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 ) In the Matter of ) ) Telephone Company-Cable Television ) CC Docket No. 87-266 (Terminated) Cross-Ownership Rules ) Sections 63.54-63.58 ) REPLY COMMENTS OF THE NATIONAL CABLE TELEVISION ASSOCIATION, INC. The National Cable Television Association, Inc., by its attorneys, submits the following Reply Comments in response to the comments submitted in the above-captioned proceeding. INTRODUCTION AND SUMMARY The Telecommunications Act offers telephone companies, incumbent cable operators and others an alternative to the traditional cable model under which they may offer cable- equivalent service without obtaining a local franchise in exchange for ceding up to two-thirds of the available channel capacity to unaffiliated packagers/programmers. In its Comments, NCTA called upon the Commission to adopt rules that fairly balance the twin policy goals of providing nondiscriminatory access to programmers and of promoting competition to incumbent cable systems by eliminating the franchise requirement. In contrast, telephone company comments ask the Commission to tilt its ruling strongly toward regulations that inhibit intra-modal competition. Simply put, the telcos want de facto editorial control over the same number of channels as cable operators, but they resist the local franchise responsibilities of cable operators. That is not what Congress had in mind. Rather, the statute contemplates different packagers able to obtain capacity on a nondiscriminatory basis. The OVS regulations must enforce nondiscriminatory access. Following review of the comments of other parties, we again urge the Commission: To adopt effective cost allocation procedures; To adopt a separate subsidiary to facilitate the detection of discrimination and cross-subsidy; So long as channel capacity is scarce, to limit the number of channels that an OVS operator may 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; and To require a demonstration of compliance with Commission policies, regulations and procedures, including cost allocations, prior to certification, and to further require ongoing compliance following certification. We urge action on each of these items to bring about an OVS scheme that affords unaffiliated programmers a real competitive opportunity. I. NONDISCRIMINATORY ACCESS FOR PROGRAMMERS IS ABSOLUTELY ESSENTIAL NCTA s comments emphasized that the unequivocal obligation to provide nondiscriminatory access to unaffiliated packager/programmers distinguishes OVS from traditional cable service. In contrast to traditional cable system arrangements in which the cable operator exercises substantial editorial control, OVS contemplates that the facility provider will cede control of up to two-thirds of the activated channels to competitors. It is only because two-thirds of the available channels are made available to the operator s competitors that Congress agreed to give the OVS operator the competitive edge of no local franchise obligations. LECs filing comments in this proceeding urge the Commission to vitiate this arrangement, asking that OVS be operated on an essentially unregulated basis. Despite the express requirement in the statute that OVS operators offer unaffiliated programmers nondiscriminatory access on up to two-thirds of the activated capacity, LECs offer up rationales for defeating the statute s requirement. A. Channel Counting and Channel Sharing 1. Counting Must Carry and PEG Channels In its comments, NCTA endorsed the Commission s proposal to take the must carry and PEG channels off the top, entitling OVS operators to one-third of the remaining channels. The Commission s example proposed that if there are 90 activated channels, and 15 stations are entitled to must carry status, the number of must carry stations will be subtracted from the total (i.e., 90 minus 15), leaving 75 channels. Of these, the OVS operator will be entitled to one-third. This proposal has the advantage of requiring the OVS operator (and other programmers) to contribute channel slots to the must carry pool in proportion to the number of channels which they are guaranteed. The telephone parties object to this arrangement. The joint filing of six telephone companies, for example, hereafter referred to as Joint Telephone Parties, argues that the Commission is incorrect when it proposes to deduct...[the must carry and PEG] channels from the total prior to calculating the operator s one-third. The Joint Telephone Parties maintain that This approach violates Section 653, which unambiguously bases the operator s one-third on the activated channel capacity. They reason that activated channel capacity is defined in Title VI as those channels engineered at the headend, including PEG channels, generally available to a cable system s residential subscribers. They claim that because PEG channels are among the activated channels, channels used for PEG and must carry should not be included among the one-third of channels to which the OVS operator is entitled. The Joint Telephone Parties are wrong. The Commission is well within its discretion to require that the OVS operator count a portion (or indeed all) of the must carry and PEG stations as part of the one-third of channels to which the OVS operator is entitled. Since the OVS operator is carrying these channels, it is proper to include them within the one-third limitation. It is also reasonable, however, for the Commission to employ its discretion to require all of the system s programmers to share the obligation for carriage of must carry and PEG stations. For that reason, in our comments we endorsed on policy grounds taking the must carry/PEG stations off the top, an arrangement which shares the obligation of must carry/PEG carriage. Adopting the Joint Telephone Parties proposal would have draconian consequences. Using the Commission s example, under their proposal the OVS operator s 30 channels would be first subtracted from the total activated channels (90 minus 30, equals 60). Thereafter, the 15 must carry channels would be taken. At that point, 45 channels would be available for division among all of the other programmers in competition with the OVS operator s package. This contrasts to the Commission s more equitable proposal under which the OVS operator receives 25 channels, and 50 are available for competitors. The net result is that under the Commission s proposal two times as many channels are available to competitors as to the OVS operator, while under the LECs plan only one and one-half times as many channels are available to competitors as to the OVS operator. 2. Shared Channels NCTA s comments contended that when an OVS operator chooses a channel that is to be shared with other programmers, it selects that channel. It follows that shared channels should be included as part of the one-third of channels for which OVS operators are entitled to select the programming. LECs seek an even greater advantage. U S WEST, for example, argues that only programming that is the subject of a unilateral decision by the OVS operator or its affiliate should be classified as programming that is selected by the OVS operator. Any other interpretation would constrain an OVS operator s selection rights beyond the statutory one- third limit. U S WEST further contends that by sharing a channel it is not selecting programming for purposes of Section 653 (b)(1)(B). Rather, in that circumstance the OVS operator has only required that it be delivered in the most efficient manner, as the law allows. U S WEST s reasoning is unavailing. If the OVS operator is merely delivering a shared channel included within its package, rather than selecting the particular channel, how does the channel get on the system? How, for example, does C-SPAN I as opposed to C- SPAN II get on a shared channel unless the OVS operator s programming entity (along with other packagers) select C-SPAN I and decide not to select C-SPAN II? Channel selection, whether on an exclusive or shared basis, is the very essence of editorial activity that the packager undertakes when it selects one channel, and decides not to select another. So long as the OVS operator s programming arm undertakes the editorial function, it is engaged in program selection rather than the mere delivery of a transmission in the most efficient manner. Practically speaking, acceptance of the LEC proposal will have seriously detrimental consequences for intra-modal competition. Returning to the Commission s 90-channel example, if there are 15 must carry and PEG stations, 30 channels reserved exclusively for the OVS operator, and 25 shared channels, only 20 channels would remain for competitors. Even if only one unaffiliated packager sought capacity (and several are likely), the competitor would have only 20 exclusive channels in comparison to 30 for the OVS operator. The Act does not contemplate placing the OVS operator s customer-competitors at such a severe disadvantage. To the contrary, the Act directs that competitors will obtain access to the OVS operator on a nondiscriminatory basis. The Commission should reject the LECs proposals because, if they are adopted, discrimination is unavoidable. B. Channel Administration In its comments, NCTA proposed the sharing of the channel administrator function among the programmers on the system. By providing for the sharing of administration functions, the Commission can be more assured that the OVS operator s programming entity does not use the role as channel administrator to discriminate against competing packagers. NCTA specifically pointed out that by calling for the joint administration of shared channels we were not advocating the establishment of new bureaucracies in every location. Rather, NCTA anticipates that each programmer using the system would designate an employee to attend a necessary joint meeting or meetings. The LECs want the exclusive responsibility to administer the must carry and shared channels. The Joint Telephone Parties maintain any other conclusion would be fundamentally inconsistent with Section 653 and patently absurd. They surely recognize, however, that if telcos are permitted to exclusively perform the channel administration functions, their already considerable competitive advantages will be even further enhanced. They will, for example, be able to decide the means by which must carry, PEG and shared channels are made available to their competitors. If combined with other advantages, competition will be compromised even further. The prospects for the level playing field contemplated for programmers on the OVS facility will be considerably enhanced if the Commission adopts joint channel administration. If all of the programmers have an opportunity to share in the channel administration decisions, consumers are much more likely to obtain real choices among program providers. Nothing in Section 653 prohibits this arrangement, and competitive considerations call for it. C. Channel Positioning NCTA s comments called for delegating the channel positioning function to the joint channel administrator. Our comments recognized that it may be appropriate to assign the lower channel numbers to the must carry and shared channels, in recognition of the presumed superior popularity of these stations. The LECs contend that the OVS operator should be entitled to determine channel positions on its own. The Joint Telephone Parties, for example, contend that operators must be permitted to assign channel positions. But this result would enable the OVS operator to further disadvantage its competitors. For example, an OVS operator might place its exclusive channels on the most desirable low channel numbers, while leaving the highest numbers for competitors. That result would be directly contrary to the principle of providing nondiscriminatory access to programmers. Under the proposal of the Joint Telephone Parties, competitors dissatisfied with an OVS operator s decision on channel positioning would bear the burden of proof. They would have to fight it out with the OVS operator in an individual adjudication in which the operator would argue that the competitor had not met the unjust or unreasonable standard. The wiser course -- and the one most consistent with the competition policy goal of the statute -- is to decide at the outset to eliminate the possibility of discriminatory channel positioning by adopting joint determination of channel positions. D. Maximum/Minimum Capacity Limits While the statute clearly limits the OVS operator to one-third of system capacity in situations where demand for channel slots exceeds the supply of available activated channels (the OVS operator s programming entity may occupy whatever portion of the remaining two- thirds of the capacity that is not taken by unaffiliated programmers), the Commission asks whether there are circumstances in which the one-third limitation can be exceeded. For example, the Commission asks, if only one unaffiliated packager seeks capacity, is it appropriate for that packager to be able to obtain all of the remaining exclusive channels? We maintain that one-third means one-third. If circumstances develop such that only one unaffiliated packager seeks capacity, that does not alter the statutory scheme. If Congress had wanted the Commission to depart from the one-third limitation where only one unaffiliated packager sought capacity, it could have said so. Since it did not, the one-third limitation stands. LECs nonetheless maintain that the Commission must intervene to obviate the possibility that a competitor will obtain more channels than the OVS operator s programming entity. The Joint Telephone Parties, for example, call for a rule under which no individual unaffiliated video programming provider...[would]...be allowed to select the programming on more channels than the open video system operator and its affiliates. U S WEST contends that it will be deterred from constructing OVS systems if it faces a competitor with more than one-third of the channels. This proposed deviation from the statute should not be adopted. The Commission should stick to the plain meaning of the statute and not authorize OVS operators to occupy more than one-third of the available channels on scarce capacity systems. Finally, it is worth noting while the LECs object to the availability to a single competitor of more than one-third of the capacity, they also advocate a must carry and channel sharing arrangement that would provide less than one-third of the available exclusive channels to all competitors. As noted in the above examples, if neither must carry nor shared channels are counted against an OVS operator s exclusive allocation, less than one-third of the remaining channels are available to all competitors. E. Capacity Allocation Procedure Our comments called upon the Commission to adopt a formal open enrollment procedure to allocate capacity where demand exceeds supply. A formal and uniform procedure is far better than an arrangement under which individual programmers throughout the country must learn of the different arrangements offered by each OVS operator. NCTA proposed a requirement that an OVS operator advertise the availability of capacity at publicly filed rates, and that the OVS operator conduct an open enrollment period that lasts for a minimum of four weeks. All requests submitted during the open enrollment period would be considered made at the same time for first-come, first-served purposes. At the conclusion of this period, the OVS operator would announce the results, and the programmers would then determine the extent to which shared channels can satisfy capacity requirements. The OVS operator would then allocate the available exclusive channels to the unaffiliated programmers in proportion to the number of requested channels. Telephone companies, in the name of leaving matters to the marketplace, oppose a procedure that will stabilize the marketplace for channels available to unaffiliated programmers. NYNEX argues that When capacity constraints arise, the operator should be able to employ any nondiscriminatory procedure to allocate capacity. USTA opposes a channel allocation procedure, and argues for OVS operator discretion, because of uncertainty surrounding the potential network architectures and service arrangements for open video systems. U S WEST, arguing that one size does not fit all, argues that the OVS operator should be permitted to allocate capacity without any further Commission guidance. The rationales of the telephone parties should not be given credence. They are obviously seeking maximum discretion so that they are able to control the channel allocation process and to preserve an ability to discriminate against competitors to the maximum extent. The establishment of a clearly understood channel allocation process, and a mechanism for ensuring that it is enforced, is essential to unaffiliated programmers that expect nondiscriminatory access to the OVS facility. F. Analog/Digital Issues NCTA s comments noted that the OVS operator s offering of analog and digital services are different. If the OVS operator offers analog channels, it cannot satisfy its obligation to offer programmers nondiscriminatory access to channel capacity by offering digital channels. Drawing this distinction is particularly important because, at the present time, the consumer base of television receiving devices is analog, and consumers will have to bear an additional expense to convert their sets to digital capability. In addition, the digital transmission and other costs may exceed those of analog. If, for example, the OVS-affiliated package consumes all of the analog channels, while unaffiliated competitors are forced onto digital capacity, the OVS operator will gain a significant competitive advantage. Many end-users may be disinclined to purchase the digital capability, if they can obtain a satisfactory package of programming delivered over the analog channels. Such discrimination is intolerable, as well as unlawful. The Joint Telephone Parties nonetheless propose a scheme that will have just this consequence. They argue that competitive necessity and business flexibility justify permitting OVS operators to select programming for any one-third of the activated channels to the extent necessary to compete effectively with incumbent cable operators. The Joint Telephone Parties conclude that Congress did not distinguish between analog and digital channels for this purpose. Neither should the Commission. Acceptance of the Joint Telephone Parties proposal would be the single most serious blow to unaffiliated programmers hoping to compete with the OVS operator s programming package. If the analog/digital service offerings are not distinguished, the OVS operator might satisfy the one-third capacity limitation by providing 100 analog channels to itself, and by offering 200 digital channels to competitors. For all practical purposes, this would circumvent the one-third limitation. The Commission should, instead, impose upon OVS operators separate obligations to offer nondiscriminatory access to programmers on analog and digital channels. G. Changes in Demand/Capacity The OVS operator s programming entity is permitted to exceed the one-third capacity limit if excess capacity is available following conclusion of the initial period for requesting channels. Subsequently, unaffiliated programmers may request capacity. The Commission asked whether in that circumstance the affiliated programmer should be required to relinquish capacity immediately, following a transition period, or not at all. NCTA supported a reasonable transition period subject to three qualifications. First, part-time users should be accommodated. Second, if new capacity becomes available, that capacity should be subject to a new open enrollment period. And third, unaffiliated programmers that have properly arranged for carriage with the relevant program network should be allowed to share any channel on the system. U S WEST, in contrast, believes that a three-year period is the absolute minimum necessary to attract VPPs to OVS with a five-year period being more economically reasonable. The Joint Telephone Parties oppose a fixed time limit, but suggest that if carriage is offered on fixed duration contracts (e.g., 5 years), then a reasonable period of time would be until the next anniversary of those contracts. NYNEX also supports the notion that OVS operators not be required to engage in new periodic enrollments more frequently than every five years. NCTA continues to believe that a shorter period is sufficient to enable OVS operators to transition to new arrangements. One year strikes the appropriate balance between the accommodation of unaffiliated programmers and the time necessary for the OVS operator s programming entity to adjust. H. The Head Start Issue NCTA s comments called for preventing the OVS operator s video programming entity from commencing service to end-users before competitors. If the operator s package is first in the market, it will gain an obvious competitive advantage. The telephone parties did not seek the ability to begin service before others, and should not object to this rule of basic fairness. The requirement of nondiscriminatory access should be interpreted to require that all programmers have the ability to begin service at the same time as the OVS operator s programming service. I. Dispute Resolution NCTA s comments advocated a dispute resolution process that contained concrete procedures to make clear to OVS operators that discrimination and other forms of anticompetitive and anticonsumer practices will not be tolerated. Our comments called for a process to resolve disputes expeditiously, noting that the statutory 180-day period for resolving complaints should not be interpreted as authorizing a LEC to engage in discrimination and other improper conduct for a full 180 days. We also opposed an entirely open-ended process in which operators are permitted to defend the reasonableness of blatantly discriminatory conduct. It is probably advisable that the Commission set forth in advance an illustrative list of prohibited practices to minimize areas of dispute. There is no dispute that a process is necessary; only the particulars of the process are in question. The Joint Telephone Parties submit an 11-page proposal that will certainly provide the Commission with all of the information it could possibly want regarding a particular situation. It may be, however, that a somewhat shorter process will provide the necessary information, and impose less of a burden upon all concerned. The Commission should carefully evaluate the information that it needs to expeditiously and fairly resolve complaints. II. THE STATUTE REQUIRES JUST AND REASONABLE RATES NCTA noted in its comments that the Act calls for 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 seems to suggest, however, that the statutory language does not result in a requirement that the Commission affirmatively find that the rates are just and reasonable. It argues that because the review period is limited, and Congress barred Title II-like rate regulation, regulatory supervision should be either significantly truncated or left to the marketplace. NCTA s comments pointed out that, in contrast to cable operators that offer service to end-users, OVS operators will offer capacity to video programmers with whom they will compete. Two potential problems may arise if channel capacity rates are not regulated. First, OVS operators may charge rates that are so excessive that unaffiliated programmers will be dissuaded from using the facility. Should that occur, the OVS operator s anticompetitive pricing strategy will be rewarded by enabling the operator s programming entity to control more channels. And second, 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 statute, by its terms, requires the Commission to find that OVS rates to programmers are just and reasonable, and not unjustly or unreasonably discriminatory, when measured against some standard. NCTA does not currently support any particular standard, but believes that two steps are essential. First, the Commission must remain directly involved in rate regulation to ensure that the OVS operator does not charge different rates to different programmers for the same service; i.e., to make certain that the service is offered at nondiscriminatory rates. And second, rates must be publicly filed so that programmers are assured that they are all obtaining the same service at the same rates. The telephone company parties see the situation differently. They maintain that the marketplace will guarantee the reasonableness of rates. NYNEX contends that the economic self-interest of the OVS operator will require it to price access at reasonable rates so as to attract ... programmers. But it does not explain why the OVS operator s economic self-interest will not inspire it to charge rates so high that no unaffiliated packager takes capacity, enabling the OVS operator programming entity to control all the channels without obtaining a local franchise. U S WEST also contends that the market will constrain OVS rates. The company analogizes its participation as an OVS operator to that of a non-dominant telecommunications carrier identified in the Competitive Carrier proceedings. U S WEST argues that like non- dominant carriers, OVS operators will be new entrants lacking market power and unable to raise prices or to engage in unreasonable price discrimination under the Commission s traditional analysis. But as explained above, U S WEST s attempted analogy to Competitive Carrier does not work because without regulation OVS operators can discriminate against other unaffiliated video packagers/programmers seeking channels on their facility. Unless rates are publicly filed, and programmers are assured of the same rates as the OVS operator s programming entity, the operator can attempt to dissuade unaffiliated programmers from seeking system capacity by charging discriminatory rates. If the OVS operator s strategy is successful, it ends up controlling more channels. The Joint Telephone Parties take a somewhat different approach. They seemingly contend that since Title II-like rate regulation of OVS is not permitted, no rate regulation is permitted. But as NCTA noted in its Comments, the Commission regulates cable rates, and that rate regulation scheme is not a common carrier scheme. The Commission can engage in regulation of OVS rates to programmers without running afoul of the statute. The Joint Telephone Parties also argue that they strongly oppose any requirement that they be required to make their contracts public. They contend that public filing is burdensome and would contradict Commission actions in common carrier proceedings in which the agency found that public rate filings in competitive markets lead to price coordination and are not in the public interest. But the Joint Telephone Parties attempt at analogy is misplaced. OVS is not the same as interexchange telephone service provided by nondominant carriers because unaffiliated packagers, unlike long distance customers, may not have ready alternative suppliers of transmission capacity. Moreover, the public filing of rates is essential to ensure that OVS operators do not engage in unjust or unreasonable rate discrimination. Finally, NCTA s comments emphasized that the Commission should find that regulatory parity is necessary. If the Commission concludes that OVS rates will not be regulated on the grounds that the marketplace is competitive, it should reach the same conclusion with respect to rates for commercial leased access offered by cable systems pursuant to Section 612 of the Cable Act. If consumers, in that instance packagers/programmers seeking OVS capacity, are involved in a sufficiently competitive market to warrant rate deregulation, the same or similar circumstances apply to programmers seeking commercial leased access capacity, and the same result should be reached. III. SAFEGUARDS TO POLICE CROSS-SUBSIDY AND DISCRIMINATION REMAIN NECESSARY NCTA s comments called for three special safeguards that are necessary because a telephone company providing video programming over an integrated network has special incentives and abilities to cross-subsidize the competitive video operation and to discriminate against competitors. We urged the Commission to articulate effective cost allocation rules so that telephone ratepayers are not burdened by a telcos uncertain video ventures, competitors do not face discrimination, and competition at subsidized rates. We sought a joint marketing procedure that prevents telephone company marketing personnel from using a customer request for telephone service as an opportunity to sell telco OVS service, unless the customer is also made aware of cable service alternatives. And, we advocated the offering of a telephone company s OVS service through a separate corporate subsidiary to facilitate the detection of discrimination and cross-subsidy. Following review of the comments, we continue to believe each of these measures absolutely essential. A. Cost Allocation NCTA s comments called for cost allocation rules that assign all of the direct cost and an appropriate share of common cost to OVS. We endorsed the Commission s decision to work out the specifics in a separate proceeding to be conducted by the Common Carrier Bureau. This proceeding should be completed promptly. But until it is completed, LECs should not offer OVS. LECs respond either by ignoring cost allocation, or, with one limited exception, by contending that no further action is necessary. The Joint Telephone Parties, for example, assert: There is no need for the Commission to take any action regarding cost allocation prior to certification or to impose cost allocation requirements as a condition for certification. The Commission already has rules in place in Part 64 that fully accommodate the joint provision of common carrier and non-common carrier services. NYNEX and USTA barely touch upon the matter. U S WEST maintains, Cost allocation should play no role in the pricing of OVS. U S WEST nevertheless concedes that common costs must be properly allocated, and we agree with U S WEST that common cost issues should be addressed in a separate Common Carrier Bureau proceeding. U S WEST correctly observes that The issue is how costs associated with the underlying common transport infrastructure should be assigned to video and telephony. Once that assignment is determined, the decision will inevitably play a role in the pricing of OVS. U S WEST is also incorrect when it maintains that the need for allocating common costs between telephony and video [arises only] in those states where telephone operations are still subject to rate of return regulation. That is surely not right. As explained previously on numerous occasions, unless regulators adopt and telephone companies abide by a pure price cap -- a cap on rates that is not ever subject to adjustment -- the Averch-Johnson incentives of the rate-of-return regulated firm to over invest so as to increase profits on an artificially inflated rate base will not be completely removed. Neither the Commission nor any state regulatory agency has yet adopted a pure price for a LEC. Moreover, nothing has happened to change the political imperative that will force regulators to authorize rate increases if the local telephone company experiences financial difficulty, and to require rate decreases if the company earns massively excessive profits. Common costs are a major portion of the total costs of integrated networks. There is no economically correct way to allocate these costs between telephone and video services; any result that regulators reach is inevitably derivative of policy goals. It is the Commission s role to determine its goals, and to decide the appropriate allocation of common costs. Since improper cost allocations continue to pose genuine risks to consumers and competition, OVS certifications should be made contingent upon the completion of the separate Common Carrier Bureau proceeding to establish cost allocation rules for OVS. Until cost allocation rules that take account of OVS are in place, consumers cannot have confidence that cross-subsidy will be averted. NCTA also agrees with the comments of NARUC which call for the establishment of a Federal-State Joint Board to address separations questions. B. Joint Marketing NCTA s comments also called for an in-bound telemarketing restriction, to stay in place until local telephone service is fully competitive, on the incumbent LEC s exclusive referral of telephone customers ordering telephone service to its OVS or video programming entity. As NCTA explained: When a person arrives in a new community or moves within their existing community (an increasingly common experience 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. To level the competitive playing field, our comments explained, the Commission should adopt procedures that prevent LECs from taking unfair advantage of their position as an essential service provider. As a condition of certification, the incumbent LEC should be (1) prohibited from directly referring the telephone customer to its OVS operator representative or video programming entity; and (2) required to inform the telephone customer of the name, address and telephone number of the local cable operator without favor or advantage, if it provides the customer with the name, address and telephone number of the OVS operator or video programming entity. The Joint Telephone Parties maintain that The 1996 Act s total silence on joint marketing of telephone and video programming services sends a strong message to the Commission: Do not interfere with the operation of the market. But this reading of the Act equates congressional silence with congressional prohibition. The proper reading is that Congress silence on telephone company-video joint marketing evidences congressional intent that the Commission determine the public interest and exercise its discretion accordingly. C. Separate Subsidiary NCTA s comments also endorsed the provision of OVS by an incumbent LEC through a subsidiary separate from the entity that offers telephone service. Structural separation is necessary to assist regulators in detection and policing of discrimination and cross-subsidy. The Commission s authority to adopt safeguards where necessary to serve the public interest, including structural separation, is undiminished by the legislation. Dr. Leland Johnson pointed out in a Declaration attached to NCTA s comments that structural separation would help to ensure against hidden transactions between the parent and the affiliate, to facilitate the proper charging of recurring operating expenses to the parent or affiliate, and to enforce the part 64 procedures. These considerations continue to be present, and counsel in favor of structural separation. The comments of six public interest representatives share NCTA s view that a separate subsidiary is absolutely essential to protect consumers. They point out that LECs will remain dominant monopoly providers of local telephone service for the foreseeable future, and they will have an enormous incentive to channel [monopoly telephone] revenues into the provision of video programming, since doing so shifts the costs of entry into the unregulated video programming market onto consumers of telephone service. An effective separate subsidiary can be a major step toward preventing this from happening. IV. NON-LECS SHOULD HAVE THE SAME OPPORTUNITY AS LECS TO OFFER OVS NCTA noted in its comments that the Act clearly permits a new entrant local exchange carrier that is also a Title VI cable operator to operate an open video system. The Act draws no distinctions between incumbents and new entrants in this regard. It would be contrary to the statute for the Commission to deny OVS certification to new entrant LECs just because they operate cable systems. NCTA also urged the Commission to use its discretion to authorize non-LECs to offer OVS. Level playing field principles argue in favor of providing incumbent LECs and incumbent cable operators with the same regulatory options. Furthermore, the same policy rationale that supports LEC-provided OVS -- encouraging nondiscriminatory access to video transmission capacity for affiliated and unaffiliated programmers -- applies to non-LECs provision of OVS transmission capacity. The National League of Cities, in comments joined in by other municipal representatives (hereafter, the Cities ), argues the Act does not permit a non-LEC to function as an OVS operator. Others take the same position. They see meaning not actually present in the different statutory OVS authorization: While a LEC may provide cable service...through an open video system, an operator of a cable system may provide video programming through an open video system consistent with the public interest and Commission regulations. They interpret this language to mean that a cable operator s role in OVS is limited to that of a programmer on a LEC s OVS platform. This argument makes no sense at all. As the Comments of Tele-Communications, Inc. ( TCI ) explain: Congress has used the phrase provide video programming and even the term transmission of video programming interchangeably with the term cable service. For example, in the now-repealed cable-telephone company cross- ownership provision, former Section 613(b)(1), Congress made it unlawful for any local exchange carrier to provide video programming directly to subscribers. Interpreting the term provide video programming, the Fourth Circuit determined that Section 613(b)(1) essentially prohibits local telephone companies from offering, with editorial control, cable television services with their common carrier subscribers. Indeed, even the transmission of video programming has been used to mean the provision of cable service. TCI further states that the most reasonable conclusion, in light of the previous use by Congress of the term provide video programming, is that use of the term in Section 653(a)(1) is intended to avoid the confusion that would have resulted from the use of the term cable service in referring to cable operators offering video programming pursuant to Section 653(a)(1). Congress intent was to distinguish between traditional cable operators that exercise editorial control over the vast majority of channels, and cable operators operating pursuant to the OVS scheme that, like telephone company-provided OVS operations, must cede control of up to two-thirds of the system s capacity. Several telephone parties raise a different, but no more valid objection. While they support the offering of OVS by cable operators, they seek discretion to refuse access to incumbent cable operators should they wish to lease capacity. Without this restriction, they claim, incumbent cable operators will be able to interfere with the successful operation of competing open video systems. This objection is easily answered. Since the OVS operator is assured one-third of the activated channels, and is obliged to offer the remaining two-thirds on a nondiscriminatory basis, the operator should be indifferent with respect to the remaining two-thirds. There seems little reason why the OVS operator should care whether the incumbent cable operator, or anyone else, consumes the remaining capacity -- unless, of course, the OVS operator intends to block an effective intra-model competitor or to use the capacity itself if no other competitors appear. V. TITLE VI APPLICABILITY NCTA s comments noted that although open video systems are substantially relieved of the obligation to comply with Title VI, several provisions are explicitly applied to OVS operators. In particular, OVS operators are required to comply with the must carry/ retransmission consent, PEG access, program access, subscriber privacy, negative option billing and equal employment opportunity sections, as well as certain cross-ownership provisions. An OVS operator, as well as its video programming entity, must also pay franchise fees. These obligations are clearly laid out in the statute. Except for several questions of implementation, they are not controversial. A. Must Carry/Retransmission Consent The application of Sections 614 and 615 to OVS, NCTA explained, means that the OVS operator s package, and any package established by an unaffiliated entity (except for programming provided by part-time users), 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. If multiple packagers develop, the must carry (and PEG) channels should be designated as shared, and should be operated consistent with NCTA s proposal, described above, for the sharing of channels. Telephone companies concede that they are subject to must carry and retransmission consent. The Joint Telephone Parties advocate the application of these rules in the same way they apply to cable systems. Other telephone parties share this view. Furthermore, U S WEST agrees with NCTA that every subscriber must arrange for a packager to carry the local broadcast stations, but the subscriber should pay for the local broadcast stations only once. But in contrast to NCTA s position that the shared must carry channels should be administered jointly, U S WEST would have the OVS operator or its designee perform channel administration. As explained above, shared administration is more likely to promote nondiscriminatory access of capacity to programmers. B. PEG Access Telephone parties seek flexibility and an absence of regulatory supervision, but they generally do not offer solid commitments as to their statutory PEG access obligations. The Joint Telephone Parties urge that there be no requirement to dedicate entire channels to individual PEG entities, while U S WEST opposes PEG requirements that could stifle experimentation with new approaches. In response, the Commission should adopt a no excuses policy, that makes plain the requirements for PEG access on OVS systems. In addition, the Commission should not adopt a requirement that existing cable operators share channel feeds or other assets with OVS operators. VI. PROGRAM EXCLUSIVITY NCTA also supported the Act s requirement for the extension of syndicated exclusivity, sports exclusivity and network nonduplication regulations to the OVS environment. We explained that for programming on shared channels, the channel administrator is 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, therefore, be in a position to block programming on the shared channels. With respect to exclusive channels, in contrast, the initial responsibility for blocking should be left to the packager leasing the channel, although the actual task of blocking might be performed by the channel administrator for a fee. The parties commenting on this matter recognize that OVS operators and packager/programmers must comply with these program exclusivity requirements. We continue to believe that exclusivity will be most efficiently enforced by a channel administration jointly operated by the programmers taking capacity on the system. VII. CERTIFICATION NCTA s comments noted that prior to offering service, OVS operators must seek Commission certification that individual proposals comply with the Commission s regulations. The Commission is directed to approve or disapprove certification proposals within ten days of their filing. Recognizing that the ten day period is insufficient to properly evaluate compliance, the Commission suggests, and we heartily endorse, a pre-filing procedure under which applicants submit basic information first, and submit the actual certification request only after the staff has found that the pre-filed information complies with the regulations. NCTA called for the inclusion of the following pre-filed information: A demonstration that the operator s plan for allocating integrated system costs between telephone service and OVS has been approved by the Commission; A demonstration that the operator has either established or intends to establish a separate subsidiary that complies with the Commission s regulations; The number of analog and digital channels that the operator proposes to offer when service commences; 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; The operator s proposal, if any, to provide the technical capability for the sharing of channels; 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; A demonstration that the rates, terms and conditions under which the channel administrator proposes to offer service are just and reasonable, and are not unjustly or unreasonably discriminatory; 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; A demonstration that the operator is either in compliance with, or intends to comply, with Cable Act provisions relating to must carry, PEG access, program access and other matters; and A demonstration that the operator is in compliance with, or intends to comply with, Commission regulations regarding network nonduplication, syndicated exclusivity and sports exclusivity. By making this preliminary showing, an OVS operator will provide the Commission with the minimum information necessary to establish that it is in compliance with the regulations. Telephone companies see things differently. U S WEST, for example, contends that all the Commission need do is to accept a carrier s intent to comply with the statute. NYNEX recommends a truncated process in which areas served and must carry/PEG eligibility are identified, and descriptions are provided of the methods by which the operator intends to comply with nondiscrimination and cost allocation requirements. USTA claims that the filing of basic identification information, along with a statement that the operator either complies or intends to comply with the regulations, is all that is necessary. The Joint Telephone Parties oppose a pre-certification process and claim such a process would violate the statute. All of the telephone company comments have two things in common: they emphasize the shortness of the review period once certifications are filed over the Commission s obligation to certify compliance with the regulations. And they attempt to use the short review period to justify an inadequate review. The Commission s task is to certify compliance, and it properly asks whether that task can be accomplished within ten days of filing. The incontestable answer is that the determination of compliance will require a longer period, and the pre-certification process, including the specific filing requirements that we propose, are the proper way to go about making the compliance determination. CONCLUSION For the foregoing reasons, the Commission should adopt regulations and policies consistent with NCTA s Comments and Reply Comments. 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 Television Association, Inc. April 11, 1996