Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) Implementation of Section 302 of ) CS Docket No. 96-46 the Telecommunications Act of 1996 ) ) Open Video Systems ) To: The Commission Comments of NYNEX Corporation Donald C. Rowe, Esq. Robert Lewis, Esq. NYNEX Corporation 1111 Westchester Avenue White Plains, N.Y. 10604 (914) 644-6993 Counsel for NYNEX Corporation Of Counsel: Theodore D. Frank Marilyn D. Sonn Arent Fox Kintner Plotkin & Kahn 1050 Connecticut Avenue, N.W. Washington, D.C. 20036 (202) 857-6016 Date: April 1, 1996 Table of Contents Page SUMMARY OF ARGUMENT. . . . . . . . . . . . . . . . . . . . . . . i I. The Commission Should Approach the Regulation of Open Video Systems With Restraint.. . . . . . . . . . . 2 II. Comments on Specific Commission Proposals. . . . . . . . . 6 A. Allocating Channel Capacity. . . . . . . . . . . . . 6 B. Nondiscrimination Requirement. . . . . . . . . . . . 9 C. Marketing Programming Services of Unaffiliated Providers . . . . . . . . . . . . . . . 14 D. Shared Channels. . . . . . . . . . . . . . . . . . . 14 1. Terms and Conditions for Shared Channels. . . . . . . . . . . . . . . . . 15 2. "Ready and Immediate" Availability of Shared Channels. . . . . . . . . 15 E. Title VI Requirements. . . . . . . . . . . . . . . . 16 1. Compliance With Must Carry, PEG, Network Nonduplication, Syndicated Exclusivity and Sports Exclusivity Requirements . . . . . . . . . . . . . . . . . . 16 2. Must Carry and PEG Channels Should Not Be Counted as Channels "Selected" By the Operator. . . . . . . . . . . . . . . . . 18 3. Program Access Requirements. . . . . . . . . . . 20 F. Rates, Terms and Conditions of Service. . . . . . . . . . . . . . . . . . . . . . . 22 G. Information to Subscribers . . . . . . . . . . . . . 24 H. The Certification Process. . . . . . . . . . . . . . 26 I. Bundling of Rates. . . . . . . . . . . . . . . . . . 28 J. Dispute Resolution . . . . . . . . . . . . . . . . . 32 K. Pre-emption of State and Local Regulation . . . . . . . . . . . . . . . . . . . . . 33 CONCLUSION. . . . .. . . . . . . . . . . . . . . . . . . . . . . 34 Summary of Argument The Commission has struggled for years to inject competition into the multichannel video market, yet its efforts have met with little success. Cable systems still dominate the provision of video service. There are very few markets where cable operators face competition from "overbuilding." Wireless cable and DBS have made only slight inroads. And, notwithstanding the vigorous efforts of the Commission and a number of carriers, video dialtone never got off the ground. As a result, both Congress and the Commission have been forced to wrestle with the thorny problems created by cable domination of the video markets; cable rate regulation and cable leased access requirements to name two, are measures adopted by Congress to protect program distributors and members of the public from abuses by dominant cable operators. The historic Telecommunications Act of 1996 (the "Act") reflects Congress's preference for competition rather than regulation. It establishes as a national goal "opening all telecommunications markets to competition," so that entrepreneurial initiative rather than government regulation can shape the communications services available across the nation. This approach is reflected in the statutory framework for OVS systems. The Act directs the Commission, in the clearest terms, to adopt streamlined regulation of open video service "in lieu of, and not in addition to, the requirements of Title II." As if to underscore its intent, Congress repealed the Commission's video dialtone rules and policies. Congress has thus emphatically rejected the rigid Title II approach that had chilled the introduction of video dialtone service. It recognized that local exchange carriers and others must be allowed maximum flexibility to structure their offerings in order to encourage them to enter the video distribution business and to maximize their chances of competing successfully with entrenched cable systems. Consistent with the Act's general mandate that the Commission forbear from regulating whenever regulation is unnecessary to achieve the Act's goals, and the specific directive in Section 653 that the Commission eschew a Title II approach to regulating open video service, the Commission should approach its task in this proceeding with the greatest restraint. Open video systems are new services with no market share. No one yet has a firm or comprehensive picture of the technologies that will be used to deliver it, the services that will be provided, how it will be marketed, or the competitive factors that will affect its development. Moreover, the companies providing this service will be new entrants in the video market competing with entrenched cable companies that have established program supplier relationships and established customer bases. Open video systems are clearly a prime candidate for forbearance. Accordingly, the Commission should afford open video operators maximum flexibility to design and price their offerings to "meet the unique competitive and consumer needs of individual markets." It should adopt only those regulations that are essential to implement statutory requirements. Thus, the Commission should:  afford OVS operators maximum discretion to allocate and position channels, subject to the Act's nondiscrimination requirement.  give OVS operators maximum flexibility with respect to the manner in which program providers are solicited, as long as the procedures employed are reasonably open to all interested participants, the criteria for participation are reasonable, and adequate public notice is given of the enrollment period and the participation requirements.  afford OVS operators broad flexibility to design their systems, set prices for access, and impose reasonable qualifications requirements for video program providers including requirements of fair program access, provided its actions are based on bona fide business considerations and are not intended to discriminate against a particular entity. The OVS operator should not be required to provide capacity to the local cable operator if it determines that doing so could give the cable operator access to sensitive competitive information or otherwise undermine competition between the open video system and the incumbent local cable system.  permit the OVS operator or its affiliate to market the programming services of unaffiliated providers along with the programming provided by the operator, with the consent of the unaffiliated provider.  give OVS operators flexibility to determine whether to require the sharing of channels, to prescribe the terms and conditions for sharing channels, and to decide whether to delegate the administration of shared channels to a third party.  apply the must-carry and retransmission consent rules to open video systems in the same manner as they apply to cable systems. The OVS operator should be responsible for assuring that system subscribers have access to the must-carry and PEG channels. Must-carry, and PEG channels should not be counted as channels "selected" by the OVS operator because it is required to carry them. As stated in the Act, only the PEG "channels" are required to be provided by the OVS operator, not the PEG facilities.  apply the syndicated exclusivity, network nonduplication and sports exclusivity rule to the entity which controls the programming. The OVS operator should also be responsible for compliance with syndicated exclusivity, network nonduplication and sports exclusivity requirements on the channels carrying broadcast station pursuant to the retransmission consent. With respect to programming on other channels, the entity providing the programs should be responsible for compliance with those rules.  vigorously enforce its program access rules and extend those rules to all programming distributed by cable-affiliated entities, whether by satellite or terrestrial means.  enforce the statutory requirement that the OVS operator not unreasonably discriminate in providing information to subscribers "for the purposes of selecting programming" as part of the general prohibition on discrimination. The statutory requirement should be interpreted as referring only to information provided on the on-screen programming menu that is used by the subscriber.  establish a certification procedure that is swift, imposes minimal burdens on OVS operators, and does not give potential competitors or local governments a means to delay or block deployment of open video systems.  leave OVS operators and their affiliates free to bundle and market OVS services together with telecommunications services in any way they believe is most likely to secure customers.  adopt simple and expedited dispute resolution procedures that place both the burden of proceeding and the burden of proof on the complainant.  make it clear that Congress has preempted state and local regulation of open video systems, except to the extent that an OVS operator is required to pay fees pursuant to Section 653(c)(2)(B). In short, to the maximum extent consistent with the Act, the Commission should avoid adopting complex rules and restrictions that may deter local exchange carriers from making the enormous investment and taking the considerable risks that will be required to compete with entrenched cable systems. The marketplace, not the government, should decide what this new service can become. Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) Implementation of Section 302 of ) CS Docket No. 96-46 the Telecommunications Act of 1996 ) ) Open Video Systems ) To: The Commission Comments of NYNEX Corporation NYNEX Corporation (NYNEX) submits these comments on the Commission's Notice of Proposed Rule Making ("Notice") in the above-captioned proceeding. The Notice proposes to adopt rules governing the construction and operation of open video systems (sometimes referred to herein as "OVS"). NYNEX is encouraged that the Commission recognizes the importance of minimizing the regulatory burdens imposed on this new and untested form of video programming distribution. As discussed more fully below, NYNEX urges the Commission to give OVS operators maximum flexibility to design their systems and offer video services in a manner responsive to the marketplace. Such an approach will further Congress' objective in enacting the Telecommunications Act of 1996 ("the Act") that competition and entrepreneurial initiative, rather than governmental regulation, shape the telecommunications services offered to the American public. III. The Commission Should Approach the Regulation of Open Video Systems With Restraint. As it plans entering the competitive marketplace of multichannel video services, NYNEX is heartened that the Commission is approaching the task of implementing the OVS provisions of the Act cognizant of Congress's overriding goal of establishing: a pro-competitive, de-regulatory national policy framework designed to accelerate rapidly private sector deployment of advanced telecommunications and information technologies and services to all Americans by opening all telecommunications markets to competition. . . . The OVS provisions of the Act are designed to replace the rigid common carrier framework established for the provision of video dialtone services -- a framework that chilled the introduction of those services. In place of that burdensome regulatory scheme, the Act directs the Commission, in the clearest terms, to adopt streamlined regulations of open video systems "in lieu of, and not in addition to, the requirements of Title II." This statutory language is echoed in the Conference Report, which cautions that "[t]he conferees do not intend that the Commission impose title II-like regulation under the authority of this section." And, as if to remove any vestigial doubt about its intentions, Congress repealed, effective immediately, all of the Commission's video dialtone rules and policies. Congress could not have made its intent any plainer. This rejection of a Title II approach reflects Congress recognition that, in order to induce local exchange carriers and others into the video distribution business, the Commission must wield a light regulatory hand, so that new entrants will have maximum freedom in structuring their offerings. And, while the Act imposes certain obligations on OVS operators and directs the Commission to adopt regulations implementing those requirements, it also authorizes the Commission to forbear from regulation where regulation is unnecessary to achieve Congress' objectives. The Commission should exercise that discretion liberally so as to create as favorable a regulatory environment as possible for OVS entry. Open video systems are a new frontier, and those considering entry face formidable obstacles. Open video systems have no market share and the contours of the services are largely undefined. No one yet has a firm or comprehensive picture of the technologies that will be used to deliver it, the services that will be provided, or the competitive factors that will affect its development. New technologies, such as switched digital video services and ADSL, among others, hold promise to increase the options available to customers and programmers, but their feasibility and marketability in the real world have yet to be tested. Moreover, the companies providing this service must compete with entrenched competitors that have established program supplier relationships and established customer bases. As the Commission found in its Second Annual Report on the Status of Competition in the Market for the Delivery of Video Programming, cable systems dominate the provision of video services and have substantial relationships with most of the attractive program providers. To date, there are few markets where a cable operator faces direct competition from "overbuilding," and wireless cable and DBS have made only small inroads. Notwithstanding the vigorous efforts of the Commission and a number of carriers, video dialtone service never got off the ground. Today, VDT systems serve an infinitesimal number of subscribers and most carriers that explored the use of VDT have abandoned the effort. Thus, to realize Congress' goal of injecting competition into the video market, the Commission must affirmatively encourage local exchange carriers and others to offer OVS services. To do so, these new entrants must have maximum flexibility to employ technologies and system configurations and to structure and price their services in a way they believe is responsive to customer demand. Otherwise, there will be no incentive for telephone companies (or others) to make the enormous investment and take the considerable risks that will be required to establish open video systems to compete with entrenched cable systems. Accordingly, the Commission should allow the marketplace to determine, to the maximum extent feasible consistent with Congressional directives, the manner in which OVS services are offered. Following the same approach that it employed in implementing portions of the Cable Act in 1992, it should adopt only those regulations that are essential to implement statutory requirements. Those regulations should not impose obligations that are more specific than the provisions in the Act and the Commission should rely on the dispute mechanisms to flesh out the specifics of the statutory requirements, much as it did with respect to the program access rules and the rules implementing Section 616 of the Communications Act. This approach will permit the Commission to resolve issues in the context of concrete, factual settings, rather than devising regulations based on conjectural harms. As OVS systems develop, the Commission can always augment its regulations if a concrete need to do so materializes. At this juncture, however, the Commission should adopt a minimal regulatory approach if it is to "encourage common carriers to deploy open video systems" and promote "Congress' goals of flexible market entry, enhanced competition, streamlined regulation, diversity of programming choices, investment in infrastructure and technology, and increased consumer choice." IV. Comments on Specific Commission Proposals. As the Commission recognizes in the Notice, there are a number of different technologies that can be employed to provide OVS service and there is no consensus as to which technologies are superior. In all likelihood, different technologies may be deployed by different entities. NYNEX is currently evaluating the use of an integrated digital system capable of delivering voice, data, video and other services. These comments will focus primarily on the issues in the Notice that relate to such a system. However, it is critical that the Commission avoid adopting any regulation based on a given technology. A. Allocating Channel Capacity. The Commission tentatively concludes that "open video system operators should be permitted to administer the allocation of channel capacity. . . ." Though it acknowledges that Congress has expressed its preference for reliance on market forces, the Commission nevertheless inquires whether specific rules are necessary to guide operators' discretion in making decisions regarding channel allocation and positioning in order to implement the statute's nondiscrimination requirement. The Commission's conclusion that OVS operators should be permitted to administer the allocation of channel capacity -- to design their service offerings -- is dictated by the statutory scheme. That scheme prohibits the Commission from regulating open video systems like passive common carrier systems, with the operator having no control over its service offerings. On the contrary, even when demand exceeds the system's capacity, the OVS operator and its affiliate is permitted to program up to one-third of their systems' capacity and must be able to "tailor services to meet the unique competitive and consumer needs of individual markets." They clearly cannot design services tailored to consumer needs or competitive exigencies unless they are permitted to perform the basic function of administering the allocation of channel capacity. NYNEX strongly opposes imposition of detailed rules constraining OVS operators' discretion to allocate or position channels. The overriding limitation on OVS operators' discretion to allocate capacity should be only the statute's nondiscrimination requirement. Thus, rather than impose detailed requirements that may hamper operators' flexibility, the Commission should adopt a broad directive reflecting the statutory nondiscrimination prohibition. When capacity constraints arise, the operator should be able to employ any nondiscriminatory procedure to allocate capacity. The three means suggested by the Commission -- first-come first-served, lottery and proportional allotment -- should all qualify as nondiscriminatory allocation procedures. But the Commission should not attempt to designate the only acceptable means of allocating capacity. At this nascent stage of the service's development, it is impossible to predict all reasonable means of channel allocation and premature to hamper operators' flexibility by dictating the exclusive channel allocation methods. To stimulate common carrier investment in OVS and increase the diversity of programming choices to consumers, the Commission must also give operators flexibility with respect to the manner in which participants are solicited as long as the procedure employed is reasonably open, the criteria for participation are reasonable, and adequate public notice is given of the enrollment period and the participation requirements. For example, where demand exceeds capacity, the OVS operator should be permitted to limit the capacity available to any one unaffiliated program provider to one-third of the system's capacity. The OVS operator or its affiliates are limited by Section 653(b)(1)(B) to that amount of capacity and giving an unaffiliated program provider more channels than the OVS operator or its affiliate -- would place the OVS operator or its affiliate at a distinct competitive disadvantage in marketing its programming. Consequently, OVS operators should have the right to place reasonable limits, even-handedly applied, on the number of channels available to a single program provider. Once an open video system's initial configuration is established, the operator should not be required to alter that configuration or expand capacity to additional programmers until the beginning of the next enrollment period. As the Commission recognizes, there is a "strong public interest in establishing some level of certainty in providers' expectations with respect to their ability to retain channel capacity once allocated, and in consumers' expectations of uninterrupted service." While there is no magic length to the period between open enrollments, the Commission should not require operators to open up new periodic enrollments more frequently than every five years, although they should be free to do so if they wish. A five-year period would afford the operator a reasonable business planning horizon to plan expansion of system facilities and would assure subscribers of a stable programming package. B. Nondiscrimination Requirement While Section 653(b)(1)(A) prohibits OVS operators from "discriminating among video programming providers," that provision must not be construed to impair the OVS operator's ability to make reasonable business decisions concerning the operation of its open video system, even if some of those decisions may have a disparate impact on some program providers. As the Commission has noted, Section 653(b)(1)(A) is designed to assure that unaffiliated video programmers have "fair access to the open video system," and was not intended to constrain the business judgment of the OVS operator. Indeed, it is clear that Congress intended that OVS operators "should be 'allowed to tailor services to meet the unique competitive and consumer needs of individual markets'." Consequently, the Commission should give OVS operators broad flexibility to design their systems, to set prices for access, and to impose reasonable requirements on those seeking access to the system, provided those actions are based on bona fide business considerations and are not intended to discriminate against a particular entity or program provider. Consistent with this approach, NYNEX supports the Commission's tentative conclusion that "Congress intended that some level of rate 'discrimination' would be acceptable, . . ." and urges the Commission to permit OVS operators to establish different access rates for different kinds of program services. Thus, for example, different rates could apply to pay-per-view services, premium channels or part-time carriage. Similarly, discounts should be allowed for volume arrangements and for entities willing to make long-term commitments. As long as these criteria are based on objective criteria and permit program providers "fair access" to the open video system, they would satisfy the nondiscrimination requirement. OVS operators should be permitted to establish other objective qualification requirements for program providers. These could include, among others, financial requirements; requirements that program providers indemnify the OVS operator with respect to copyright, defamation and similar claims; assurances concerning the program provider's right to distribute the programming; standards concerning the distribution of indecent programming or programming with excessive violence; interconnection and technical standards; and other nondiscriminatory requirements cable operators may employ for commercial leased access channels. As indicated above, the test for determining whether these requirements are "unjustly or unreasonably discriminatory" should be whether they are based on valid business considerations and permit fair access by unaffiliated programmers. The validity of such a requirement should be resolved in the dispute resolution process rather than through rules adopted in advance. The OVS operator should not be required, however, to provide capacity to the local cable operator, although it should be free to do so if it wishes. The legislative history of the Act makes it very clear that Congress's goal is to "introduce vigorous competition in entertainment and information markets." It would undercut that goal to force the OVS operator to provide capacity to its principal multichannel competitor -- the cable operator. Requiring the OVS operator to provide capacity to the local cable company could also require that the OVS operator give the cable operator access to sensitive confidential information or permit the local cable company to undermine the competitiveness of the open video system by not cooperating with others using the system. Just as the Commission made an exception to its prohibition on restricting resale of cellular service by permitting one cellular carrier to refuse to permit its wireline or nonwireline competitor to use its facilities when the latter's system is fully operational, so should the Commission permit OVS operators to refuse to provide capacity to the local cable operator. OVS operators should also be permitted to preclude the use of the system for the distribution of programs or program series by an entity with exclusive rights to the program or favorable contract terms that effectively preclude others from distributing the program on that open video system. This will allow the OVS operator to protect its substantial investment in constructing an open video system by assuring effective intra-system competition. Cable operators and others may have the economic muscle to extract exclusive or very favorable arrangements with suppliers of programming that is essential to the viability of an OVS program package. As a result, those entities will have an unfair competitive advantage over the OVS operator or its affiliate who made the investment in constructing the system. In that respect, this proposal carries over to the OVS environment the provisions of Section 616 of the Act and levels the playing field. While exclusive vertical arrangements may be pro- competitive in some circumstances, they can also be used, as the Commission recognized in the Second Annual Report, to foreclose entry by new entities. Permitting the OVS operator to adopt this condition will diminish the likelihood that entrenched cable operators will be able to hobble the OVS industry. Thus, it will promote investment in open video systems and enhance the attractiveness of program packages made available over those systems. NYNEX opposes the Commission's proposal to require that contracts with video program providers be made publicly available. Cable operators are not required to make public agreements that are subject to the program access requirements of Section 628 of the Communications Act. If those agreements can be held in confidence, so too should agreements between OVS operators and unaffiliated program packagers taking capacity on the system. Requiring that these documents be made public would disclose sensitive competitive information and thus adversely affect the competitive posture of the OVS operator and the unaffiliated program providers vis-a-vis the local cable company. If the Commission believes that pricing information should be made available, however, it should allow OVS operators to require a confidentiality agreement so that certain perfunctory information does not get in the hands of their competitors. C. Marketing Programming Services of Unaffiliated Providers The Commission recognizes that the statute allows OVS operators and their affiliates to market the program services of unaffiliated program providers along with the programming provided by the operator. Affording OVS operators and their affiliates that flexibility is clearly consistent with the thrust of the Act and will enhance the competitiveness of open video systems. D. Shared Channels NYNEX supports the Commission's proposal to give OVS operators flexibility to determine whether to require the sharing of channels and whether to delegate the administration of shared channels to a third party. Those proposals are consistent with the deregulatory mandate of the Act and the requirement that OVS operators be given flexibility to structure their OVS systems and services. 1. Terms and Conditions for Shared Channels. Some of the other specific suggestions in the Notice concerning shared channels are more problematical -- especially the suggestion that the Commission adopt rules prescribing the terms and conditions for sharing channels. Adopting such rules at this time, while OVS is still a concept and not a reality, is likely to stifle deployment of OVS and limit the creativity of those attempting to bring new OVS services to the marketplace. The OVS operator should have the discretion to decide whether any channels will be shared and, if so, which channels will be shared. There is nothing in the statute to suggest that an OVS operator's discretion to require channel-sharing should be circumscribed, other than by (1) the specific requirement that subscribers have "ready and immediate access" to programming on the shared channels and (2) the general requirement that OVS operators not discriminate among program providers. Moreover, there is very limited experience at this time with shared channels and no basis for determining the kinds of problems that might arise. Thus, there is no record on which the Commission can reasonably fashion rules governing channel sharing in specific situations. 2. "Ready and Immediate" Availability of Shared Channels Similarly, there is no justification for adopting rules that define what constitutes "ready and immediate" access to shared channels, such as the requirement proposed by the Commission that access be "transparent" to the subscriber. While it may be technically feasible to offer shared channels in a manner that is transparent to the subscriber, that is not the only manner in which shared channels can be offered. Moreover, given the many different possible technologies that may be used to provide OVS service, imposing a specific requirement of transparency may inhibit deployment of certain kinds of systems. Therefore, rather than attempting to refine the statutory requirement, the Commission should simply require that customers have "ready and immediate" access to shared channels, in accordance with the Act. E. Title VI Requirements The Commission seeks comments on the manner in which the must-carry and retransmission consent rules, the obligation to provide access for PEG channels, and the sports exclusivity, network non-duplication and syndicated exclusivity rules should apply to open video systems. 1. Compliance With Must-Carry, PEG, Network Nonduplication, Syndicated Exclusivity and Sports Exclusivity Requirements The Commission solicits comments on a number of issues concerning the manner in which the must-carry, retransmission consent, PEG, network non-duplication, syndicated exclusivity and sports exclusivity rules should apply to open video systems. In general, the must carry and retransmission consent provisions should be applied to open video systems in the same manner as they apply to cable operators serving the same area. For example, cable systems frequently serve multiple municipalities and often cross ADI or other must-carry boundaries. The Commission has an established body of law governing the application of these rules in those circumstances. The same body of law should apply to OVS operators, which can manage their systems in ways similar to cable systems. Similarly, OVS operators should devote the same capacity to PEG channels as competitive cable operators and deal with the different PEG obligations that apply where the OVS system serves multiple municipalities in the same way as cable systems. OVS operators should have the flexibility, however, to fulfill their PEG obligations in any of the ways outlined in paragraph 57 of the Notice. Where there is no local cable operator, OVS operators should make a reasonable amount of capacity available for PEG purposes. The local municipality or franchise authority should be responsible for delivering program material for distribution on those channels and the OVS operator should be free to use the channels, if it wishes, for other programming when they are not employed for PEG purposes. The Commission requests comment on which entity -- the OVS operator or unaffiliated programmers -- should be responsible for assuring that OVS subscribers have access to the PEG and must-carry channels and for assuring compliance with the network nonduplication, syndicated exclusivity rules and sports exclusivity rules. Compliance with must-carry and PEG requirements is an inescapable part of the OVS operator's basic responsibility for allocating channel capacity. The Commission should give the OVS operator the flexibility, however, to determine whether to require, as a condition of access, that all unaffiliated program packagers offer at their expense those mandatory program services to their subscribers. Similarly, the OVS operator or its affiliate should be responsible for assuring compliance with the network nonduplication protection, syndicated exclusivity and sports exclusivity rules with respect to channels the operator or its affiliate controls, including must- carry programs, retransmission consent programs and programs distributed on shared channels. With respect to programs distributed by unaffiliated programmers, the unaffiliated programmer should be required to assure compliance. 2. Must Carry and PEG Channels Should Not Be Counted as Channels "Selected" By the Operator. NYNEX supports the Commission's proposal not to count must-carry and PEG channels against the OVS operators' (or its affiliate) one-third channel limitation under Section 653(b)(2)(B) of the Communications Act. Neither the OVS operator nor its affiliate has "selected" those program services; they are required by statute to carry them. Accordingly, those channels should not be counted against the OVS operator's or its affiliates' programming limitation. NYNEX disagrees, however, with the Commission's proposal to deduct those channels from the system capacity in calculating this OVS cap. Section 653(b)(1)(B) limits the OVS operator and its affiliates to "one-third of the activated channel capacity on such system" and that language entitles the OVS operator to program one-third of the total number of channels, including those activated to provide must-carry and PEG services. Thus, for example, if an open video system has 180 channels, including 10 used to provide must-carry and PEG services, the OVS operator should be able to program up to 60 of those channels. The situation is no different with respect to local broadcast stations carried pursuant to retransmission consent. In many cases, carriage of those local broadcast signals will be essential to the competitiveness of the open video system and their carriage will thus benefit all programmers distributing programs on the system. The OVS operator should not be penalized by counting these stations against its one-third limit, thereby hampering its ability to select other programming. Such a penalty would be particularly unfair since the decision whether a broadcast station is carried pursuant to the must-carry or retransmission consent rules is in the hands of the local broadcaster, not the OVS operator. 3. Program Access Requirements In the Notice, the Commission alludes briefly to the program access rules and seeks comment on how those rules should apply to OVS operators and in the context of shared channels. The rigorous enforcement of those rules, and the analogous rules implementing Section 616 of the Communications Act, is essential to the launch of open video systems, because, as the Commission is well aware, the success or failure of any video distribution system turns ultimately on the attractiveness of its programming. As the Commission has consistently found, cable operators and their affiliated programmers currently control the vast preponderance of video program material available to multichannel video providers. Without access to those programs, OVS operators will have scant chance of success. Accordingly, the Commission must make it clear that it intends to vigorously enforce the rules adopted pursuant to Sections 616 and 628 of the Communications Act and to give OVS operators a meaningful opportunity to distribute the programming to which those rules apply. While vigorous enforcement of those rules will go a long way towards making desirable programming available to OVS operators and other program providers using the open video system, the program access rules under Section 628 apply only to satellite- distributed programming, not to programming distributed by cable-affiliated entities using terrestrial systems, such as microwave or fiber optic systems. That limitation creates a potentially huge loophole, permitting cable operators and their affiliated program suppliers to monopolize the distribution of valuable programming and limit competition by start-up multichannel video providers. As the legislative history of the 1992 Cable Act makes clear, Congress adopted Sections 616 and 628 to enhance the ability of unaffiliated cable systems and independent program producers to acquire and market their programming. In order to fulfill that objective, the Commission should extend the program access requirements to all program distributors affiliated with a cable system or other multichannel video programmer. Without assurance of access to non-satellite distributed programming -- much of it regional sports programming important to the success of open video systems -- local exchange carriers will be hesitant to take on the competitive challenge of open video systems. F. Rates, Terms and Conditions of Service The Commission acknowledges that the provisions of Section 653(b)(1)(A) requiring that rates be "just and reasonable" and "not unjustly or unreasonably discriminatory" are not to be given their common carrier meanings, and tentatively concludes that these provisions are designed to permit unaffiliated video programmers "fair access to the open video system platform." Nynex fully agrees that these terms must not be given their Title II meaning and supports the Commission's tentative conclusion to interpret them to require that OVS operators afford unaffiliated entities "fair access" to the OVS. As the Commission acknowledges, "open video system operators . . . will be 'new' entrants in established video programming distribution markets, lacking in market power vis- a-vis programming end users and subject to competition from the incumbent cable operator." Thus, they will not be able to extract unreasonable prices or impose unreasonable terms and conditions on unaffiliated program providers. Rather, to be competitive, OVS operators will have to offer a diverse programming array and a different mix than that offered by the cable operator. Consequently, the economic self-interest of the OVS operator will require it to price access at reasonable rates so as to attract such programming. Thus, this is an ideal circumstance for the Commission to exercise its discretion under Section 401 of the Act and forbear from regulating, relying instead on the marketplace to assure that rates are "just and reasonable" and not "unjustly or unreasonably discriminatory." In an analogous situation involving nondominant common carriers, the Commission has looked to the marketplace to regulate the rates of carriers without market power. Experience under that regime clearly demonstrates that rate regulation is not required with respect to new entrants without market power. If the Commission believes, however, that the Act requires it to adopt a standard for determining whether rates are "just and reasonable," NYNEX urges the Commission to gauge whether an OVS operator's rates effectively preclude others from gaining "fair access" to the system. During the early period when open video systems are being launched, the Commission should not attempt to define that standard further, but should allow the concept to be developed through the dispute resolution proceeding. That will permit the Commission to evaluate rates in a concrete factual setting and, over time, may provide the basis for defining in concrete terms the parameters of just and reasonable rates. At this juncture, there is insufficient data to permit the Commission to craft a readily enforceable test that is not unduly restrictive. NYNEX opposes the Commission's suggestion that an appropriate measure of the reasonableness of OVS rates might be whether a given number of unaffiliated programmers acquire capacity on the system. While the rate charged for access is undoubtedly one of the factors affecting a decision to enter the market, it is clearly not the only factor and may not be the dominant one. The economic vitality of the area, the penetration of the established cable operator, the presence of other video providers and the availability of attractive programming from program providers may also bear on a video programmer's decision to enter the market. Indeed, in the face of the incumbent cable operator's market position, entry will be a daunting prospect for any programmer. Thus, the willingness of unaffiliated programmers to acquire capacity on an open video system is not a valid test of the reasonableness of the OVS operator's rates. G. Information to Subscribers Section 653(b)(1)(E)(i) of the Communications Act prohibits an OVS operator from unreasonably discriminating in favor of itself or its affiliates "with regard to material or information (including advertising) provided by the operator to subscribers for the purposes of selecting programming on the open video system . . ." NYNEX concurs with the Commission's view that this section is "intended to be a specific application of the non- discrimination requirement contained in subsection (A)." Consequently, for the reasons set forth in Sections II.A and B above, the Commission should enforce this requirement as part of the general prohibition against discrimination against unaffiliated carriers, rather than attempting to develop specific rules. NYNEX believes, however, that the Commission has interpreted this section much more broadly than was intended by Congress. It appears to read this provision as applying to any information provided by the OVS operator to its subscribers that may influence its subscribers' future selection of programming. But the provision is drafted so that it is limited in scope to information that is provided "for the purposes of selecting programming". This language was intended to refer only to information (including advertising) provided on the on- screen programming menu that is actually used by the subscriber to make its choice of programmer or its programming selection. The broader interpretation suggested by the Commission, which would include all advertising, billing inserts, and the like, would effectively prevent the OVS operator from advertising or marketing its own programming services without also advertising and marketing the services of unaffiliated programmers to the same extent. Prohibiting an OVS operator from differentiating and promoting its own channels would substantially impair its ability to compete with other program services, diminish competition, and be a substantial deterrent to construction of open video systems by local exchange carriers. H. The Certification Process. In order to qualify for reduced regulatory burdens under new Section 653 of the Communications Act, an OVS operator must certify to the Commission that its open video system complies with the Commission's rules and the Commission must approve such certification. The Commission must give public notice of the receipt of such certification and must approve or disapprove it within 10 days of its receipt. While the statutory requirement that the Commission approve or disapprove the OVS operator's certification implies that the filing should contain some information concerning the OVS system, the requirement that the Commission act within 10 days of the filing suggests that such information should be abbreviated. Indeed, it would be contrary to the statutory scheme for the Commission to require an extensive filing that would slow down what is clearly intended to be an expedited process or that would provide an opportunity for competitors to delay the process. Similarly, the Commission should not impose any requirement that an OVS operator obtain consents or satisfy any other obligation before submitting its certification. And, the certification process should not be a means by which existing cable operators or other multichannel video providers gain competitive information concerning the OVS system. The certification itself should contain only the following information: 1) the name, address and telephone number of the OVS operator; 2) the areas to be served by the open video system; 3) a description of the manner in which unaffiliated programmers have been or will be advised of the opportunity to gain access to the system; 4) a list of the broadcast stations eligible for carriage pursuant to the must-carry rules and the PEG capacity to be offered; and 5) a certification that the system complies with the Commission's rules, including the cost allocation requirements. OVS operators should be permitted to file their certification at any time prior to commencement of service. The Commission should give public notice of the filing. To expedite the provision of public notice, it could require the OVS operator to provide the text of the public notice as an attachment to its certification. If the Commission does not disapprove the certification within the statutory 10-day period, it should be deemed approved. Such approval would automatically preclude local franchising authorities from exercising any authority over the open video system, except as expressly provided in the Act. The Commission should not require submission of additional documentation to support the OVS operator's certification, as the 10-day review period would not permit the staff to review supporting documentation. If a programmer or other adversely affected party wishes to oppose certification, they should be required to make a prima facie case, within the 10-day review period, that the proposed system does not comply with Commission requirements. In the absence of a prima facie case, the certification must be approved. In all events, the Commission's procedures must be swift and not burdensome. The certification process must not become a means by which potential competitors or local governments can delay or block deployment of open video systems. The Act and its legislative history make it clear that Congress does not want a repeat of the experience with video dialtone applications. I. Bundling of Rates The Commission requests comment on whether it should adopt regulations regarding the bundling and joint marketing of video and other telecommunications services by open video system operators, and, if so, "whether the 1996 Act's new rules concerning joint marketing of local and long distance telephone service provide a useful model." NYNEX urges the Commission to resist any temptation to drag these issues into the proceeding. OVS is an inchoate concept and there is no need or basis for any regulation of the marketing and bundling of OVS services and telecommunications services. The thrust of the Act is to encourage competitive entry by cable operators into telephony and local exchange carriers into video distribution. As each enters the other's historic domain, they should have the flexibility to offer their services in the manner they conclude will best secure customers. As Section 401 makes clear, the Act's goal is to have telecommunications services regulated by the marketplace, and the Commission should allow the marketplace to operate, at least until there is clear evidence of abuse or market failure. The Commission can always take corrective action if the need arises. J. Dispute Resolution As suggested in the Notice, the Commission should employ simple and expedited procedures for dispute resolution. The Commission's procedures for resolving program access complaints provide a good model for OVS dispute resolution procedures since they envision pre-filing notice to the operator, paper proceedings and limited discovery, if any. OVS operators' practices should be presumed lawful; the dispute resolution procedures should impose both the burden of proceeding and the burden of proof on the party filing the complaint. The complainant should be required to specify in detail its basis for alleging that the OVS operator is not complying with a specific requirement of the rules. Complainants alleging unjust discrimination should be required to submit with their complaints substantial evidence that (1) the OVS operator has treated the complainant in a manner that is substantially different than other, similarly-situated programming providers; (2) that such discriminatory treatment was commercially unreasonable; and (3) that such discriminatory treatment caused the complainant actual and substantial economic harm. Complaints that do not meet this standard should be summarily dismissed. Importantly, only unaffiliated program suppliers and those seeking access to an open video system should be able to file complaints; competitors in the market should not be permitted to tax the resources of the OVS operator and the Commission by using the dispute resolution procedure for competitive advantage. While NYNEX generally favors the use of alternative dispute resolution procedures, it is concerned that the very short time frame established by the Act for resolution of complaints will make it difficult for the Commission to resolve a dispute if a significant portion of the 180-day period is devoted to alternative dispute resolution procedures. Nevertheless, the Commission should respect any agreement between an OVS operator and an unaffiliated program provider to submit disputes between the parties to arbitration, mediation or any other commercially reasonable procedure for dispute resolution. If a programmer files a complaint without having complied with an alternative dispute resolution procedure to which it has previously agreed, the Commission should dismiss the complaint. K. Pre-emption of State and Local Regulation. In implementing Section 653 of the Act, the Commission should make it clear that state or local regulation of open video systems is preempted, except to the extent that local governments receive payments in lieu of franchise fees pursuant to Section 653(c)(2)(B). Preempting state and local regulation of open video systems will assure that the regulatory approach established in Section 653 is faithfully implemented and that OVS operators are not burdened by obligations Congress did not intend to apply. Preemption will also forestall future disputes and litigation concerning state and local authority over open video systems, and thus further Congress's goal of spurring the rapid introduction of OVS services. State and local regulation can be preempted either by Congressional or agency action. Congress may expressly preempt state and local law or, through legislation, clearly indicate its intent to "occupy the field" of regulation, leaving "no room for the States to supplement." Congress has made it unmistakably clear that, in enacting Section 653, it intended to "occupy the field" of OVS regulation. That section establishes a comprehensive and streamlined regulatory scheme designed to spur the swift introduction of OVS service by telephone companies, unburdened by either common carrier regulation or local franchising requirements. Further, the Act vests complete authority in the Commission to implement its provisions: to adopt ground rules, to approve OVS operators' certifications and to resolve disputes. The comprehensiveness of the statutory scheme, the specificity with which it directs the Commission to implement its provisions, and the swiftness with which it requires Commission action so as to "hasten the development of video competition" simply do not permit state or local authorities to play any role in the regulation of this service. Even if the Commission were not convinced that Congress had "occupied the field" of OVS regulation, the Commission itself should preempt all state and local regulation, except to the extent that local franchising authorities may collect fees pursuant to Section 653(c)(2)(B). Such preemption is clearly necessary to achievement of Congress's goal of fostering vigorous competition with cable operators by encouraging swift telephone company entry into local video markets. CONCLUSION For the reasons set forth above, NYNEX urges the Commission to afford OVS operators maximum flexibility and rely on the marketplace, with recourse to the Commission through the dispute resolution procedures, to regulate OVS operators. As the Commission is aware, the provision of video programming is today dominated by the cable industry and efforts to introduce competition have met with limited success. OVS operators face an uphill and expensive battle if they are to enter this market. Burdensome regulations will undoubtedly deter entry. Congress has made it clear that the Commission should encourage local exchange carriers and others to provide OVS service and, in order to achieve that objective, the Commission must resist the urge to adopt detailed and restrictive regulations. Rather, to the maximum extent feasible, the Commission should exercise the authority granted by the Act to forbear from regulation and adopt general rules that permit the OVS operator to succeed or fail in the marketplace. Respectfully submitted, _____________________________ Of Counsel:Donald C. Rowe, Esq. Robert Lewis, Esq. Theodore D. Frank NYNEX Corporation Marilyn D. Sonn 1111 Westchester Avenue Arent Fox Kintner Plotkin & Kahn White Plains, N.Y. 10604 1050 Connecticut Avenue, N.W. (914) 644-6993 Washington, D.C. 20036 (202) 857-6016 Counsel for NYNEX Corporation April 1, 1996