Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 ) In the Matter of ) ) Implementation of Section 302 of ) The Telecommunications Act of 1996 ) CS Docket No. 96-46 ) OPEN VIDEO SYSTEMS ) ) ) COMMENTS OF MFS COMMUNICATIONS COMPANY, INC. Andrew D. Lipman Jean L. Kiddoo Karen M. Eisenhauer SWIDLER & BERLIN, Chartered 3000 K Street N.W., Suite 300 Washington, D.C. 20007 (202) 424-7500 Counsel For MFS Communications Company, Inc. April 1, 1996 TABLE OF CONTENTS SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i I. INTRODUCTION AND STATEMENT OF INTEREST. . . . . . . . . . . . . . .3 II. THE COMMISSION S RULES MUST PERMIT CARRIERS TO DESIGN SYSTEMS THAT ARE COMPATIBLE TO THEIR OWN NETWORK IN RESPONSE TO MARKET DEMAND . . . . . . . . . . . . . . . . . . . . .5 III. THE COMMISSION APPROPRIATELY PROPOSES TO RELY ON MARKET FORCES TO ENSURE REASONABLE AND NON-DISCRIMINATORY RATES, TERMS AND CONDITIONS. . . . . . . . . . .8 IV. THE 1996 ACT REQUIRES ONLY THAT THE COMMISSION ASSURE THAT OVS OPERATOR CERTIFICATIONS ARE FACIALLY PROPER . . . . . . . . . . . . . . . . . . . . . . . . . 15 V. THE COMMISSION S REGULATIONS TO ENSURE COMPLIANCE WITH THE CAPACITY ALLOCATION REQUIREMENTS SHOULD NOT PREJUDGE ANY PARTICULAR SYSTEM CONFIGURATION OR NETWORK DESIGN . . . . . . . . . . . . . . . . . . . . . . . . 18 A. Definition of Demand and Capacity . . . . . . . . . . 20 B. Notice. . . . . . . . . . . . . . . . . . . . . . . . . . 21 C. Changes in Demand/Capacity. . . . . . . . . . . . . . . . 22 D. Allocation Procedures . . . . . . . . . . . . . . . . . . 23 VI. TO ASSURE INFRASTRUCTURE DEVELOPMENT AND AVOID ANTI-COMPETITIVE PRACTICES, THE COMMISSION SHOULD PRECLUDE A CABLE TELEVISION OPERATOR FROM DISTRIBUTING PROGRAMMING OVER ANY OVS NETWORK IN ITS CABLE SERVICE AREA . . . . . . . . . . . . . . . . . . . . 24 VII. OVS OPERATORS SHOULD BE PERMITTED TO ASSURE COMPLIANCE WITH MUST-CARRY, PEG AND PROGRAM EXCLUSIVITY REGULATIONS EITHER DIRECTLY OR THROUGH CONTRACTS WITH PROGRAMMERS. . . . . . . . . . . . . . . . 26 VIII. REGULATIONS RELATED TO COMMUNICATIONS WITH SUBSCRIBERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 IX. CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SUMMARY MFS welcomes Congress efforts to encourage the development of competition from local telephone companies in the distribution of multi-channel video programming. MFS agrees with the Commission that its goal should now be to adopt regulations that will promote the Congressional intent to provide for flexible market entry, enhanced competition, streamlined regulation, diversity of programming choices, investment in infrastructure and technology, and increased consumer choice. Flexible regulations and reliance on market- based controls against anti-competitive behavior are essential if the Commission s rules are to further these goals. The law has now relieved the Commission from many of the statutory constraints which existed when it developed its video dialtone ( VDT ) rules and which hamstrung the Commission s ability to implement a fully market-driven approach to that service. As a result, most of the VDT proposals that the Commission had attempted to nurture were stillborn. The Congress has now given the Commission the tools to develop rules which will indeed allow telephone companies the flexibility to design and implement OVS platforms which are economically justified by demand, technology, and network constraints. Just as Congress indicated a very strong desire that OVS not simply be a reconstituted VDT structure when it terminated the Commission s VDT rules, MFS stresses that the Commission must not assume that OVS platforms will necessarily develop in the configuration envisioned when VDT proposals were developed pursuant to more restrictive statutory and regulatory constraints. The 1996 Act has made possible a whole new class of local exchange carriers who will now be authorized to compete head-to-head with incumbent LECs. Those new carriers have very different networks, technology and capital structures than their incumbent competitors. Consequently, in order for the Commission to achieve the robust facilities-based competition which the Congress expects in the local marketplace, the Commission s rules must be flexible enough to allow the survival of demand-driven OVS systems as well as systems based on currently available, finite and ubiquitous infrastructure available only to incumbent LECs. Newer telephone companies such as MFS cannot possibly incur the tremendous capital expense required to duplicate the infrastructure available to an incumbent LEC on the hope that if they build it, programmer s will come. Instead, these companies must be allowed to construct additional infrastructure as demand warrants. With respect to specific issues on which the Commission has sought comment, MFS offers the following suggestions:  The Competitive Marketplace Should Control Rates, Terms and Conditions MFS urges the Commission to rely on market forces to ensure that reasonable rates, terms and conditions are negotiated between the parties. The Commission will retain complaint jurisdiction in order to resolve disputes if the arise, but in the meantime, the Congress has very clearly signaled its intent that market forces be relied upon to assure just and reasonable rates. Moreover, the Commission is correct in observing that OVS operators (and particularly those new local exchange market entrants like MFS) will by definition compete with established cable operators whose penetration among cable subscribers is now 100 percent. Based upon its similar experience in opening up the long distance marketplace to competition, the Commission can be confident that the 1996 Act s reliance on the market is well-justified. In that earlier experience, the Commission wisely did not impose standards and formulas, or require carriers to publish rates, and a robustly competitive market is the result. There, both facilities-based and resale carriers compete vigorously, and a myriad of new services and pricing structures have developed. There is no reason to second guess Congress belief that the same market-based approach will succeed here as well.  OVS Operator Certificates of Compliance Should be Approved if Facially Proper The 1996 Act requires that carriers submit a Certificate of Compliance to the Commission in order to qualify for streamlined regulation and requires the Commission to approve or reject such certifications within 10 days. What the Congress envisioned by the Commission was a certification of the carrier s intent to comply with the rules -- it certainly did not intend that the Commission give a stamp of approval to the OVS operator. Instead, the Congress provided for minimal entry hurdles, with complaint jurisdiction if the Commission or any other entity later believes that the OVS operator is not in compliance with its obligations. (In this regard, MFS cautions that, as in the long distance context, the Commission must be mindful of the potential for the frivolous or strategic use of the complaint process, and be prepared to take strong action if and when any such frivolous complaint is filed.)  OVS Operators Should not be Required to Carry the Program of Competing Cable Franchisees The Commission should permit OVS operators the flexibility to deny carriage to competing cable operators and their programming affiliates. To require such carriage would run counter to the intent of Congress to introduce additional facilities-based competition into the video market. It would also be a recipe for anti-competitive mischief, insofar as it would permit a cable operator to tie up capacity on its competitor s network without any reciprocal obligations, would give the cable operator access to confidential business plans and information, and would provide a vehicle for the cable operator to tie up its competitor in regulatory proceedings with frivolous challenges and proceedings.  The Commission Should Not Prejudge Any Particular OVS Network Configuration or Service Design The Commission s challenge in developing its OVS rules will be to allow carriers the broad flexibility envisioned by Congress to develop OVS networks and services which justify investment in transmission infrastructure and technology. Most difficult, but clearly workable, will be the development of rules which provide that, where demand exceeds capacity, OVS operators and their affiliates may not use more than one-third of the system s channels. This is clearly a critical issue. The possibility that, at any point in time bandwidth might have to be re- allocated and existing customers thereby deprived of programming to which they had subscribed, would eliminate any incentive whatsoever for a carrier to initiate OVS service. As a threshold matter, it is impossibly uneconomic for a carrier to construct substantial excess capacity for which it does not, and may never, have demand. In order to avoid such excess capacity, and to satisfy the 1996 Act s one-third/two thirds obligation, therefore, capacity should include both existing capacity and capacity that the operator can construct or otherwise obtain by reconfiguring or re-engineering the network within a reasonable amount of time. (In this regard, it is also essential that the Commission provide that the OVS operator can assure that demand is bona fide before any such effort is required.) Similarly, the Commission s notice requirements should require that the OVS operator provide notice in its Certificate of Compliance as to the markets where it will offer service, and permit 45 days for any interested programmer to submit a bona fide request, whereupon the OVS operator can develop appropriate pricing and capacity engineering for its initial system. After that initial subscription by programmers, the Commission should establish that additional enrollment periods of up to 3 years may be provided for by the OVS operator to accommodate additional demand. Should bona fide demand exceed capacity at those times, the OVS operator should be permitted to maintain compliance with the capacity requirements of the statute either by re-allocating existing capacity, re-engineering its system, or by constructing new capacity within six months.  The Manner In Which Programming Obligations Will Be Met Should Be Left To Negotiations Between The OVS Operator, Programmers, And Where Appropriate, Local Franchising Authorities The manner in which programming obligations can most effectively and appropriately be met will depend to some extent on the OVS network configuration and the type of service offered by programmers. The Commission s involvement should be limited to requiring the parties to comply and then allowing them to ascertain the most effective means to do so. Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 ) In the Matter of ) ) Implementation of Section 302 of ) The Telecommunications Act of 1996 ) CS Docket No. 96- 46 ) OPEN VIDEO SYSTEMS) ) ) COMMENTS OF MFS COMMUNICATI ONS COMPANY, INC. MFS Communications Company, Inc. ( MFS ), pursuant to the Commission s Report and Order and Notice of Proposed Rulemaking ( NPRM or Notice ) in the above-referenced proceeding, hereby submits its Comments and Proposed Regulations regarding Open Video Systems ( OVS ). MFS strongly supports the efforts of Congress to facilitate the development of competition in the video marketplace by, among other things, creating the Open Video System, an entirely new framework for providing video services to the marketplace. MFS urges the Commission to follow through on its stated effort to implement this new framework in a way that will promote Congress goals of flexible market entry, enhanced competition, streamlined regulation, diversity of programming choices, investment in infrastructure and technology, and increased consumer choice. To do so, Congress has freed the Commission from many of the statutory constraints formerly imposed on its ability to develop fully a truly marketplace-driven regulatory structure for the common carrier video dialtone ( VDT ) services offered by local telephone companies. Indeed, by actually terminating the Commission s video dialtone rules (as opposed to permitting the Commission to modify them), the Congress has dramatically signaled its intent that OVS not simply be implemented as reconstituted VDT service. Instead, the Congress has given the Commission wide latitude to develop flexible rules which do not envision any single configuration or any single type of provider, but instead will allow both incumbent and new local exchange carriers to respond to the marketplace by developing innovative, cost-effective video distribution platforms tailor[ed] . . . to meet the unique competitive and consumer needs of individual markets. Indeed, the Congress has even given the Commission the flexibility to forbear from enforcing the provisions of the 1996 Act as to any service, carrier or class of carriers if it determines that enforcement is not necessary. As the Commission has long recognized, and Congress has now confirmed in its repeal of unnecessary regulatory burdens and its adoption of pro-competitive policies and options throughout all segments of the telecommunications industry, vigorously competitive markets, not regulation, are the best way to serve consumers interests. I. INTRODUCTION AND STATEMENT OF INTEREST MFS is a publicly-traded telecommunications corporation, organized under the laws of the State of Delaware. MFS, one of the pioneers in the development of competition in the local marketplace, has been providing competitive local telephone services for eight years. MFS subsidiary, MFS Telecom, Inc., has invested over a billion dollars in the development, construction and operation of state-of-the-art fiber optic communications networks in 43 metropolitan areas across the U.S. and, in response to end users and carriers who are highly receptive to competitive service offerings, offers an ever-expanding range of high-quality digital local access, private line, and switched local services. MFS looks forward to even greater growth in the wake of the 1996 Act, as federal and state regulators eliminate historic restrictions on the entry of local service competitors and the unnecessary regulatory burdens which hamper innovation and vigorous competition. MFS has a substantial interest in this rulemaking proceeding. As possibly the only non-dominant local exchange carrier which has developed and tariffed a common carrier video distribution system pursuant to the Commission s VDT rules, MFS is in a unique position to comment upon the need for the Commission to establish rules which encourage such non- dominant carriers to participate and which will clearly permit all local exchange carriers ( LECs ) sufficient flexibility to develop transmission systems which do not simply match a single one-size-fits-all platform concept but instead respond to market demands. If there is a central theme to the provisions of the 1996 Act, it is that Congress intended to assure that regulation not serve to impair the development of competition, and that new entrants into both the telephone and video marketplaces be afforded the opportunity to add to such competition by receiving at least the same opportunities as the incumbent providers. While there is nothing in the Notice to suggest that the Commission does not intend for non-dominant local exchange carriers to participate fully in the video marketplace, including the development of OVS networks, neither is the Notice explicit that the Commission does envision (and indeed seeks to encourage) such participation. A statement from the Commission that it does seek to promote development of OVS by all local exchange carriers is essential to the ability of non- dominant carriers such as MFS to raise the significant capital necessary to do so, and to its ability to move forward with internal planning and resource allocation. MFS urges that the Commission s order include such a policy statement. II. THE COMMISSION S RULES MUST PERMIT CARRIERS TO DESIGN SYSTEMS THAT ARE COMPATIBLE TO THEIR OWN NETWORK IN RESPONSE TO MARKET DEMAND In requesting that the Commission s rules provide all local exchange carriers ( LECs ) sufficient flexibility to develop OVS networks tailored to their own network designs and market demand, MFS recognizes that the Commission has a responsibility under the 1996 Act to assure that such platforms conform to the principles and requirements set forth by Congress. The Commission also has a responsibility not to stifle innovative approaches through its regulation, however, or to pre-determine the nature of the OVS platforms that creative, highly competitive carriers may develop in the future. For example, MFS business plan includes the continued expansion and development of OVS over its existing fiber optic transmission infrastructure and over the additional facilities which it intends to construct as demand increases. Without ubiquitous networks, however, it is impossible for MFS to predict how and where it will develop future OVS systems, since by definition the competitive market envisioned by Congress has barely begun to develop. MFS primary concern in this proceeding is therefore to urge that the Commission implement the OVS provisions of the 1996 Act in a way that will allow all local exchange carriers, and particularly new local competitors such as MFS, sufficient flexibility to develop demand-driven new products and services that are compatible with their networks, and that therefore sustain infrastructure and technology investment. MFS submits that it is precisely this type of flexibility that the Congress envisioned in developing a broad statutory framework for OVS and by precluding extensive entry scrutiny of every OVS system. Instead, the Congress provided that OVS operators be required only to submit Certificates of Compliance to enter the market, with any subsequent questions of compliance to be considered on a case-by-case basis in light of an individual operator s circumstances. In its Notice, the Commission generally acknowledges and indeed, appears to favor, a flexible regulatory approach which would permit MFS and other carriers to develop such demand-driven systems. Some of the possible alternative approaches raised in the Notice, however, are framed from the perspective of its extensive experience with the VDT systems which were proposed by incumbent local exchange carriers. If adopted, these would severely constrict the ways in which OVS could develop. In their VDT proposals, the incumbent local telephone companies not surprisingly envisioned system designs which could only make economic sense in the context of existing ubiquitous telephone networks (if, indeed, the history of VDT supports even that assumption). As a new competitor without such a network, however, MFS cannot justify economically the investment in a field of dreams. It simply cannot build out a video distribution network on the basis that, if it builds it, programmers will come. There is no reason to suggest that Congress intended for OVS to provide only one type of platform for carriers to transmit video programming, and therefore effectively to limit video distribution infrastructure development only to the incumbent dominant local telephone and cable television carriers. The Commission must therefore assure that its implementing rules do not inadvertently preordain such a duopoly result. Moreover, MFS notes that such a result would also have an irreparably harmful spillover effect beyond merely the video distribution marketplace. Inevitably, the detrimental effect of limiting competition to a duopoly structure would also infect competition in the local telephone marketplace, since only the two incumbent carriers could effectively offer both telephone and video services over their networks. As a result, other carriers would necessarily have significantly fewer efficient uses for their telephone network infrastructure and therefore would not be able to justify as much new construction or to raise the necessary financing to do so. In addition, they would be substantially disadvantaged in marketing their services in competition with the incumbent telephone and cable providers who will now be marketing a full range of telephone and video services. This asymmetric competition would not be likely to lead to the technological advancements and price reductions that Congress intended to encourage, and is certainly one reason why the Congress reserved for the Commission the ability to forbear from regulation with respect to certain classes of telecommunications carriers. Therefore, any regulations adopted pursuant to the Notice must be drafted in broad enough terms that they implement the statutory OVS obligations but do not limit OVS configurations in such a way as to eviscerate Congress goal of encouraging competitive entry and spurring new investment. As the Notice recognizes, the best way to achieve this goal is to rely upon market forces to regulate OVS whenever possible. III. THE COMMISSION APPROPRIATELY PROPOSES TO RELY ON MARKET FORCES TO ENSURE REASONABLE AND NON- DISCRIMINATORY RATES, TERMS AND CONDITIONS Many of the regulations proposed and issues raised by the Commission in the NPRM are designed to implement the statutory requirement that the Commission s rules must prohibit OVS operators from discriminating among video programmers with respect to carriage over the OVS network, and must require them to establish just and reasonable rates, terms and conditions of carriage which are not unjustly or unreasonably discriminatory. The Commission has requested comments on how to implement this mandate, particularly in light of the 1996 Act provisions that OVS operators will not be regulated as common carriers, and that the Commission will only have 10 days to review Certificates of Compliance submitted by OVS operators. The Notice tentatively concludes that there may be a number of viable options that would be consistent with the provisions of the 1996 Act concerning nondiscrimination and reasonableness of rates The Commission is correct that OVS operator flexibility to establish service offerings and pricing mechanisms which are both tailored to their own system configuration and customer needs, and are just, reasonable and non-discriminatory, is the best way to encourage entry into the video marketplace through an open video system. This is particularly true if the Commission seeks to encourage local exchange carriers other than the incumbent LEC to construct video distribution infrastructure and offer competition in the video marketplace on high capacity fiber optic networks such as those operated by MFS. The legislative history of the 1996 Act supports this position. The Joint Explanatory Statement explains that [t]here are several reasons for streamlining the regulatory obligations of such systems, including the fact that even dominant local exchange carriers deploying OVS will be new entrants in the established video programming market and, therefore, deserve reduced regulation in order to level the playing field. The Congress also noted that the development of competition and the operation of market forces mean that government oversight and regulation can and should be reduced. Clearly, in determining that telephone companies offering OVS are new entrants in the video marketplace who will compete with established cable television incumbents and should therefore be subject to streamlined entry and rate regulation, the Congress echoed reasoning long applied by the Commission to new entrants in the long distance and local telephone markets. Indeed, as the Commission notes, even though the 1996 Act specifically excludes OVS from Title II regulation, it nevertheless applies essentially the same just and reasonable standard used in Title II to the carriage and rate obligations of OVS operators and essentially has declared, by requiring streamlined regulation for these new entrants to the video distribution marketplace, that they are non-dominant. MFS submits that, to determine how appropriately to implement the 1996 Act s just and reasonable and not unjustly or unreasonably discriminatory standards for OVS, the Commission should look to its parallel application of those same standards in the Competitive Carrier line of decisions. In those cases, the Commission determined, among other things, to forbear from regulating rates of non-dominant carriers, applying instead a presumption of lawfulness to their rates. Importantly, the Commission did not merely determine to forbear from requiring tariffs to be filed by non- dominant carriers, it also wisely did not try to develop rigid guidelines, formulas or standards for determining whether rates are just and reasonable, nor did it require that non-dominant carriers make their contracts public -- all of which would have had the same effect as tariffs in stifl[ing] price competition and service and marketing innovation, and providing a potential vehicle for collusive conduct and facilitating price discounting. Instead, it relied upon the principle that [c]ompetitive market forces, together with our power to intervene in appropriate cases, are sufficient checks on the rates of non-dominant carriers. To have tried to develop formulas and standards for determining what would constitute an unjust or unreasonable rate, term or condition in those early Competitive Carrier decisions (the first of which was as far back as 1980), would unquestionably have circumscribed and hamstrung the ability of new entrants to develop innovative service offerings and therefore hampered the exponential growth of the long distance marketplace. The absence of formulas and tests for what constitutes just and reasonable did not result in multitudes of valid complaints, but instead facilitated the growth of a market where, in only a few short years, the the monopoly carrier s market share was eroded by more than a third, and hundreds (if not thousands) of carriers now engage in vigorous competition at all levels and in a multitude of geographic and service market niches. Thus, as the Commission predicted in making its decision to forbear from intrusive rate regulation, valid complaints were indeed infrequent, and competitive growth substantial, thus demonstrating the correctness of the Commission s market analysis. The Commission should exercise the same judgment in the OVS market, particularly where, unlike those earlier Competitive Carrier decisions, the Congress has now clearly indicated its intent for a streamlined, deregulated approach and has given the Commission the statutory tools to implement that approach. To construct specific rules and regulations regarding rates, terms, and conditions which will be appropriate for all of the contractual arrangements which might be developed by OVS operators is an impossible task. Any attempt to do so, especially in the case of non-dominant carriers, would necessarily circumscribe the development of new products and services, and consequently would have precisely the result which the Commission, and now the Congress, have sought to avoid -- marketplace development dictated by the predictions of regulators, and not driven by the market itself. Instead, therefore, the Commission should permit [m]arket forces, together with [its] power to intervene in appropriate cases, either on its own motion (should it believe that the market in general is not working as expected) or in response to specific complaints, to be the principle under which the Commission permits the market to develop. Under this principle, approaches such as those described in Paragraph 31 of the Notice, which attempt to apply standards and formulas for deciding, in advance, whether a particular rate or charge for carriage is just and reasonable, would clearly be inappropriate. All of those approaches would necessitate predictions of the rate structures, platform designs, and marketplace penetration which will develop in the OVS market. Clearly, by doing so, and developing rules based on those predictions, the Commission would be stifling the very market innovations and infrastructure development that the Congress sought in mandating flexible market entry and streamlined regulation. Similarly, the Commission has long recognized that published rates stifle price competition and service and marketing innovation. This is the case whether the rates are published in a tariff or in a public contract. While the Commission s Notice tentatively concluded that OVS contracts should be made public, MFS urges that it once again refer to the successful development of the long distance marketplace under the Commission s forbearance decisions. There, a robust resale market developed because non-tariffed facilities-based carriers had every incentive to maximize their network usage by permitting their competitors to resell their services. That vigorous competition emerged without public contracts precisely as the Commission s Competitive Carrier decisions predicted -- based on marketplace factors -- without the detriment of published rates. There, the results amply justified the Commission s reliance on the market, plus its complaint jurisdiction, to assure that negotiated carrier-to-carrier contracts would be just and reasonable, and not unjustly or unreasonably discriminatory. There is no basis for an assumption that the marketplace will not be equally effective in the OVS context. OVS operators will certainly have the same incentives as facilities-based long distance carriers to maximize the use of their networks by developing rates which encourage programmers to purchase service. As the Commission found in the long distance context and more recently in its regulation of Commercial Mobile Radio Services carriers, that incentive for competition and service innovation clearly outweighs any possible benefit from the published rates. For an OVS provider to have to signal its price structure to its competitors -- both other OVS providers and the incumbent cable operator -- clearly would be contrary to the Commission s (and Congress ) goal of encouraging vigorous competition in the video market. IV. THE 1996 ACT REQUIRES ONLY THAT THE COMMISSION ASSURE THAT OVS OPERATOR CERTIFICATIONS ARE FACIALLY PROPER The 1996 Act requires that an OVS operator submit a certificate to the Commission which certifies that it complies with the Commission s OVS regulations, adopted pursuant to 47 U.S.C.  573(b). The Act further requires that the Commission publish notice of such certifications and act upon them within ten days of filing. MFS agrees with the Commission that the 10-day period permitted for review is a clear indication that the Congress expects that the Commission review will be to determine whether a certification contains the necessary attestation of compliance with the rules. The language of the statute itself supports this conclusion by requiring that the OVS operator certify to the Commission that it will comply with the applicable regulations, rather than requiring that the Commission certify compliance. Furthermore, the legislative history also indicates that entry regulation of OVS operators be limited to self-certification. For example, the House proposal would have required only that a common carrier notify the Commission of its intent to offer video programming, and the Conference Report indicates that the provision was expanded only slightly in conference, by adding that reduced regulation afforded to OVS operators would only apply subject to Commission certification of a carrier s intent to comply. The requirement for submission of such certificates, and the Commission s processing of them, however, does not indicate that the Congress intended to establish an entry hurdle for OVS operators, particularly in the case of non-dominant carriers who, even prior to the 1996 Act, were not required to obtain Section 214 authority to construct telecommunications facilities -- just the opposite. The Act clearly omitted the entry scrutiny that was faced by dominant VDT providers before the Commission the Section 214 requirement for those carriers, thereby recognizing that such carriers are non-dominant in the video market and essentially treating them the same way that non-dominant telephone companies have long been regulated. Moreover, in leaving the Commission ten days to review a Certificate of Compliance, the Congress certainly couldn t have intended that the Commission would be required to give any stamp of approval to the OVS plans of the submitting carrier. Indeed, the Congress again parallels the Commission s earlier Competitive Carrier decisions in its desire to take away entry hurdles and leave regulation to the marketplace and, where necessary, the Commission s complaint jurisdiction. In the second of those decisions, the Commission reasoned: In view of the present competitive industry structure, we believe that the Commission need not exercise its certification authority in such a manner as to ensure the financial soundness or credibility of new resale carriers. Rather, we believe that competitive market forces will serve effectively to weed out inferior operations. To repeat, successful market inroads can and should depend, to a large extent, on carrier conduct and performance, not upon the Commission s unintended stamp of approval. If free from artificial entry constraints, new market entrants will be able to compete through pricing and marketing strategies, service quality, innovation and carrier willingness to respond adequately to individual customer demands. In turn, the unencumbered introduction of new and varied resale services is likely to result in a broad array of service alternatives significantly benefitting the telecommunications user. In sum, we find that economic regulation in the form of entry and exit controls serves no public policy that will not be better served by competitive market forces. The Commission should not attempt a substantive review of an OVS operator s proposal in order to pass upon the merits of the operator s compliance with the rules. Indeed, to do so would be to turn the new OVS procedure into a reconstituted Section 214 proceeding under another name. First of all, the Commission should not -- indeed may not -- suspend the 10- day approval period in order to investigate any objection. Second, it is unclear how or why any party would have ground to challenge an OVS operator s Certificate that it is in compliance with the rules until the system is available. At that time, if any party believes that the system does not comply with any rule, it may seek Commission review pursuant to Section 653(a)(2) of the Act. In this regard, MFS also urges that the Commission take measures to assure that no party may take advantage of the process by filing frivolous complaints. As in the Competitive Carrier context, the Commission must be ever mindful of the potential for the frivolous or strategic use of the complaint process. If [the Commission s] analysis of the market is correct, valid complaints should be infrequent. Accordingly, the Commission should be prepared to take strong action when any such frivolous complaint is filed, including, but not limited to, imposing sanctions against the complainant. This will ensure that the Commission, OVS operators and, perhaps most importantly, the competitive marketplace, is not burdened with costly proceedings based on objections designed only to delay the provision of service. V. THE COMMISSION S REGULATIONS TO ENSURE COMPLIANCE WITH THE CAPACITY ALLOCATION REQUIREMENTS SHOULD NOT PREJUDGE ANY PARTICULAR SYSTEM CONFIGURATION OR NETWORK DESIGN As noted at the outset, it is critical to the development of competitive OVS networks that the Commission implement the provisions of the 1996 Act in a way that allows local exchange carriers, and particularly new local competitors such as MFS, sufficient flexibility to develop demand-driven products and services that are compatible with their networks and that therefore sustain infrastructure and technology investment. Only by doing so will the goal of Congress to encourage telephone company entry and spur competition and new investment be realized. It will be critical to such development for all local telephone companies -- incumbent and new -- to have broad flexibility to determine where and how to construct and operate OVS platforms in response to their own individual assessment of demand and their own creativity in developing a platform structure to accommodate it. That analysis will also need to be based in part on each operator s technical network configuration, capacity, and location. Given the vastly different networks of incumbent local exchange carriers and new entrants like MFS, a different OVS platform configuration is inevitable -- and indeed desirable. The Commission s challenge, therefore, is to develop rules which allow carriers the broad flexibility to develop OVS networks which justify the investment in transmission infrastructure and technology to bring the desired competition to the market, and which also conform to the obligations set forth in the 1996 Act. The most difficult task in this regard will be for the Commission to develop a specific rule to implement of the statutory requirement that, when demand for use of an OVS system exceeds the capacity of that system, an OVS operator and its affiliated programmers will be limited to selecting the programming on only one-third of the system s channels. Specifically, the statute provides: if demand exceeds the channel capacity of the open video system, [the Commission shall prescribe regulations that] prohibit an operator of and open video system and its affiliates from selecting the video programming services for carriage on more than one-third of the activated channel capacity on such system, but nothing in this subparagraph shall be construed to limit the number of channels that the carrier and its affiliates may offer to provide directly to subscribers. In raising proposals to implement this provision of the 1996 Act, the Commission s Notice has clearly approached the issue based upon its experience with incumbent local exchange carrier VDT system designs. Certainly, any rules developed here must be drafted in the expectation that at least some incumbent local exchange carriers will indeed proceed with plans to implement such platforms, which were designed from the starting point of an existing ubiquitous telephone network. In order for OVS competition to develop beyond the incumbent local exchange carrier, however, the rules must also encompass the development of OVS networks by other local exchange carriers. A. Definition of Demand and Capacity The way that the Commission defines the terms demand and capacity will be essential to determining whether economic demand-driven OVS networks can be developed. Clearly, since excess demand signals certain obligations under the Act, it is essential that a carrier be assured that a request for capacity is bona fide prior to undertaking any required construction or re-allocation of existing capacity. To assure that demand is bona fide, an OVS operator should be allowed to require a reasonable showing of good faith and legitimate intent, including, but not limited to: a deposit, a demonstration of financial and technical capability, a firm term commitment, and a detailed description of the requested facilities, including capacity and bandwidth requirements, subscriber locations, headend location, and such other technical specifications as needed by the OVS operator. In the type of OVS system which MFS envisions as economically feasible for carriers who do not have existing ubiquitous networks and who have high capacity fiber optic transmission facilities where technology developments over the past several years have increased capacity many-fold, the term capacity should not be limited to existing system locations and capacity but should allow for systems whose capacity can be increased either by developments in electronic technology or by new construction. MFS, for example, will need to base its OVS facilities on demand and ascertain, in response to such demand, how to configure and allocate costs for its initial OVS facilities. Accordingly, the measurement of capacity for an expanding system of a new entrant cannot be measured as an absolute number at any point in time. The capacity of such a system must therefore include not only the capacity of existing infrastructure, but that which can be produced by facilities that the operator can reconfigure, re-engineer or construct within a reasonable period of time. (As discussed below, MFS submits that such a definition will also serve to eliminate the re-allocation dilemma which the Notice raises wherein programming capacity might otherwise have to be taken away from existing programmers and their subscribers.) B. Notice The Commission has requested comments on whether the Commission should require an OVS operator to publish notice of its intent to establish an open video system in a given area, and what the nature and extent of that notice should be. As a threshold matter, MFS notes that the Commission s concern that OVS operators provide notice of available capacity follow from the expectation that capacity is an amount of bandwidth available at a particular point in time and that the OVS operator will have built a ubiquitous OVS platform throughout a particular area with whatever capacity it expects, in a vacuum, to need to serve demand. Then, like the land rushes in the last century, the carrier must line up all of the demand at a starting gate and hope that it matches capacity. If the carrier has guessed wrong and capacity is too great, then it will have wasted capital, and if capacity is too little, it must be rationed in a way that will likely not accommodate any programmer s needs. This, of course, is just the opposite of a demand-driven system -- and is surely not the way that a competitive marketplace generally functions. And it is certainly not a viable way for a carrier to proceed who must construct its capacity requirements from scratch and who, because it cannot economically justify constructing a ubiquitous programming network, certainly cannot afford to construct such capacity without a customer who has demanded it. This is not to say, however, that the Commission s concept of notice is entirely unwarranted with respect to implementation of the Act s capacity requirements. MFS suggests that an OVS provider should be required, as part of its Certificate of Compliance, to designate the market area in which it will offer OVS. (To the extent that it will offer OVS in multiple areas, each area should be designated and additional Certificates filed if new areas are subsequently added.) Such designations would likely be filed based upon the OVS operator s general business plan or in response to a request by a programmer to offer programming in a given geographic area. Once the Certificate is filed, MFS would propose to permit other programmers to have 45 days to submit a bona fide request to provide programming in the OVS market as well, which request would designate with particularity the specific locations which the programmer seeks to serve, as well as the bandwidth capacity needed. When all of the requests are received, the OVS operator would either need to divide up existing facilities among all of the requesting programmers, including itself or its affiliate, or build sufficient additional facilities to accommodate the demand. Should demand exceed available capacity in either case, the OVS operator and its affiliates could control no more than one-third of the capacity. C. Changes in Demand/Capacity The Commission also requests comment on how to maintain the required two-thirds/one-third channel selection ratio within a system if demand and capacity change over time. The Commission correctly notes that to require re-allocation would be harmful to the development of OVS if a programmer were required to relinquish existing channels -- thereby causing disruption of services to customers and substantial market uncertainty. Unless the Commission s rules can mitigate these detrimental effects, OVS will be nothing more than a statutory concept -- there will simply be no market possibility for such a service to exist, since the marketplace -- both capital markets and consumer markets -- will not support or tolerate such uncertainty or disruption. Recognizing that constant re-allocation will be a death knell to OVS, the Commission suggests limiting the entrance of new programmers to periodic enrollment periods. This concept would indeed serve to mitigate some of the detrimental effects by assuring a planning horizon. However, no matter how long the horizon, the uncertainty of perhaps having to contract existing programming offerings would be a market disaster. Accordingly, MFS suggests that, coupled with enrollment periods of not less than 3 years, the Commission provide that an OVS operator for whom demand expands to exceed available capacity and whose own or affiliate s programming exceeds one-third of that existing capacity may maintain compliance with the statute either by re-allocating existing capacity or by constructing new capacity within a reasonable period of time from the beginning of the re-enrollment date. MFS submits that such period should be at least six months to allow a carrier a reasonable time to assess demand requirements on the existing facilities and to reconfigure, re-engineer or construct new facilities. D. Allocation Procedures The Commission has also requested comments on whether the Commission should design procedures to allocate the two-thirds of channel capacity that must be selected by unaffiliated video programming providers, or whether the method of allocating capacity in this situation should be left to the discretion of the open video system operator. MFS strongly asserts that the latter is the only feasible proposal. The Commission cannot possibly fashion a single regulation that takes into account every type of OVS platform and how each can be divided among programmers. The Commission should simply require, as does the statute, that channel capacity be allocated on a non-discriminatory basis among affiliated and non-affiliated programmers. There is no reason to fear that discrimination will go unremedied. First, the market will eliminate it by drawing programmers to non-discriminatory systems. Second, any such discrimination could be eliminated through the complaint process provided for by Congress. VI. TO ASSURE INFRASTRUCTURE DEVELOPMENT AND AVOID ANTI-COMPETITIVE PRACTICES, THE COMMISSION SHOULD PRECLUDE A CABLE TELEVISION OPERATOR FROM DISTRIBUTING PROGRAMMING OVER ANY OVS NETWORK IN ITS CABLE SERVICE AREA MFS agrees with the Commission s concern that permitting a cable television operator to distribute video programming over an OVS network in its service territory may run counter to the intent of Congress to introduce additional facilities-based competition in the marketplace. Permitting the cable television operator or its programing affiliates to distribute programming over a competing OVS platform would permit a cable operator, which has its own franchise to construct facilities, to instead tie up capacity on a competitor s network, either directly or through a programming affiliate, without any reciprocal ability on the OVS operator s or its programmer customers parts to use the cable operator s capacity. Moreover, the ability to take programming capacity on a competitor s system would be susceptible to substantial competitive abuse if capacity in an OVS network is limited, since the cable operator, in addition to avoiding its own construction costs, could at the same time effectively limit its competitor s programming and thereby limit competition in the marketplace. It would also give the cable operator (either directly or through its programming affiliates) access to confidential business plans and information. And, as the Commission learned in its VDT proceedings, it would provide a vehicle for the cable operator to tie up the OVS operator in regulatory arenas with frivolous challenges and proceedings. Clearly, given the fact that the incumbent cable operators have franchises to construct their own facilities and have a significant head-start in the market, there is no need for the Commission to provide for an opportunity for a cable operator to avoid developing its own alternative infrastructure, or to risk the competitive harm which would result from requiring an OVS operator to permit access to transmission facilities by the incumbent cable provider. A prohibition in this regard is consistent with the Commission s cellular decisions, where the Commission held that a facilities-based carrier of these services should be allowed to deny resale to other fully-operational facilities-based carriers. This exception to non-discrimination rules has been deemed valuable by the Commission because it promotes competition by encouraging each licensee to build out its network. Consequently, the Commission held that companies offering these services were only required to offer resale to other facilities-based carriers until they were fully operational. The same reasoning justifies permitting OVS operators to deny carriage of programming on behalf of local cable television operators. VII. OVS OPERATORS SHOULD BE PERMITTED TO ASSURE COMPLIANCE WITH MUST-CARRY, PEG AND PROGRAM EXCLUSIVITY REGULATIONS EITHER DIRECTLY OR THROUGH CONTRACTS WITH PROGRAMMERS The Commission has also requested comments on how it should implement in the OVS context a number of the programming obligations imposed on cable television operators:  Must-Carry Obligations  Public/Educational/Governmental (PEG) Access  Retransmission Consent  Sports Exclusivity Requirements  Network Non-Duplication  Syndicated Exclusivity Provisions The manner in which these obligations and requirements can most effectively and appropriately be met will depend to some extent on the OVS network configuration and the type of service offered by programmers over that network. In some cases, particularly where programming entities transmit a full package of video programming to their subscribers, it may be more appropriate for OVS operators to assure compliance with these obligations and requirements through its contracts with the programmers. The manner in which OVS operators and/or their customer programmers comply with PEG obligations should generally be worked out between the programmer and the local government entity that oversees the implementation of these rules for cable companies. The Commission should, however, require that OVS operators may not be required to duplicate PEG facilities or programming but rather, consistent with the requirement that PEG obligations should be no greater or less than those imposed on the cable operator, the local cable franchising authority should assure that the OVS operator has access to existing PEG channel feeds so that it may comply with the 1996 Act by making such programs are available on its OVS platform for programmers to deliver to their subscribers. It is MFS understanding that the costs of maintaining such facilities is typically collected as part of the cable franchise fee. To the extent that the franchising authority elects to charge OVS operators a fee based on its OVS revenues pursuant to 47 U.S.C.  573(c)(2), the pro rata cost of such facilities will be recovered. VIII. REGULATIONS RELATED TO COMMUNICATIONS WITH SUBSCRIBERS The statute requires that the Commission adopt regulations that prohibit an operator of an open video system from unreasonably discriminating in favor of the operator or its affiliates with regard to material or information (including advertising) provided by the operator to subscribers for the purposes of selecting programming. The Commission has suggested that this provision should only apply when the open video system operator is the only entity that deals directly with the subscriber. MFS agrees that this is the only reasonable interpretation of this provision. Where programers have their own relationships with subscribers and deal directly with them on matters such as billing, customer service and marketing, there is no basis for such a provision. Put simply, there is no reason to require programers to distribute material or information to another programmer s subscribers (or more absurd, its own subscribers) if the other programmer has the means to distribute its own information. With respect to the section of the statute that requires non- discriminatory inclusion of all programmers or operators on any menu, guide or navigational device, MFS submits that the operator should be considered in compliance provided it lists all programs available to the subscriber over the facility utilized by that subscriber. IX. CONCLUSION For the foregoing reasons, MFS urges the Commission to adopt rules which will permit OVS operators the broadest possible flexibility within the scope of the 1996 Act to design and implement OVS networks. MFS encourages the Commission not to adopt any regulation that can only be applied to a single type of OVS system, and that it confirm explicitly that it intends by its rules to promote the development of OVS systems and infrastructure by all local exchange carriers, including non-dominant carriers. If the explosion of communications technology and services over the past few years has taught us anything, it is that there will continue to be change and that this change cannot always be accurately anticipated. Therefore, in order to avoid the chilling of new developments and to eliminate the need to constantly amend these regulations, the Commission should adopt the most flexible scheme that will adequately ensure compliance with the applicable statutes. MFS believes its proposals accomplish this goal. Respectfully submitted, _______________________________ Andrew D. Lipman Jean L. Kiddoo Karen M. Eisenhauer SWIDLER & BERLIN, Chartered 3000 K Street N.W., Suite 300 Washington, D.C. 20007 (202) 424-7500 Counsel For MFS Communications Company, Inc. Dated: April 1, 1996