--Before the F EDERAL COMMUNICATIONS COMMISSION W ashington, D.C. 20554 In the Matter of ) ) Implementation of Section 302 of ) CS Docket No. 96-46 the Telecommunications Act of 1996 ) ) Open Video Systems ) In the Matter of ) ) Telephone Company-Cable ) CC Docket No. 87-266 (Terminated) ) Television Cross-Ownership Rules, ) Sections 63.54-63.58 ) COMMENTS AND PETITION FOR RECONSIDERATION OF THE NATIONAL CABLE TELEVISION ASSOCIATION, INC. The National Cable Television Association, Inc. ( NCTA ), by its attorneys, submits the following comments in response to the Commission s Notice of Proposed Rulemaking ( NPRM ) in the above-captioned proceeding. NCTA is the principal trade association of the cable television industry. Its cable system members provide cable television services throughout the United States. Its programmer members offer the full range of satellite-delivered services that are offered to consumers over cable systems. The Commission s resolution of this proceeding will substantially affect NCTA s cable system and programmer members. INTRODUCTION AND SUMMARY Section 653 of the Telecommunications Act offers a regulatory alternative to franchised cable service. The alternative permits the operator of a cable-equivalent facility to offer programming directly to end-users without complying with local franchise requirements. The Act incorporates a conscious policy trade-off operators of open video systems voluntarily cede editorial control over up to two-thirds of their activated channel capacity in return for nearly complete relief from local franchise requirements. This rulemaking will determine how the Commission should exercise its oversight necessary to enforce the trade-off. Will OVS be a genuine opportunity for other programmers and packagers to compete with the facility-provider s programming operation in attracting end-user subscribers? Or will it turn out to give the OVS operator so many advantages that competitors lack a real chance and consumers lack a real choice? The answers to these questions will determine whether or not OVS will represent a realistic business opportunity for unaffiliated programmers, and if the OVS arrangement will offer consumers accessing the OVS facility a genuine choice of programming packages. In addition, this action and the related proceeding to be undertaken by the Common Carrier Bureau, will decide whether telephone ratepayers are adequately protected when telephone companies undertake the investments to make their integrated networks video- capable. The cost allocation issue repeatedly deferred in the video dialtone proceedings, can wait no longer. NCTA urges the Commission, consistent with the statute and as elaborated below: To adopt effective cost allocation rules that prevent cross-subsidy, and that protect telephone ratepayers from being burdened by OVS investments; To implement a separate subsidiary requirement as a necessary safeguard to facilitate the detection of cross-subsidy and discrimination; So long as channel capacity is scarce, to limit the number of channels that an OVS operator is permitted to select to one-third of the activated channels, exclusive of must carry and PEG requirements, but including the shared channels; To establish procedures that guarantee programmers nondiscriminatory access to OVS system facilities; To mandate procedures that prevent discrimination against unaffiliated programmers in the provision of information to subscribers; To provide for selection of the channel administrator based upon the collective determination of the programmers using capacity on the system, and to provide for the classification of channels, exclusive of must carry and PEG channels, as shared only when programmers enter into agreements for the simultaneous carriage of a program network on the facility; To prohibit, until effective telephone service competition is a reality, the joint marketing of telephone service and telephone company-provided OVS transmission or programming services, unless customers are simultaneously made aware of video transmission and programming alternatives by cable operators, in a manner that gives no advantage to OVS over competing cable operators or unaffiliated packagers/programmers; To permit incumbent cable operators the same choice as is available to incumbent LECs to provide OVS service in lieu of franchised cable service; To require a demonstration of compliance with Commission policies, regulations and procedures, including cost allocation regulations, prior to certification, and to further require ongoing compliance following certification; and To require telephone companies holding outstanding commercial video dialtone applications to choose between franchised cable service and OVS service following a reasonable transition period. Action in each of these areas is necessary to establish an effective regulatory regime. I. THE COMMISSION MUST GUARANTEE PROGRAMMERS NONDISCRIMINATORY ACCESS The obligation to provide nondiscriminatory access distinguishes OVS operations from traditional cable system arrangements. Under traditional arrangements, cable operators exercise editorial control over all of their channels, except for those channels devoted to must carry, PEG access and leased access. OVS is different. The key distinctions between OVS and traditional cable are that with OVS (1) the manager of the facility does not exercise editorial control over the vast majority of the channels; and (2) the manager of the OVS facility is not required to obtain a local cable franchise, and is not subject to most local regulation. In creating the OVS option, Congress undertook a conscious trade-off of policy goals. Traditional cable, in which the cable operator functions as editor on most channels, is fully subject to Title VI, including the franchise requirement. In contrast, in return for ceding control of up to two-thirds of the system capacity, which must be made available nondiscriminatorily to non-affiliates, the OVS operator is relieved of the franchise requirement. The choice between these options is left to the facility provider. Commission oversight of the OVS operator is needed because a LEC-affiliated OVS operator is specially positioned to compete unfairly against unaffiliated packagers and programmers. Without effective Commission supervision, the LEC can over-allocate costs to the telephone operation and under-allocate costs to OVS. The resulting misallocation could enable the LEC to fund a strategy of predatorily pricing video programming service rates to end-users. The OVS operator s programming operation is, after all, in competition with other potential providers of programming on the open video system. The Commission must stand ready to intervene to prevent discrimination of this sort. The Commission s proposal to adopt a regulation that simply prohibits an open video system operator from discriminating against unaffiliated programmers in its allocation of capacity, and to allow the open video system operator latitude to design a channel allocation policy consistent with this general rule, will not guarantee nondiscriminatory access for programmers. Moreover, if adopted, it can effectively eliminate the trade-off inherent in OVS that relieves the OVS operator from the franchise requirement in return for providing nondiscriminatory access to programmers on two-thirds of the available channels. The potential for discrimination warrants an effective program of Commission oversight. As described below, the Commission must establish procedures to effectively enforce nondiscrimination. A. Channel Counting, Channel Sharing and Channel Positioning Where the demand for capacity exceeds the supply, the Telecommunications Act bars an operator of an open video system and its affiliates from selecting the video programming services for carriage on more than one-third of the activated channel capacity. The interpretation of one-third in these circumstances is absolutely critical, because it can decide the number of available channels and the scope of potential competition. 1. Channel Counting The NPRM proposes to satisfy a portion of the OVS operator s must carry/PEG requirement by taking the channels needed for must carry and PEG off the top of the activated channel total, and granting the OVS operator access to one-third of the remaining channels. Under the example put forth in the NPRM, if there are 90 channels on an open video system, 15 of which are devoted to PEG and must carry requirements, the open video system operator would be entitled to select the programming on one-third of the remaining 75 channels -- i.e., 25 channels. NCTA agrees with this proposal. It represents a middle ground between requiring the OVS operator to satisfy the must carry/PEG carriage requirements by utilizing a significant proportion of its exclusive allocation (in the above example, 15 of 30 channels) for must/PEG channels, and not using any portion of its capacity for this purpose. By effectively requiring the OVS operator to use a portion of its mandated channel allocation for must carry/PEG stations, while providing that other users satisfy the rest, the Commission would establish the policy that packagers share the responsibility for must carry/PEG carriage. The Commission must also decide whether to require the inclusion of shared channels for purposes of determining the one-third of system capacity that the OVS operator may control. The statute answers this question. It provides that, where demand for channels exceeds the supply, the OVS operator or its affiliates are prohibited from selecting the video programming services for carriage on more than one-third of the activated channel capacity. If the OVS operator, either exclusively or in consultation with other programmers, selects the shared channels, it is engaged in channel selection for purposes of Section 653 (b)(1)(B). The OVS operator is not entitled to select more than one- third of the available channels, even if these channels are also selected by other packagers for purposes of sharing. Any other interpretation places the OVS operator in a position to select significantly more than one-third of the activated channels. Returning to the Commission s example, if the OVS operator were permitted to select one-third of the channels for its exclusive use plus the shared channels, the prospect for effective intra-modal competition could be defeated. If, for example, thirty of the remaining 50 channels were classified as shared, only 20 would be left over for competitors. Even if only one competitor emerged, that competitor would be at a significant competitive disadvantage in relation to the OVS operator. 2. Channel Sharing The competitive situation would be tilted even more strongly (and unfairly) in favor of the facility provider if, as the Commission proposes, the OVS operator is allowed to decide how and which programming is selected for shared channels. The NPRM maintains that, under the Telecommunications Act, the agency has no choice but to grant this discretion to OVS operators. But there is no basis in law for the Commission s conclusion, and the proposal represents unsound policy. To the contrary, the Act s grant of discretion to the OVS operator is much more limited. The Act permits an operator of an open video system to carry on only one channel any video programming service that is offered by more than one video programming provider (including the local exchange carrier s video programming affiliate), provided that subscribers have ready and immediate access to any such video programming service This language does not authorize the OVS operator to decide that particular program networks should be shared, while others may be offered on an exclusive basis. As the Commission recognizes elsewhere in the NPRM, that authority is left to program producers, vendors, and other entities responsible for programming content. Their right to exercise control over their products is to be neither altered nor diluted by the adoption of the Commission s proposal. The statute merely authorizes the physical or technical act of carrying a program network selected by multiple programmers on the same portion of bandwidth. The statute authorizes the technical act of channel sharing so that the OVS operator will not be required to carry the same program network on multiple channels. The provision addresses a practical problem that arose in numerous video dialtone proposals. Anticipating that the limited analog capacity would be oversubscribed if multiple packagers were forced to carry the same programming on different channel slots, and that certain popular networks would be sought by multiple packagers, telephone companies proposed and the Commission agreed in principle that technical arrangements should be permitted to avoid unnecessary duplication. For example, recalling the above 90 analog channel example, if three packagers each propose to carry C- SPAN I on the system, there is no rational reason, so long as technical and economic factors can be overcome, for that network to occupy three of the 90 available channels. Instead, it is preferable to carry C-SPAN I on only one channel slot, which would be made available to each of the three packagers that seek to carry the particular programming. This arrangement, if practically workable, conserves scarce channel capacity and makes additional capacity available for other programmers to display their product. The likely result is enhancement of competition through the addition of more programmers able to compete for the attention of audiences, and an increase in program diversity. The channel efficiency called for by the statute can be accomplished without allowing the OVS operator to select these shared channels. Under copyright law, each entity proposing to offer programming on the OVS facility should be permitted to negotiate with the program network its proposes to distribute. (As noted, the Commission explicitly acknowledges the right of the program network to control its product. See Open Video Systems at 17.) Thus, channel sharing cannot be required with respect to a particular program network if the packager s arrangement with the program network does not explicitly permit such carriage. However, (if and only if) two or more programmers agree to carry a program network, and are permitted to do so pursuant to appropriate license agreements, even if one of those entities is not the OVS operator, the program network may be required to be carried on a shared channel. The Commission asks whether the OVS operator should be required to include channels it selects for inclusion within its package on a shared basis within the one-third limitation if the choice of the particular networks is delegated to an independent entity. The answer is yes. Under our proposal, channel sharing will arise only if more than one packager selects a particular network for carriage. If only one packager selects the network, it will be available on an exclusive basis. (A channel sharing arrangement in which the OVS operator decides which channels will be shared, or in which that function is delegated to an independent entity selected by the OVS operator, makes no sense unless more than one packager wants to carry a particular network and share bandwidth on the system.) If an OVS operator, directly or through an independent entity that it chooses, selects the shared channels, those channels should be charged against the one-third limitation. Any other result circumvents the one-third limitation. The Commission further proposes to permit the OVS operator, automatically, to either act as channel administrator on the shared channels, or to select the entity that will perform this function. This approach is wrong. Instead, all programmers taking capacity on the system should agree upon an administrator, or share in the administration of the system. We do not mean a new bureaucracy needs to be created. For instance, an employee of each programmer, including the OVS operator, could be selected to meet as a group to decide by consensus questions of administration. At a time when policymakers are moving away from the control by monopoly entities of systems and processes used by many to deliver competitive services, such as the determination that the North American Numbering Plan is to be independently administered, adoption of the NPRM proposal would be a step backward. 3. Channel Positioning The channel administrator, in addition to making arrangements for channel sharing, should also facilitate the positioning of channels. As the NPRM acknowledges, there are marketing advantages to lower channel numbers. The administrator in consultation with each of the programmers, including but not limited to the OVS operator s programming entity, should be permitted to determine channel locations. It may be reasonable to locate the shared channels on the lower channel slots in recognition of their presumed popularity. Channel allocations for other programmers should be awarded on a nondiscriminatory basis. Channels might be allocated by lot in groups to packagers that purchase groups of channels. B. Analog/Digital Issues Marketplace reality dictates the separate treatment of analog and digital channels for purposes of allocating capacity or the right to select video programming on open video systems. Digital capacity is not expected to be available to consumers on a widespread basis in the near term. For now, technical and cost considerations limit its use. The limited use of digital capability in existing broadband transmission networks, and the paucity of digital set-top boxes in the hands of consumers, means that programmers are almost certain to view the digital option as no option at all. If forced to use digital channels on a system in which their programming competitors have the use of analog channels, programmers will be competitively disadvantaged. The Commission should recognize that analog and digital transmission service are not the same service, analog channels are much preferred to digital channels in the near term, and a decision by the OVS operator to claim analog capacity for its own programming service, while leaving digital capacity to competitors, would constitute unjust and unreasonable discrimination. C. No Discrimination in Providing Information to Subscribers The Act prohibits an OVS operator 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 purpose of selecting programming on the open video system, or in the way such material or information is presented to subscribers. The Commission finds this section is a specific application of the non-discrimination requirement. The plain purpose is to prevent the OVS operator from using its status as the provider of the facility to advantage its programming service over other program services and broadcast stations. The provision should be read as congressional recognition of the OVS operator s ability, in the absence of regulation, to unfairly advantage its own programming venture, and a declaration of policy that effective implementation is needed to level the competitive playing field for unaffiliated programmers utilizing the OVS platform. To the extent that the OVS operator provides program guides, menus and navigation devices, it must ensure that end-users, including those that have presubscribed to its package, remain continually aware of their programming options. Descriptions by OVS facility personnel of programming available over the OVS facility, as well as hard copy and electronic program guides, should describe and display available programming choices, including local broadcast stations, in a nondiscriminatory manner. On the same grounds, navigation devices provided by the OVS operator must not advantage the programming package or packages of its affiliate. D. Capacity Issues 1. Capacity Allocation Procedure Demand for channel capacity may exceed the supply, particularly because most OVS operators are likely to offer only analog channels in the near term. When that happens, and in anticipation of the possibility, the Commission should establish a procedure to allocate capacity on a nondiscriminatory basis. Without Commission standards, programmers will need to learn of each OVS operator s channel allocation procedure in each jurisdiction, a potentially resource-consuming endeavor. NCTA proposes that OVS operators be required to advertise the availability of capacity to potential programmers, packagers and the public, at the publicly-filed rates the OVS operator intends to charge, and then to conduct an open enrollment period for at least four weeks. All packagers/programmers that seek capacity within the four-week period would be considered to have sought capacity at the same time for purposes of the first-come, first- served procedure. If at the conclusion of the four week period the OVS operator finds the channel requests exceed the available capacity, a meeting of the packagers would be convened to announce the results. There would then commence a second four week period during which all of the parties seeking capacity, including the OVS operator s programming affiliate, would have an opportunity to determine whether and to what extent shared channels could be used in lieu of exclusive channels. Thereafter, the remaining channels available for exclusive use would be allocated by the OVS operator in proportion to the number of channels requested. 2. Maximum/Minimum Capacity Limits The statute is as plain as day on the issue of the percentage of capacity that an OVS operator may select when other entrants want the remaining channels; that is, one-third. The explicit language prohibits, when demand exceeds supply, an operator of an open video system and its affiliates from selecting the video programming services for carriage on more than one-third of the activated channels on such system. One-third means one-third. If an OVS operator needs more channels, it can build them. The Commission asks whether one-third might not mean one-third when only one other packager besides the OVS operator seeks capacity on the system. The statute means what it says. If Congress intended an exception to the one-third limitation where only one unaffiliated packager seeks capacity, it could have said so. It did not. As to minimum term requirements, the Commission should require OVS operators to accommodate part-time users. For decades, cable operators have been offering public access users blocks of time on channels, rather than requiring their use on a full-time basis. In contrast, telephone company video dialtone tariffs attempted to impose a minimum one month charge. The Commission has previously questioned why, if cable operators are able to accommodate part-time users, telephone companies cannot do the same. Companies proposing to offer OVS must explain why they, unlike traditional cable operators, are either unable or unwilling to offer time to part-time users. Without good cause to the contrary, the Commission should include within the certification process a requirement that OVS operators agree to serve part-time users. 3. Changes in Demand/Capacity The Commission seeks comment on the adoption of a procedure to account for situations in which the OVS operator, finding that some unused capacity is available, decides to exceed the one-third limit. The issue is whether, in these circumstances, the operator upon receiving a request for channels by a nonaffiliate should relinquish capacity immediately, following a transition period or not at all. Requiring the OVS operator s programming entity to immediately relinquish channels could cause unjustified disruption to the entity s business plans and to the expectations of its customers. At the same time, however, the OVS operator has a continuing obligation to make capacity available following a transition, and if not, to construct additional channels. The Commission should take several steps to take account of new requests following the conclusion of the initial open enrollment period. First, OVS operators should be required to provide capacity to part-time users. These programmers cannot anticipate their demand for channel capacity, and as a matter of policy their programming should be able to find its way onto the system. The OVS operator should be given greater flexibility to accommodate programmers seeking larger channel blocks on limited capacity systems. The OVS operator should remain subject to the one-third limitation. But if it is occupying channels because unaffiliated programmers have not sought capacity during a prior open enrollment period, a reasonable transition period of up to one year is appropriate. During that period, the OVS operator can either arrange for additional capacity or relinquish the channels to which the unaffiliated packager is entitled. The one-year transition should be subject to two material qualifications. First, if in the interim the OVS operator upgrades its system and has available additional capacity, that capacity should be subject to an open enrollment period during which the unaffiliated programmer can request channels. Second, the unaffiliated programmer should be entitled to share any channel on the system, so long as it has properly arranged for carriage with the appropriate program network. 4. The Head Start Problem The nondiscriminatory access requirement should be interpreted to prohibit the commencement of service by the OVS operator to its affiliate prior to the availability of transmission service to competitors (using the OVS facility). The OVS operator should not use its control over the facility to obtain the marketing advantage of a head start over other programmers . The Dover Township, New Jersey video dialtone system strikingly illustrates the problem. In Dover Township, Bell Atlantic commenced service last January for a favored packager, even though other programmers on the system, who believed they had obtained capacity through a Commission-supervised open enrollment period, (to our knowledge) are still unable to reach subscribers. This situation should not be repeated. E. Dispute Resolution Finally, the Commission should adopt concrete procedures to make clear to OVS operators that discrimination and other forms of anticompetitive and anticonsumer practices will not be tolerated. The Act provides a procedure for the resolution of disputes arising under the open video systems section. While the statute requires the resolution of disputes within 180 days, the Commission should not interpret this provision as permitting OVS operators to act in a discriminatory manner for a full 180 day period prior to resolution. Nor should the Commission invite an entirely open-ended procedure in which OVS operators are permitted to argue the appropriateness of blatantly discriminatory conduct under the Act s not unjustly or unreasonable discriminatory standard. II. THE ACT REQUIRES JUST AND REASONABLE OVS RATES The Telecommunications Act directs the Commission to adopt regulations to ensure that the rates, terms, and conditions" for the carriage of programming on an open video system are just and reasonable and are not unjustly or unreasonably discriminatory." The NPRM, however, identifies several statutory and policy rationales that all seem to argue against the acceptance by the Commission of an affirmative responsibility to ensure that rates are just and reasonable. The Commission notes that Congress did not contemplate that OVS operators would be regulated as common carriers, and that the conferees did not intend for "Title II-like" regulation to be imposed. It is further observed that OVS operators will likely lack market power in relation to end-users and will almost certainly face competition from incumbent cable operators. The NPRM points out, in addition, that Congress provided for only a limited period in which to review requests for certification. The NPRM suggests the limited review period has implications for the type of certification process that the Commission ultimately adopts. As a factual matter, there are regulatory schemes other than the common carrier model for insuring fair rules for programmers. The Cable Services Bureau has an alternative rate regulatory model -- the cable rate regulatory scheme, adopted by the Commission following passage of the 1992 Cable Act -- which is neither common carrier regulation nor Title II-like. The NPRM further errs in contending that an effective rate regulation scheme is not needed because OVS operators are likely to lack market power vis-…-vis end users. The end- user rate does not tell the whole story. OVS operators are obliged under the statute to charge just and reasonable rates to other programmers. The reason for Congress' focus on this relationship is obvious -- OVS operators will control a bottleneck facility and will have strong incentives to use that control to disadvantage competing programmers. If channel capacity rates are not subject to regulation, OVS operators might try to charge unaffiliated programmers rates so high that they are dissuaded from entering the market. Moreover, by focusing on the OVS operator-end user relationship, the Commission ignores the possibility that the OVS operator will engage in a price squeeze, charging unjustifiably high rates to programmers for access, while keeping the end-user rate at competitive levels. The limited review period does not automatically justify no review, any more than the short period provided for an initial FCC order and reconsideration justifies no regulations. Congress did not say, after all, that because of a limited period for review of certification, OVS rates are subject to marketplace regulation. To the contrary, Congress imposed upon the Commission an affirmative duty to either find that the proposed rates are just and reasonable or to reject the rates and with it the certification. However challenging, this statutorily-mandated process requires the Commission to find that the rates charged to programmers are just and reasonable when measured against some standard that the agency finds appropriate to the circumstances. Although NCTA does not support any particular standard at this time, it believes the Commission can take two additional regulatory steps to facilitate an efficient OVS marketplace. First, the Commission must remain involved in the supervision of rates to the extent necessary to warrant that they are not discriminatory. OVS operators should not be permitted to charge different rates for the same transmission services. The Commission must stand ready to promptly resolve complaints. And, in addition, it may be necessary to adopt a rule under which an OVS operator is required to offer transmission service at the same per channel rate to all customers. Second, the public filing of rates is a necessary safeguard to protect nonaffiliates against rate discrimination. Public filing will aid in detection if OVS operators charge different rates to different programmers without any justification. It will also facilitate charging the same rates to the OVS operator s programming entity as are charged to nonaffiliates. Most significantly, regulatory parity is necessary: if no plan is adopted to regulate rates to programmers here, the same policy considerations should apply to regulation of rates to programmers for commercial leased access offered under Section 612 of the Cable Act. If the Commission decides that the rates for open video system service--the leasing of transmission capacity over a closed system to programmers--are not subject to rate regulation on the grounds that the marketplace is competitive, it follows that the rates for commercial leased access should also be deregulated. This conclusion is consistent with Congress judgment that cable rates should not be subject to regulation where consumers have effective competitive alternatives. III. THE COMMISSION MUST ESTABLISH EFFECTIVE SAFEGUARDS The prospect of incumbent LECs offering open video system services over integrated transmission facilities requires that the Commission establish safeguards against cross-subsidy and discrimination. The Commission should take three concrete steps to limit these risks. First, effective procedures must be adopted to allocate costs between incumbent LEC telephone operations and OVS, and the proceeding to establish these procedures must be completed prior to the initiation of open video system service. Second, incumbent LECs should be barred from the joint marketing of telephone service and OVS in response to customer-initiated calls, unless they simultaneously inform customers of cable service alternatives. Finally, incumbent LECs should be required to provide open video system service through a separate corporate subsidiary. A. Cost Allocation Effective regulations that protect telephone ratepayers and LEC competitors from cross-subsidization are an essential ingredient of the OVS regulatory scheme. Without effective regulations in this area, telephone companies will be able to gain an unfair competitive advantage over other providers of multichannel video distribution services. This unfair advantage will be achieved at the expense of telephone ratepayers who will be forced to pay higher rates, or who will not enjoy rate reductions as great as should be the case. The Commission properly asks what steps local exchange carriers should be required to take prior to certification with respect to establishing cost allocation procedures between regulated and nonregulated services under Part 64 of the Commission s rules. By asking this question, the Commission recognizes that, in contrast to the transmission component of the video dialtone service which is subject to regulation under Title II of the Communications Act, OVS will be regulated under the Part 64 Joint Cost rules. While determining that Part 64 rules will apply to separate the costs of OVS and telephone transmission service, however, the Commission does not explain how the system will work. Indeed, the Commission explicitly puts off the resolution of cost allocation procedures to a separate proceeding. Although the Commission requires a separation of costs between telephone service and OVS, LECs may not have been given sufficient direction to actually apply the Part 64 procedures, and the necessary guidance will not be forthcoming until the Commission acts in the separate proceeding. This is not to say that the decision to apply Part 64 will not have profound consequences. As Dr. Leland L. Johnson observes in the attached Declaration, These rules are of key importance to protecting against cross-subsidization, because they govern the segregation of costs for providing regulated telecommunication services from the costs of unregulated services such as OVS. By deciding to apply Part 64, the Commission has chosen the proper framework from which to derive the more specific requirements. These regulations are so important that until they are adopted in the forthcoming separate Common Carrier Bureau proceeding, certification requests should not be entertained. The Part 64 framework is consistent with the application of a stand-alone cost test as a starting point to the determination of the pricing of LEC services delivered over an integrated network. Under the stand-alone cost procedure, which is explained more fully in Dr. Johnson s Declaration, the costs allocated to the regulated sector are no greater than the stand-alone cost of whatever telephone services are to be provided on the common transmission network with OVS. Otherwise, ... OVS will bear less than its incremental cost, resulting in a subsidy from telephony. While stand-alone cost is the right starting point, it is extreme as an ending point because it does not include a share of common cost. Dr. Johnson explains, through an example, how the Joint Cost rules might incorporate a share of common cost in the telephone- OVS context: Under the joint-cost rules, each service is assigned its attributable cost (as a proxy for incremental cost) plus a share of common cost. After the costs attributable to each service in question are estimated, common costs are allocated to each service in proportion to directly attributable costs. Thus, if the costs attributable to OVS are $25 and those attributable to telephony are $50, OVS would be assigned one-third of the common cost. Consequently, any underspecification of OVS attributable cost would have a double effect on cost allocations. Not only would the assigned attributable or incremental cost of OVS fall below the true level, but the common costs of OVS would fall as well. The prospect of this double effect means that effective cost allocation procedures are particularly important. Without effective cost allocation procedures, LECs may be successful in underspecifying the costs attributable to OVS, with the remainder assigned to the telephone side. To prevent this from happening, the Commission must not accept the LECs rate proposals at face value. Rather, the agency should adopt in the pending rulemaking a cost allocation procedure requiring that an appropriate share of common cost in OVS rates. Employing this procedure, the Commission should verify in each individual case that the cost assignment to telephony is appropriate. Unless the cost (incremental and common) of the telephone component of the integrated facility is appropriately determined, telephone ratepayers will be subsidizing open video service. B. Joint Marketing The Commission recognizes that open video system operators may wish to offer bundled packages of local and long-distance telephone service, video programming delivery, and data transmission over integrated networks. There are obvious benefits from one-stop shopping. When local telephone service, long distance, video programming and other services are available to consumers through a single contact, they are able to arrange for each service simultaneously. Consumers, however, may wish to obtain these services from different suppliers on an unbundled basis, and they should have that choice. If consumers want to continue to obtain local telephone service from the incumbent LEC, and video programming services from the incumbent cable operator, for example, there is no policy justification for standing in their way. At the same time, there should be no prohibition against the institution of marketing inducements to encourage consumers to purchase bundled packages of services. Special considerations arise, however, if the incumbent LEC attempts to market bundled local telephone service and video programming services. The incumbent LEC occupies a unique competitive position in the marketing of adjacent services. When a person arrives in a new community or moves within their existing community (a increasingly common occurrence in our mobile society), the first call is generally made to the telephone company to arrange for that essential service. If at that time the telephone company representative, either directly or through a referral, exclusively recommends the incumbent LEC s cable or OVS service, the LEC will achieve an unfair marketing advantage deriving exclusively from its position as the monopoly supplier of local telephone service. The new telephone customer might even be induced to purchase the LEC s video service without being aware of competitive alternatives. Rather than encouraging this possibility, until telephone service is fully competitive, the Commission should institute an in-bound telemarketing process that levels the competitive playing field. As a condition of certification, incumbent LECs should be required to comply with a Commission-established set of procedures. These procedures should require an incumbent LEC representative who, in response to a customer call requesting telephone service wishes to advise the customer of any available video programming services, to also provide the name, address and telephone number of the local cable operator. The incumbent LEC representative should be prohibited from directly referring the telephone customer to the company s OVS or video programming service. Until telephone service is effectively competitive, this transitional protection is necessary to ensure consumers a true choice among video programming service alternatives. C. Separate Subsidiary The Commission should require Bell Operating Companies and other incumbent Tier I LECs that offer open video service and video programming directly to subscribers over OVS, to offer the services through a structurally separate subsidiary. Structural separation is necessary to assist regulators in the policing of discrimination and cross-subsidy. The Act makes clear that the Commission may use its existing authority to prescribe safeguards consistent with the public interest, convenience and necessity. The Commission has used its broad public interest mandate in the past to impose structural separation between the regulated transmission and unregulated information services offerings of the Bell companies and of other telephone companies. On similar grounds, the Commission should structurally separate the incumbent LEC s telephone operations and its OVS operations. Structural separation is warranted because the incumbent LEC has strong incentives to misallocate costs associated with OVS to telephone services. If successful, these misallocations will facilitate the unjustified loading of costs onto telephone services resulting in increased charges for the relatively inelastic telephone service, and the corresponding decrease in the charge for the more competitive OVS service. The resulting cross-subsidy will unfairly advantage the competitive OVS operation at the expense of telephone subscribers and competing multichannel video programming distributors. Accounting safeguards can only go so far in ameliorating the potential problem where physically integrated plant is involved. As Dr. Johnson explains: The separate affiliate requirement would help ensure that "hidden" transactions do not occur between the parent and affiliate -- e.g., employees of the parent "helping out" informally with some of the functions of OVS ventures, resulting in costs recorded by the parent rather than by the OVS venture. Thus, a separate affiliate would help to ensure that recurring operating expenses properly chargeable to OVS are not instead borne by the parent. More generally, separation would help to enforce the ground rules for cost allocations established in accordance with part 64 procedures. Structural separation is particularly important here because certain telephone companies have previously announced plans to invest billions of dollars in integrated plant. With such huge sums potentially involved, the separate subsidiary tool is absolutely essential to aid in the detection of cost and resource misallocations. IV. NON-LECS SHOULD BE PERMITTED TO OFFER VIDEO PROGRAMMING OVER LEC OPEN VIDEO SYSTEMS AS WELL AS THEIR OWN Pursuant to the Act, A local exchange carrier may provide cable service to its cable service subscribers in its telephone service area through an open video system that complies with ... [Section 653 of the Act]. This provision applies to incumbent LECs that choose to offer video programming over an open video system, rather than elect the option of obtaining a cable franchise. But it equally applies to new entrants into the business of providing local exchange service. They, too, qualify as LECs for purposes of the statute. These new entrants may unequivocally include companies that provide cable television service pursuant to a local franchise. It would be contrary to the statute for the Commission to reach the conclusion that new entrant LECs are not entitled to seek certification under Section 653, just because they are now franchised cable operators. The statute also provides that cable operators, and others, may qualify as OVS providers if the Commission concludes that their operation in this manner is in the public interest. The Commission should find non-LEC cable operators qualified to provide OVS for several reasons. First, Congress has just found that OVS operation is a legitimate alternative scheme for the provision of video programming directly to subscribers. In reaching that conclusion, Congress balanced the benefits of a franchised cable operator against the benefits of reduced local regulation when the facilities provider cedes substantial editorial discretion over the programming carried on the system. On competitive grounds alone, the Commission should provide non-LECs with the option of pursuing OVS. If there is something desirable about the OVS option to LECs that causes them to pursue this option, there may be some similar benefit to their non-LEC competitors. Level playing field principles should be embraced in this instance because, after all, the principal purpose of the OVS option is to advance competition and innovative ways of distributing programming. Non-LECs should be given the option of OVS for an additional reason. If they voluntarily cede a significant portion of their capacity to others, the same multiple distributor benefits deriving from LEC-delivered OVS would be present. While we believe that there are major consumer benefits to the cable operator s exercise of editorial discretion over its system s channels, there may be potential policy advantages to the OVS arrangement. If a cable operator, or indeed a new entrant that presently offers neither cable service nor telephone service decides to follow the OVS route, the Commission should not stand in its way. While the Commission has been granted considerable flexibility to implement OVS, the scope of the agency s discretion does not permit the exclusion of cable operators from the LEC s OVS system. The Commission asks, in light of subsection 653(b)(1) s general prohibition on discrimination among video programming providers, the extent to which open video system operators would have discretion regarding the identity of video programming providers entitled to carriage on its system. In other words, does the Conference Report language expressing Congress intent to permit open video system operators to tailor services to meet the unique competitive and consumer needs of individual markets authorize exclusion of a cable operator from capacity on an open video systems? The answer is no. First, it is a settled rule of construction that the express language of the statute overcomes any potentially contrary legislative history. The statute unequivocally prohibits an operator of an open video system from discriminating among video programming providers with regard to carriage on its open video system. This language is not qualified in any way. Since a cable operator seeking capacity on an open video system would be among the video programming providers seeking carriage on ... [the LEC s] open video system, discrimination against the cable operator by excluding it from the facility is prohibited. In addition, there is nothing in either the statutory language or the legislative history to suggest that Congress intended for the OVS operator to exercise editorial control over more than the one-third of the capacity to which it is expressly entitled, except where excess capacity is available. The Conference Report language does not say, for example, that an OVS operator may exercise editorial control over more than one-third of the available channels if it is able to demonstrate that doing so will serve unique competitive and consumer needs of individual markets. It certainly does not suggest that there are any reasons for the adoption of a new cross-ownership rule. The Telecommunications Act took a major step in the direction of solving this perceived problem. It grants LECs the right to program their networks as cable operators under Title VI. It also gives LECs, and others who might want to operate open video systems, a guarantee of one-third of the system s channel capacity. With that level of control, not available to operators of video dialtone systems, OVS operators will be able to tailor services to meet the unique competitive and consumer needs of individual markets. Any further allocation of capacity or control to the OVS operator will constitute discrimination under the statute. The Commission should not bar local cable operators from obtaining OVS capacity. The OVS model is designed to promote not only competition to cable incumbents (and, we assume, DBS, MMDS, SMATVs and others), but also to provide for competition to the OVS operator on its facility. That, presumably, is a large justification for the OVS model. The incumbent cable operator is an obvious potential user of (and competitor to) the OVS operator. To exclude the cable operator by rule at the outset would diminish potential competition, and could defeat one of the best hopes for making OVS a workable model over which multiple programmers deliver video programming directly to subscribers. V. THE COMMISSION SHOULD APPLY TITLE VI PROVISIONS TO OPEN VIDEO SYSTEMS IN A STRAIGHT-FORWARD MANNER In establishing the OVS option, Congress expressly relieved system operators of the requirement to obtain a local cable franchise, and certain of the obligations, such as franchise renewals and compliance with most local requirements, that follow directly from the franchise requirement. OVS operators, in addition, are not subject to commercial leased access obligations, local rate regulation (except for the prohibition against negative option billing), and locally imposed customer service requirements. OVS operators are, however, required to abide by several Cable Act provisions. Among these are must carry requirements for commercial and public television stations, retransmission consent, and ownership restrictions. Program access, negative option billing, subscriber privacy and equal employment opportunity regulation also apply. The Commission s certification procedure should be used to ensure that OVS operators are fully complying with the relevant Cable Act provisions. A. Must Carry and Retransmission Consent Congress plain intent is to mandate a must carry/retransmission consent regime for OVS that is as similar as possible to the scheme that applies to traditional cable operators, to ensure that programmers employing the OVS facility do not escape from these obligations, and to guarantee broadcasters must carry/retransmission consent status (and PEG access for localities that seek it). This direction is straight-forward. The must carry/retransmission consent provisions mean that the OVS operation must contain the equivalent of a tier of channels, including local broadcast and PEG channels, that all subscribers must purchase and buy-through to reach other programming on the system. The OVS operator s programming package must contain, at a minimum, the must carry channels. Similarly, any other packagers, except for part-time users, that purchase capacity must carry the local broadcast and PEG channels. The Commission asks how must carry ought to be implemented in an environment of multiple packagers on the same facility. Should multiple packagers arise, the most practical solution would appear to be to classify the must carry channels as shared, and to require all programmers to offer the must carry channels along with exclusive channels. This arrangement should not, of course, require subscribers purchasing multiple packages to pay for the must carry channels more than once. The subscriber should be permitted to choose the provider from which it will purchase the must carry channels. Once the subscriber makes this choice, it should be permitted to purchase programming from other packagers without being required to buy the other packagers shared channels. The Commission additionally seeks comment on the scope of must carry; i.e., which and how many channels, including low power stations, should receive must carry status. For purposes of this rulemaking, the Commission should apply the requirements of Section 614 and 615, and leave the particulars to the same process that is used to interpret statutory requirements for carriage of broadcast signals by traditional cable operators. Resolving must carry obligations in this way is sound policy and consistent with the Act s requirement that obligations on OVS should be no greater or lesser than on cable operators. B. PEG Access Open video systems are also subject to Section 611 of the Communications Act, 47 U.S.C. 531, which requires cable operators to provide local government with a local government channel for coverage of city council meetings and related matters, and an educational channel for use by local educational authorities, and a public access channel. PEG access channels, in the traditional cable context, are arranged for by the local franchising authority and the cable operator through the franchise negotiation process. Section 611 of the Communications Act provides the procedure pursuant to which cable operators comply with PEG access requirements. Under the procedure, the franchising authority may establish PEG access obligations as part of an initial franchise negotiation or renewal. The franchising authority is given authority to enforce PEG access requirements that are contained in the franchise agreement. The cable operator generally is not permitted to exercise editorial control over any of the PEG access channels. In contrast to the heavy involvement of local authorities in the regulation of traditional cable systems, the OVS model does not specifically contemplate any local role. But the absence of a local role in other aspects of OVS should not be interpreted by the Commission as undermining or eradicating the appropriate role of the local franchising authority in PEG access. Localities, not the FCC, are in the best position to deliver on the Act s intent to accomplish PEG access over open video systems. The practical necessity of local franchising authority involvement in the implementation of PEG access on open video systems is consistent with the Act s admonition to impose obligations that are no greater or lesser than those imposed upon traditional cable operators. The local franchising authority is the governmental entity best positioned to appreciate community needs and most experienced in the implementation of PEG access rules. PEG access should be implemented through the channel administrator, on behalf of the system s programmers/packagers. The administrator should be authorized to enter into negotiations with the local franchising authority or a local access authority over the terms and conditions of providing PEG access over OVS systems.. The channel administrator should be offered the same terms as those contained in the incumbent cable operator s franchise. Any variance from the terms contained in the franchise agreement must satisfy the Act s requirement that the obligations imposed are neither greater nor lesser than those imposed upon cable operators. While the obligations imposed upon the OVS programmers and the incumbent cable operator should be as identical as possible, the cable operator should not be required to interconnect its channel feeds with those of the OVS operation. Nor should the Commission require the cable operator to otherwise share capital and operating expenses related to PEG channels. There is no legal basis to require the cable operator to interconnect its PEG channel feeds with anyone. (PEG access transmissions are not subject to common carrier requirements.) Unless voluntary interconnection agreements are reached between the parties, the OVS programmers will have to deliver PEG access independently. C. Program Access The Act applies the program access rules contained in Section 628 to open video systems. The provision is one of the elements of the new law designed to level the competitive playing field between traditional cable operators and open video systems. By applying the program access law to OVS, the Commission will comply with the plain meaning of the statute. D. Other Title VI Provisions The Act applies several other Cable Act provisions to OVS. Operators of open video systems must comply with Section 613 (ownership restrictions), exclusive of the MMDS/cable and SMATV/cable cross-ownership prohibition; Section 616 (carriage agreements); Section 623 (f) (negative option billing); Section 631 (subscriber privacy) and Section 634 (equal employment opportunity). These provisions are easily understood and their implementation should not be controversial. The Commission should proceed to amend its rules to state simply that open video systems are subject to these requirements. E. Franchise Fees The Act permits a local franchising authority to impose a fee upon an OVS operator, akin to the franchise fee levied on cable operators pursuant to Section 622 of Title VI, on the gross receipts of the [OVS] operator for the provision of cable service. This fee is be assessed on the basis of the gross revenues derived by the OVS operator on all of the channels, as well as the gross revenues derived by the OVS operator s video programming service. The fee may not be assessed at a rate that is greater than the amount imposed upon the local cable operator. As with the local operator, the OVS operator may include the proportionate amount of the fee as a separate line item on the subscriber s bill. This is straight-forward. This provision is one of the level playing field actions by Congress to require that OVS operators, to at least some extent, operate under the same rules as cable operators. It also requires OVS operators to compensate localities for the use of their streets when they provide the cable-similar (if not equivalent) OVS service. VI. SPORTS EXCLUSIVITY, NETWORK NONDUPLICATION AND SYNDICATED EXCLUSIVITY SHOULD BE APPLIED TO OPEN VIDEO SYSTEMS The Act further directs the Commission to adopt regulations that extend to the distribution of video programming over open video systems the Commission s regulations concerning sports exclusivity (47 C.F.R. 76.67), network nonduplication (Id., 76.92 et seq.) and syndicated exclusivity (Id., 76.151 et seq.). The Commission asks how these provisions ought to be applied to OVS, and notes that the issue is complicated because the programming on these channels are likely to be shared by multiple users of the OVS facility. The solution is to give the responsibility for implementation to the channel administrator which, under the proposal described above, will be selected collectively by the programmers using the system. The channel administrator will be in the best position to track schedules to determine when the display of particular programming by any of the programmers on the system will violate the exclusivity rights exercised by broadcasters. The channel administrator should be empowered to block the required programming on shared channels and thereby to prevent its display. For the exclusive channels, the first responsibility for blocking should be left to the particular packager leasing the channel, although the actual blocking function might be performed by the channel administrator for a fee. VII. AN EFFECTIVE CERTIFICATION PROCESS IS ABSOLUTELY ESSENTIAL The Act provides that prior to commencing service, an OVS operator must certify that it is in compliance with the Commission s regulations. The Commission is directed, pursuant to Section 653(a) (1), to approve or disapprove certification requests within ten days of their receipt. The statute makes clear that the purpose of the certification process is to provide a vehicle through which the Commission may determine whether particular OVS operator proposals comply with the regulations. There is no suggestion in the statute or legislative history that a certification request carries with it any presumption of validity. Rather, following public notice, the Commission is directed to approve or disapprove certification requests. The Commission asks whether it would be consistent with the 1996 Act to establish a review process that only would make a determination that the application is facially proper, subject to a more thorough review if a dispute subsequently arises regarding compliance with the open video system provisions. The Act does not permit this approach. It requires a finding, based upon the operator s showing, of whether the operator complies with the Commission s regulations. The Commission is properly concerned that ten days is an insufficient period to evaluate compliance. It suggests that the OVS operator should be required to file basic information, presumably subject to staff evaluation, as a prerequisite to the filing of certificates. This procedure will give the staff an opportunity to evaluate whether the submitted information is sufficient to demonstrate compliance, and, where necessary, to communicate potential deficiencies. This approach is far better than an arrangement in which the Commission is forced to initially reject certification requests because of an operator s failure to file necessary information. Pre-filed information should include, and applications for certification should demonstrate at a minimum, that the operator s plans in the following areas warrant approval: 4 A demonstration that the operator s plan for allocating integrated system costs between telephone service and OVS has been approved by the Commission; 4 A demonstration that the operator has either established or intends to establish a separate subsidiary that complies with the Commission s regulations; 4 The number of analog and digital channels that the operator proposes to offer when service commences; 4 The operator s plan for offering two-thirds of the activated channels on a nondiscriminatory basis, including an open enrollment procedure that complies with the Commission s procedures; 4 The operator s proposal, if any, to provide the technical capability for the sharing of channels; 4 A demonstration that the operator intends to enter into an agreement for the joint administration of shared channels, including must carry and PEG channels, or for channel administration by a channel administrator collectively chosen by all of the programmers; 4 A demonstration that the rates, terms and conditions under which it proposes to offer service are just and reasonable, and are not unjustly or unreasonably discriminatory; 4 A demonstration that the operator has adopted a procedure whereby, if its telephone affiliate informs customers of the affiliated OVS or video programming service, it will simultaneously and without favor inform customers of competitive alternatives; 4 A demonstration that the operator is either in compliance with, or intends to comply, with Cable Act provisions relating to must carry, retransmission consent, PEG access, program access and other matters; and 4 A demonstration that the operator is in compliance with, or intends to comply, with Commission regulations regarding network nonduplication, syndicated exclusivity and sports exclusivity. Based upon a review of this basic information, the Commission can determine whether to grant an OVS operator s request for certification. The Commission s work is not over once it authorizes a certificate. In accordance with the dispute resolution procedure provided for at Section 653(a)(2), the Commission should stand ready to resolve complaints brought by interested parties or by the Commission s on its own motion in an expeditious manner. VIII.PETITION FOR RECONSIDERATION The Commission, in a Report and Order accompanying the NPRM, takes several actions that are intended to conform the agency rules to the legislation. Because the Act repeals Section 613(b), the telephone/cable cross-ownership bar, the Commission removes the implementing regulations from the Code of Federal Regulations. The Act also eliminates the requirement that local telephone companies obtain the Commission s prior approval before constructing or operating video capable facilities. Finally, the Act terminates and vitiates CC Docket No. 87-266, the video dialtone proceeding, but directs that the new law shall not be construed to require the termination of any video-dialtone system that the Commission has approved before the date of enactment of this Act. The Commission s elimination of accounting and reporting requirements established for the provision of video programming over common carrier transmission facilities, while not a part of CC Docket No. 87-266, follows directly from the elimination of the video dialtone regulations. The Commission errs, however, when it does not require currently approved video dialtone systems to cease operations and offers no explanation for this ruling. Congress did not require the termination of existing authorizations, but it does not constrain the Commission s discretion to order termination. The agency should do just that, following a reasonable transition period. Congress could have grandfathered existing authorizations. However, it did not. Accordingly, the outstanding video dialtone trials that were authorized to operate only until a date certain should terminate on those dates. If the companies currently offering service pursuant to these authorizations wish to continue operations, they should seek either a local cable franchise or an OVS certificate. Trials in which the offering of service has not yet commenced, and commercial authorizations, should be required, after some reasonable transition, to choose between OVS and franchised cable service. With the termination of the video dialtone proceeding, there are no longer any video dialtone rules. Since the Commission surely does not intend the complete deregulation of these systems without any public interest finding that deregulation is appropriate, the only choices are to conduct a rulemaking to consider the establishment of new rules for these few systems, or to require that they select between OVS and franchise operation. The latter choice is the preferable alternative. CONCLUSION OVS allows companies, in exchange for ceding a degree of editorial control, to avoid the local franchising process. In return, they must offer nondiscriminatory access to nonaffiliates on up to two-thirds of their channel capacity. Having chosen the OVS route, operators may be inclined to discourage unaffiliated programmers--their competitors--from pursuing the business opportunity that the statute plainly contemplates. If unaffiliated programmers can be persuaded that they have no real business chance to compete with an OVS operator s programming package, the operator will achieve the best of both worlds: a monopoly on its facility, with no local oversight and few of the local responsibilities of franchised cable operators. It is up to the Commission to see that this does not happen. It is the Commission s responsibility to enforce real nondiscriminatory access, to implement effective cost allocation rules, to adopt structural and non-structural competitive safeguards, to protect the rights of programmers, and to more generally protect consumers and competition in the process. It is also up to the Commission to implement a certification process that makes this all come about in individual cases. Respectfully submitted, Daniel L. Brenner Neal M. Goldberg David L. Nicoll 1724 Massachusetts Avenue, N.W. Washington, D.C. 20036 (202) 775-3664 Counsel for the National Cable April 1, 1996 Television Association, Inc.