation ("CSTC"), which together controlled 60 percent of the analog capacity on Pacific's video dialtone platform. Similarly, in Dover Township, New Jersey, there was evidence of a continuing preferential arrangement between Bell Atlantic and one particular video information provider -- FutureVision -- that enabled FutureVision to provide service at announced rate levels that no other competitor could legitimately match if it was not so-favored. There is no reasonable basis for the Commission to conclude that OVS operators will act in a nondiscriminatory manner with respect to channel capacity and allocation decisions regarding favored programmers, any more so than with the video dialtone proposals to date, the risk of such anticompetitive behavior by OVS operators in favor of entities in which they have an interest is not hypothetical. Because Congress dictated that one-third of an OVS platform's capacity will be allocated to the OVS operator or its affiliate and two-thirds to unaffiliated programmers, the Commission must adopt rules requiring nondiscrimination and equality not only with respect to treatment of "affiliates," but also with respect to situations of actual and prospective ownership or financial interests between the OVS operator and the video programmer. 2. The Commission Must Ensure that OVS Operators Do Not Abuse Channel Sharing In addition to establishing clear rules prohibiting discrimination by OVS operators in the selection and allocation of the capacity, the Commission must also ensure that channel sharing is not used to advantage favored and affiliated programmers and essentially to provide traditional cable service under the guise of OVS. Channel sharing should not become a means to allow the OVS operator to demand video programmers "share" the channels that offer common video programs. While proponents of channel sharing believe it provides efficiencies and increases programming diversity, as the Commission has recognized in the past, channel-sharing proposals can raise genuine fairness and other concerns, especially with respect to the terms and conditions under which shared channels are made available to video programmers. While the 1996 Act explicitly allows channel sharing, the Commission must implement the governing regulations in a manner that is faithful to the basic pro-competitive and nondiscriminatory premises of OVS. Thus, contrary to the Commission's tentative conclusion, the 1996 Act does not permit an OVS operator to choose "how and which programming will be selected for shared channels." Rather, the statute provides an OVS operator with the ability to determine whether or not to implement a channel sharing arrangement. The underlying premise remains that an OVS operator shall not engage in unreasonable discrimination. Shared channels are not and should not become a "basic tier" controlled by the OVS operator. Instead, to the extent they are offered, they should be a mechanism that benefits all video programmers equally, whether affiliated or independent. Joint Commenters' experience with the LECs' deployment of video dialtone foreshadows the likelihood that OVS operators will seek to exclude unaffiliated or non- favored video programmers from any genuine role in the process of selection of the shared channel programming services. For example, channel-sharing plans proposed by both Pacific and SNET were designed to preserve and strengthen unlawful discriminatory advantages afforded to programmers with which they were directly or indirectly affiliated. SNET's channel-sharing plan in effect requested that the Commission ratify a channel-sharing arrangement that SNET forged with its favored programmer, CCT, almost two years earlier. With respect to Pacific, the Commission felt so strongly that Pacific's channel sharing plan was without merit that it required that Pacific request additional authority under Section 214 when it granted Pacific's video dialtone applications. Pacific developed a channel- sharing proposal that was to be administered by CSTC, a favored entity. It required video programmers to commit to distributing unknown programming services, pay an unspecified deposit amount, and bear an unknown portion of shared programming costs computed according to an unspecified formula. In effect, Pacific sought to force the Commission and prospective unaffiliated video programmers, to buy sight unseen its channel-sharing plan. Unless the Commission establishes clear guidelines as to what is and is not acceptable, this pattern will almost certainly continue. Indeed, abuses will likely flourish. If the Commission is to ensure channel sharing plans do not enable OVS operators to act as de facto cable operators, the Commission should prescribe rules for channel sharing that require: (i) all initial video programmers on the platform are involved in the process of selecting the programming for the shared channels; (ii) a shared channel cost-sharing formula does not require unaffiliated programmers to bear a disproportionate share of the costs; and (iii) OVS operators may not enter into arrangements which could disproportionately favor the OVS operator or its affiliated programmer with respect to the distribution of advertisement availabilities ("ad avails") and related revenue. Moreover, to promote the underlying OVS goals to the maximum extent, the Commission should also require that channel sharing arrangements are structured and administered in a nondiscriminatory fashion by an independent third party agreed to by all video programmers on the platform. 3. The FCC Must Prevent the Provision of Marketing Services from Skewing Unfairly the Competitive Video Marketplace Critically, the 1996 Act also seeks to prevent discrimination in favor of an open video system operator or its affiliates with regard to "material or information (including advertising) provided by the operators to subscribers for the purposes of selecting programming on the open video system, or in the way such material or information is presented to subscribers." Thus, the 1996 Act mandates that the Commission implement regulation which prevents the provision of marketing services and other critical aspects of service provision from undermining the goals of OVS and from disadvantaging competing video service providers. Central to the Commission's determinations in this regard are decisions involving joint marketing and subscriber information. First, the Commission should establish clear rules with respect to the joint marketing of OVS and voice telephony services by LECs in order to ensure that it is not tilting the competitive playing field unfairly. In order to promote parity and enhance opportunities for facilities-based competition, the Commission should prohibit joint marketing by an incumbent LEC until such time that the incumbent cable operator undertakes such joint marketing. Given the overwhelming advantages that incumbent LECs have as a result of their monopoly enterprises, such a rule would assist greatly in fostering true competition. Thereafter, relying on its experience in implementing "equal access" and customer premises equipment ("CPE") rules, the Commission should require that for all inbound telemarketing, OVS operators advise customers of their video services options. Thus, just as the Commission required specific information be given to consumers with respect to interexchange providers and the availability of CPE from independent vendors, the Commission should limit the inbound telemarketing or referral services provided by the OVS operator to a listing, on a rotating basis, of video programmers and cable operators, including the OVS operator's programming affiliate, that request such a listing service. Moreover, to prevent the OVS operator from using its inbound telemarketing in a manner that disadvantages a video programmer utilizing OVS or other video service providers, such as cable operators, the OVS operator should be prohibited from including any information about the price, terms, or conditions of the video services offered by any video programmer or other video program provider, as well as engaging in comparisons of various video programmers and other service providers. 4. Rules Requiring An OVS Operator To Make Programming Contracts Public Will Reduce Discrimination The Commission tentatively concluded "that an OVS operator should be required to make its contracts with all video programmers publicly available, which will disclose the rates charged to programming providers and other terms and conditions of carriage." The Joint Commenters strongly support this tentative conclusion given the pattern of private dealings that occurred with video dialtone and urge the Commission to clarify that these key contracts cannot and should not be hidden under the claim of "confidentiality." Full and open disclosure of the contractual relationship between OVS operators and video providers on the OVS platform will promote nondiscrimination and fair dealings that must be the bedrock of an open video system. Indeed, failure to do so will create a strong incentive for OVS operators to act as traditional cable operators, contrary to the new statutory paradigm. B. REGULATORY PARITY DEMANDS THAT THE COMMISSION ENFORCE ALL TITLE VI OBLIGATIONS THAT ARE MANDATED BY THE ACT As a matter of parity and competitive equity, the 1996 Act mandates that the Commission apply all Title VI requirements to OVS operators, except those that are inapplicable because the OVS operator qualifies for "reduced regulatory burdens." As Congress expressly provided that the obligations imposed on OVS operators should be "no greater or lesser" than obligations imposed on cable operators, the Commission's rules must clearly and fully apply the requirements of Title VI. 1. OVS Operators Must Comply With PEG, Must-Carry, and Retransmission Consent Requirements OVS operators are required by the explicit language of the Act to comply with Sections 611, 614, and 615 and Section 325 of Title III, which detail: the obligations of cable operators, and now OVS operators, to provide channels for public, educational, or governmental ("PEG") use; must-carry obligations; and retransmission consent requirements. In order to achieve the robust competition that is the overarching objective of the 1996 Act, each of these statutory obligations must be applied to OVS operators just as they are applied to cable operators. With respect to PEG access obligations, the Commission seeks comment on how it should implement this provision given the fact that OVS operators do not have a franchise requirement and may provide service in multiple cable franchise areas. The Commission's concern about the absence of a franchise requirement, however, is misplaced. Congress certainly understood that PEG access requirements are now imposed by localities to meet critical localism goals. Thus, the Commission can require OVS operators to comply with these obligations in all areas they offer service. Likewise, that open video systems may offer services to more than one cable franchise area is no reason to reduce obligations in this regard. Indeed, today cable operators operate in multiple cable franchise territories and must comply separately with each municipality's requirements. There is absolutely no basis for the Commission to require cable systems to share PEG channels, either by interconnecting or otherwise, with an OVS operator. Such an interconnection or sharing requirement would undermine the Congressional objective of competitive parity by imposing all PEG obligations on cable operators and none on OVS operators. In fact, even obligating OVS operators to fund their share of the costs associated with providing PEG programming, standing alone, is unfair as PEG obligations frequently extend far beyond the simple payment of funds. Moreover, as PEG obligations frequently involve capital outlays made by cable companies over a long period of time, requiring interconnection would permit OVS operators to benefit unfairly from expenses incurred over that period of time. Notably, in some cases, cable operators voluntarily make significant additional investments in PEG services to distinguish their own offerings. OVS operators should not be permitted to profit from cable operators' investments. Finally, although the Commission should not compel cable operators and OVS operators to share PEG programming, OVS operators should be free to negotiate with cable systems to contract for PEG channel feeds. In the event that arrangements cannot be reached between the parties, the OVS operator should be required separately to comply with the PEG requirements, as mandated by Congress. 2. OVS Operators Must Fulfill Other Mandated Requirements The 1996 Act requires that OVS operators comply with the Commission's regulations concerning sports exclusivity, network non-duplication, and syndicated exclusivity. Here too, just as cable operators already comply with these requirements across multiple community units or geographic zones, OVS operators should be required to do so as well. The Act also provides that OVS operators are subject to the Commission's program access rules. Just as cable operators comply with the Commission's rules, so too must OVS operators. What the Commission should not do, however, is interpret this provision to dilute the "rights of programming producers, vendors, and other entities responsible for programming content to exercise control over their products." Congress intended OVS operators to have equivalent obligations as cable operators in this regard, but this does not mean that Congress intended to supplant the rights of video programmers utilizing OVS to make decisions regarding channel capacity or to determine the manner in which their program services are to be provided. Thus, Congress did not intend for the program access rules to be used by certain OVS video programmers to license programming for OVS. Any other interpretation would vitiate the nondiscrimination premise of OVS and thwart the robust competition that was envisioned. 3. The OVS Rules Must Not Undermine the Public Policies Underlying State Level Playing Field Statutes In implementing OVS regulation, the Commission must also be cognizant of state "level playing field" statutes, which typically require that all potential new cable entrants are subject to terms and conditions that are no more favorable than those imposed on existing cable operators. Such state level playing field laws have been enacted in order to promote the critical public interest objectives of providing consumers with additional programming choices and the development of effective and equitable competition in the cable marketplace. In addition, by ensuring that all competitors build out their services areas fully, rather than selectively deploy service, these laws help promote equality of service to consumers. Significantly, such state level playing field provisions are wholly consistent with and promote the Congressional intent that the Commission "impose obligations that are no greater or lesser" than those imposed on cable operators. For example, the California "level playing field" statute provides that additional cable television franchisees must "contain the same public, educational, and governmental access requirements that are set forth in the existing franchise." The fundamental purpose of this provision is to ensure that the needs and interests of local communities are served fully by all cable providers without the threat of anticompetitive forces such as redlining and greenmailing. Accordingly, imposition of different or lesser obligations on OVS operators providing cable service than on existing cable operators within their franchise areas is not only contrary to the 1996 Act, but also undermines these critical public interest determinations by state legislatures. II. THE STATUTORY OBLIGATION TO OFFER JUST AND REASONABLE RATES REQUIRES THAT RATES BE BASED ON COST CAUSATION PRINCIPLES While the 1996 Act enables a LEC, at its election, to offer video programming over its own facilities as an OVS operator, it does not authorize the LEC to subsidize such a system at the expense of its telephone ratepayers. Indeed, the 1996 Act explicitly requires that OVS "rates, terms, and conditions" shall be "just and reasonable." The only truly effective means for achieving this statutory obligation is the economically correct assignment of the underlying network costs to the video services and telephony categories. Moreover, if the Commission is to fulfill its obligation to provide "just and reasonable rates" for the subscribers of Title II common carriage services, it must commit to a fundamental and thorough examination designed to reach the critical determination that all costs incurred due to a decision to deploy a particular service are to be assigned to that service. The Commission must prescribe cost allocation procedures as a precondition to the deployment of any OVS platform to segregate the common costs, including facilities, personnel, and other service costs, depreciation expenses, and overhead costs of providing video and telephone services over the same facilities. Indeed, failure to prescribe cost- causative rates will thwart fair competition in the video arena and undermine the economically efficient provision of services. The FCC has previously recognized that LECs have strong incentives to shift costs from competitive video services -- such as video dialtone and similar services -- to regulated telephone service. Even though video dialtone regulations were repealed by the 1996 Act, incentives for cross-subsidization have not changed. Common carriers seeking to become OVS operators remain the new entrants in the video marketplace with powerful economic assets and the intense desire to dominate the industry. They still have every incentive to gain a competitive edge in the marketplace, especially by setting prices as low as possible however it is achieved to gain market share as quickly as possible. In the absence of a basic cost allocation framework, there is no reasonable or articulated basis to conclude that LECs operating OVS platforms will not cross- subsidize their integrated systems to the detriment of both their telephone customers and competing video programming services. Record evidence and experience suggest that the commingling of video costs with telephony service costs is likely. A NARUC audit of Pacific Bell's performance under price caps in California from 1990-1994 demonstrated that Pacific Bell improperly cross- subsidized hundreds of millions of dollars of investment and expense in competitive broadband development. In addition, SNET has consistently promoted a proposed cost allocation methodology that would improperly shift the substantial majority of the costs of its $4.5 billion hybrid-fiber coaxial network to its telephony customers. Other LECs, such as Bell Atlantic and Pacific continue to justify installation and construction of new multi-use networks on the basis of the alleged significant cost advantages the network will provide for telephone service. For these reasons, the Commission should require all information before OVS certification that it has previously deemed crucial to cost allocation issues. Throughout the Commission's video dialtone proceedings, the cable industry asked that the Commission establish at the outset a coherent and verifiable policy grounded in sound economic principles for the allocation of the costs of an integrated system. Although, the Commission recognized that LECs had the potential to engage in anticompetitive conduct by "imposing added costs on the monopoly ratepayer by cross-subsidizing . . . new broadband services," the Commission determined that it would be better to address pivotal cost allocation issues on a case-by-case, ad hoc basis, which ultimately proved to be extremely contentious and inefficient. The Commission should build upon its previous experiences and address at the outset these critical determinations so that it can minimize the potential for cross-subsidization. In this regard, Joint Commenters applaud the Commission for recognizing that a separate proceeding to address cost allocation issues is necessary. The Commission, however, should not relegate these critical issues solely to the Cost Allocation Manual ("CAM") process, as it is insufficient to address the cost allocation issues that arise with the deployment of OVS. The CAM process is not, and was not, designed to resolve the basic cost questions that are presented with the deployment of integrated video/telephony networks. Rather, the CAM rules were developed for more "traditional" (and less far-reaching) nonregulated services such as electronic messaging and payphone message delivery service. As such, the CAMs were not designed to provide the FCC and interested parties with detailed information regarding all of the LECs' costs. Indeed, the CAM rules do not require carriers to submit actual cost information as part of their filings, but instead require only a brief narrative description of the regulated and nonregulated services and supplies provided between the carrier and its unregulated affiliates and the allocation method utilized. Consequently, the information contained in CAM filings does not provide interested parties or the Commission with an opportunity to analyze or discern any critical joint cost allocation issues. Without the cost data, including the cost studies used to develop the data, there is no legitimate opportunity to uncover carrier subsidization of the costs of deploying video services with funds from regulated services. If the Commission is to fulfill its core duty in this regard, it cannot and should not rely on such an inadequate framework. The only effective means of ensuring that telephone ratepayers do not subsidize telephone company entry into unregulated video services is for the Commission to prescribe appropriate cost allocation rules. Moreover, this must be done prior to the filing of OVS certification applications, given the extremely short timetable provided for approving these filings under the 1996 Act. Therefore, the Joint Commenters recommend that the Commission initiate a separate cost allocation rulemaking in order to determine both permanent and interim rules for cost allocation -- such as a gross allocation factor -- prior to certifying any OVS operators under the 1996 Act. In the event such proceeding is not completed prior to the time LECs may begin to seek OVS certification, the Commission should continue to address the issue on a case-by-case basis before issuing a certification by requiring the provision of all relevant information, including cost studies, to show that all common costs and depreciation expenses have been allocated properly. III. THE PUBLIC INTEREST IN ROBUST VIDEO COMPETITION WILL BE SERVED BY PERMITTING NON-LOCAL EXCHANGE CARRIERS TO OPERATE AND UTILIZE OVS In order to promote the Congressional objective that OVS introduce vigorous competition into entertainment and information markets, the Commission should not preclude entities that are not LECs from operating their own open video systems or from obtaining access to another open video operator's system as a video programmer. Not only did Congress envision that OVS would provide an alternative regulatory scheme for cable operators to provide video programming, but as the Commission recognizes, allowing non- LECs to offer OVS will promote regulatory parity among providers and thereby foster competition and consumer choice in the video marketplace. A. Congress Contemplated That Cable Operators May Be Given the Option to Become OVS Operators Section 653(a)(1) of the 1996 Act states that "an operator of a cable system or any other person may provide video programming through an open video system." The Commission seeks comment on whether the statutory language in Section 653(a)(1) limits its ability to permit cable operators to become open video system operators, apparently based on the fact that Congress used the term "provide video programming" to apply to the activities that cable operators may undertake on open video systems rather than the term "cable service." When read in context and in light of explicit Congressional goals, the 1996 Act permits the Commission to allow cable operators to become OVS operators. Given the identified public interest benefits, the Commission should do so. The plain language of Section 653(a)(1) permits cable operators to "provide video programming through an open video system that complies with this section." As set forth in the Conference Report, Congress enacted Section 653 to promote competition in the video marketplace and thereby "meet the unique competitive and consumer needs of individual markets." Permitting cable operators or other persons to offer services in this manner, by offering an outlet for unaffiliated video program providers, would significantly further this goal by allowing cable operators to use their significant experience in the video distribution marketplace to serve as an outlet for diverse programming. In addition, it would enhance competitive parity by ensuring that cable operators and local telephone companies operate under similar regulatory constraints. Likewise, cable operators choosing to become OVS operators would be forced to make two-thirds of their capacity available to unaffiliated programmers. There is no evidence that Congress had any intent to prevent cable operators from offering services on an open video system. Indeed, if it had intended to do so, Congress could have expressly so stated. Moreover, Congress has often used the phrase "provide video programming" and even the term "transmission" of video programming interchangeably with the term "cable service." For example, in the now-repealed cable- telephone company cross-ownership provision, former Section 613(b)(1), Congress made it unlawful for any common carrier to "provide video programming" directly to subscribers. The Fourth Circuit has interpreted the term "provide video programming" expansively and determined that Section 613(b)(1) "essentially prohibits local telephone companies from offering, with editorial control, cable television services to their common carrier subscribers." Indeed, even the "transmission" of video programming has been used to mean the provision of cable service. Based upon previous use of these terms, it is most reasonable to conclude that Congress used the term "provide video programming" in Section 653(a)(1) to avoid the confusion that would have resulted from use of the term "cable service" in referring to cable operators offering video programming pursuant to Section 653(a)(1). By constructing a separate regulatory regime under Section 653, Congress plainly meant to distinguish cable operators who are not required, for example, to make capacity available to other programmers, from cable operators operating open video systems that must comply with such obligations. Given the language that refers to the provision of an "open video system that complies with this section," that is intended to clarify that an open video system operated by a cable operator or other non-LEC must nonetheless meet all OVS obligations, it is only logical to conclude that Congress meant to use the term "provider of video programming" as it has been used in the past -- to refer to the offering of cable service. For these reasons, the Commission should find that Section 653(a)(1) permits cable operators to operate their own open video systems and should take such action in this proceeding. B. There Is No Reasonable Basis to Conclude That Cable Operators And Their Affiliates Can Be Prevented From Becoming Video Programmers On An OVS The basic premise of OVS is that they are open, non-discriminatory systems available to all programmers on a fair basis. The 1996 Act specifically provides that open video system operators may not discriminate among video programming providers with respect to carriage on an open video system. Except when demand exceeds capacity on an open video system, capacity is not limited to any specific providers, and then only to limit the OVS operator itself from selecting video programming on more than one-third of the system. Nevertheless, the Commission asks whether an OVS operator "should be permitted to limit or preclude . . . the competing cable operator's ability to obtain capacity on the open video system . . . ." Not only is there no legitimate statutory basis to exclude cable operators or their affiliates from utilizing the open video systems of local exchange carriers or other providers, there is no valid public policy reason to do so. Restrictions on the identity of video programmers that are permitted to seek carriage on open video systems would fundamentally undermine the Congressional intent in repealing the cable-telephone company cross- ownership restriction. As the Fourth Circuit has determined, a complete ban on access to channel capacity is a drastic measure that implicates the First Amendment. As such, cable operators and affiliates should be permitted to obtain access to the open video systems. In fact, cable operators and their affiliates are the most likely class of video programmers in the marketplace that can take advantage of the opportunities created by OVS. Unless the Commission expressly states that cable operators and their affiliates may obtain access to channel capacity on their open video systems, they will likely be excluded. For instance, Rainbow Programming Holdings, Inc. ("Rainbow"), a wholly-owned subsidiary of Cablevision, has made several forays into the video dialtone business, seeking access to the video dialtone systems of US WEST, SNET, and Bell Atlantic, often to be denied or delayed. Thus, Rainbow sought capacity from US WEST for the Omaha video dialtone system, but US WEST denied Rainbow's request because Rainbow had allegedly applied after US WEST's selection process, of which Rainbow had no notice or knowledge. Ultimately, unused channels surrendered on the platform were reallocated to other providers despite Rainbow's outstanding request. Rainbow had an even more blatant situation with SNET, which initially delayed answering Rainbow's request for capacity because of its affiliation with Cablevision. Ultimately, SNET denied Rainbow's request for capacity, pointing to a never-before established "formal" request policy and the fact that its own affiliate had exhausted all remaining capacity. In fact, even when Rainbow has achieved its objective of obtaining access to channel capacity on a video dialtone system, it has been the victim of anticompetitive stall tactics. Rainbow requested and received 192 channels as a video programmer on Bell Atlantic's Dover Township system, but has had difficulty gaining access to the interface software and digital converters necessary to provide video programming to its end-user subscribers. Without clear rules mandating equal access for all video programmers, regardless of their affiliation, robust competition, and the goals of OVS will be frustrated. In short, ensuring that cable operators and their affiliates can utilize the capacity on an OVS will enhance, rather than compromise, competition. CONCLUSION The OVS paradigm has tremendous potential to precipitate many public interest benefits. Based on its vast experience with related issues, the Commission should implement the 1996 Act's OVS mandate in accordance with the foregoing. Respectfully submitted, __________________________ Donna N. Lampert James J. Valentino Charon J. Harris MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C. 701 Pennsylvania Avenue, N.W. Suite 900 Washington, D.C. 20004 (202) 434-7300 Robert Lemle Alan J. Gardner Charles Forma Jerry Yanowitz Marti Green Jeffrey Sinsheimer CABLEVISION SYSTEMS CORPORATION CALIFORNIA CABLE TELEVISION One Media Crossways ASSOCIATION Woodbury, New York 11797 4341 Piedmont Avenue (516) 364-8450 Oakland, California 94611 (510) 428-2225 Dated: April 1, 1996 F1/51089.1