$//New Jersey Bell FCC 94-180//$ $///FCC 94-180 7-29-94///$ ///newjob/// FCC 94-180 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of the Application of ) ) NEW JERSEY BELL TELEPHONE COMPANY ) ) For Authority pursuant to Section 214 ) of the Communications Act of 1934, as ) File No. W-P-C-6840 amended, to construct, operate, own, ) and maintain advanced fiber optic ) facilities and equipment to provide ) video dialtone service within a ) geographically defined area in Dover ) Township, Ocean County, New Jersey ) ORDER AND AUTHORIZATION Adopted: July 5, 1994 Released: August 1, 1994 By the Commission: Commissioners Barrett and Ness issuing separate statements. TABLE OF CONTENTS Paragraph No. I. Introduction 1 II. The Application 3 III. Discussion 8 A. Video Dialtone Issues 9 1. Overview 9 2. Sufficient Capacity and Nondiscriminatory Access By Video Programmers 11 a. Comments 11 b. Discussion 13 B. Section 214 Issues 19 1. Comments 21 2. Discussion 25 a. Section 214 Legal Standard 25 b. Application of Section 214 Standard to NJB Application 31 i. Economic Justification 32 ii. Public Interest Benefits of These Video Dialtone Systems 38 iii. Accounting Conditions and the Tariffing Process 42 IV. Motion For Investigation 44 A. The NCTA Motion and Responses 45 B. Discussion 55 C. Other Allegations and Issues 65 V. Conclusion 69 VI. Ordering Clauses 70 Appendix: Pleadings Filed I. INTRODUCTION 1. In the captioned application, the New Jersey Bell Telephone Company (NJB) proposes to provide video dialtone service in a part of its service area. This application represents one of the first two filings for the provision of commercial video dialtone service. We here grant the application subject to conditions that will help protect against improper cross-subsidy and discrimination by NJB. We find that the proposed system will promote the "public convenience and necessity" in Dover Township, in part by stimulating investment in telecommunications infrastructure, providing competition in the video marketplace, and fostering a diversity of information sources in order to expand consumer choice. 2. In the VDT Order, the Commission determined that, through video dialtone, local telephone companies could participate in the video marketplace, consistent with the statutory telephone company- cable television cross-ownership restrictions. We defined "video dialtone" as the provision by a local telephone company of a basic common carrier platform to multiple video programmers on a nondiscriminatory basis. A "basic platform" is a common carriage transmission service coupled with the means by which end-user subscribers can access any or all video programming. If a local telephone company provides such a basic platform, it is permitted to provide enhanced and non-common carrier services related to the provision of video programming in addition to basic common carrier services. The Commission also determined that carriers must receive Commission authorization under Section 214 before constructing video dialtone facilities. II. THE APPLICATION 3. On December 15, 1992, NJB filed a Section 214 application to provide video dialtone service in Dover, New Jersey (Application). The service will pass 38,000 homes, 35% of which NJB predicts will become end-user subscribers. Seven parties filed petitions to deny, one party filed a letter of opposition, and two parties filed a request for consumer safeguards. On April 22, 1993, the Commission staff asked NJB to respond to questions regarding its Section 214 application, to which NJB responded on April 30, 1993 (NJB Answers). Adelphia filed comments on the NJB Answers. On July 28, 1993, the Commission sent a letter to NJB finding that the application did not contain the level of specificity necessary for decision and noting that the application appeared inconsistent with video dialtone requirements for a basic common carrier platform able to serve a multiplicity of video programmers. NJB was given forty-five days to amend its application, or to submit a new application. On September 2, 1993, NJB amended its application. Seven parties filed comments or responses on the Amended Application. The record closed on October 12, 1993. 4. NJB states that the system will offer tariffed video dialtone service using a fiber-to-the-curb architecture, with coaxial cables and copper wire for the final link to the home. NJB states that it will replace the copper-based facilities between its central offices and the curb with fiber optic cable over which it will provide, on an integrated basis, video dialtone, telephone exchange, and exchange access service. More specifically, NJB's application is for the following facilities and equipment: (1) installation of coaxial cable from the curb-side Optical Network Unit (ONU) to the home; (2) installation of fiber optic cables between New Jersey Bell's central offices where needed to transmit video signals; (3) where requested by a programmer-customer, installation of fiber optic facilities from that customer's head- end to New Jersey Bell's nearest central office; (4) installation of signal processing or other equipment at New Jersey Bell's central offices and on New Jersey Bell's side of the network demarcation points; and (5) installation of other equipment, such as pedestal-mounted electronics, connectors, and power supplies needed to operate the proposed system. NJB states that it is already committed under the "Opportunity New Jersey" plan approved by the New Jersey Board of Regulatory Commissioners (New Jersey Board) to accelerating deployment of advanced technologies to achieve full broadband capability by 2010. 5. The network will transmit digital voice, data, and video signals over the same fiber cable. NJB states that it plans to offer, as part of its video dialtone service, both a regulated video dialtone platform consisting of common carrier transport along with a regulated entry-level gateway, and non-common carrier services, including an unregulated second-level gateway, ancillary services such as set-top converters or other video customer premises equipment (CPE), and inside wiring. Initially, according to NJB, it will deliver multicast and narrowcast services, with the capability in the future of delivering movies and other video programs to customers on demand. With its application, NJB filed an illustrative tariff containing the proposed charges and regulations for the services to be offered. Under the tariff, NJB proposes to charge only the programmer-customer, not the end-user subscriber. The illustrative tariff would require the programmer- customer to pay the subscriber connection fee. 6. NJB has an agreement with FutureVision of America, Corp. (FutureVision) under which FutureVision will be a video programmer- customer on NJB's video dialtone platform. NJB states that the initial capacity of the system will be 64 digital channels. Upon installation of the software upgrade after its availability in September of 1994, however, the system will have a minimum of 384 channels of digital capacity. In its amended application, NJB states that as long as the capacity of the system remains limited to 64 channels, no one programmer-customer may purchase more than half of this initial capacity. 7. NJB states that it will account for the investment and expenses associated with the proposed facilities in accordance with Parts 32 and 64 of the Commission's rules. According to NJB, preliminary cost and separations studies suggest that approximately 40%-50% of the costs of the system will be assigned to video dialtone services, thus helping to ensure that the costs of providing video dialtone service are not borne by customers of other common carrier services. NJB states that, if it receives Section 214 approval, the allocation of costs for ratemaking purposes will be addressed in more detail at the tariff review stage, and that it will submit a tariff that includes cost justification appropriate for a new service. III. DISCUSSION 8. Before us is an application under Section 214 for a commercial video dialtone service offering. To be granted, the application must satisfy the requirements of both our video dialtone rules and Section 214 of the Communications Act. Petitioners contend that the application satisfies neither. We consider first the contentions that this application does not satisfy our video dialtone requirements, and then turn to the issues raised under Section 214. A. Video Dialtone Issues 1. Overview 9. To qualify as video dialtone, a service must meet the requirements set forth in our VDT Order. Among other things, the service must include a "basic common carrier platform [available] to multiple video programmers on a nondiscriminatory basis," and a "means by which [end-user] customers can access any and all of the video programming" offered. The platform must provide "sufficient capacity to serve multiple video programmers." 10. In the instant application, the system proposed by NJB does feature the "basic platform" required by our VDT Order. End- user subscribers have access to all of the video programming offered on the system. For the reasons set forth below, we conclude that NJB's application meets the requirements of nondiscrimination and adequate capacity. 2. Sufficient Capacity and Nondiscriminatory Access By Video Programmers a. Comments 11. NCTA contends that NJB's application does not qualify as video dialtone because NJB does not meet the requirement of providing a common carrier platform with sufficient capacity to serve multiple video programmers on a non-discriminatory basis. In addition, NJCTA contends that, even if NJB retains no control over actual programming, NJB has violated a principle of video dialtone by choosing an initial programmer. According to NCTA, the nature of NJB's alleged invitation to "all the cable operators in New Jersey to use the network" is unclear. NCTA claims that there is no evidence such an invitation was issued to use NJB's network in Dover. Video dialtone, says NCTA, "is supposed to be 'open house,' not a private dinner for two." 12. NJB responds that it has the ability to provide capacity to multiple video programmers and to expand capacity as demand increases. NJB argues that, even with its agreement with FutureVision, the remaining initial capacity will be available for other programmers' use on a non-discriminatory, common carrier basis. Moreover, NJB states, upon completion of construction, NJB's platform will have a capacity of 384 channels. NJB contends that the Commission expressly rejected a minimum capacity requirement for video dialtone, and that NJB's platform satisfies the standard that the Commission adopted. In addition, according to NJB, FutureVision was not privately preselected; rather, all the cable operators in New Jersey were invited to use its platforms. FutureVision is one of the few who responded, and one of only two multichannel providers that have agreed to use NJB's platforms to date. b. Discussion 13. A video dialtone service must offer nondiscriminatory access to multiple programmers, and its capacity must be able to expand to accommodate increasing demand so as not to become a bottleneck. In SNET Trial we stated that in applying the capacity requirement we would review each application on a case-by-case basis taking into consideration: (1) the initial capacity available; (2) the ability to expand this capacity; and (3) the demand for capacity. 14. For the following reasons, we conclude that NJB's proposed platform will offer capacity sufficient to satisfy the requirements of the VDT Order. Most importantly, NJB represents to us that the system will have a 384-channel capacity by year-end 1994. This is a capacity significantly greater than existing standard commercial cable systems, and none of the parties opposing grant of the application argues that 384 channels will not accommodate foreseeable demand. We find it unlikely based on this record that actual demand will exceed significantly the projected demand in the record and thus threaten to outstrip NJB's 384-channel system. Several commenters do challenge as overly optimistic NJB's plan to expand the initial 64 channels to 384 channels by late 1994. NJB states, however, that the necessary software will be available for installation in September 1994. We require, as a condition of this authorization that any video dialtone service offered in Dover Township through January 3, 1995, must have at least 64 channels, and that after January 3, 1995 any such service must have a capacity of at least 384 channels. This approach is consistent with NJB's representations in its application, and expressly incorporates NJB's representations into the conditional authorization. 15. We also conclude that NJB's proposed 64-channel platform will provide sufficient capacity to serve multiple video programmers in Dover Township during the short transitional period before January 3, 1995. NJB states that there currently remain 32 channels available to accommodate programmers other than FutureVision. We find that NJB's commitment to upgrade to 384 channels to be an adequate and timely response if demand unexpectedly rises. Thus, given the extremely short time period before NJB will expand its capacity and the relative lack of current demand during this transitional period, despite NJB's documented promotional efforts, we find that NJB has satisfied the necessary capacity requirements. 16. Finally, in order to further assure sufficient capacity and nondiscriminatory access, we condition this order, as we have in several other Section 214 approvals of video dialtone systems, on a requirement that NJB report to the Chief, Common Carrier Bureau, within five days of its denying a programmer platform access due to capacity limitation. In its report, NJB also must describe the steps it will take to accommodate the rejected programmer. 17. NCTA also argues that we should not authorize these systems because NJB has struck "discriminatorily advantageous deals with favored customers prior to the filing of a public tariff." NCTA contends that "once the tariff is filed, . . . customer- programmers should be able to arrange for access to the system on a first-come, first-serve, non-discriminatory basis." We find that NJB has not contravened our video dialtone requirements. Video dialtone achieves nondiscriminatory access for programmer- customers by requiring sufficient capacity to accommodate multiple programmers and by applying Title II regulation to the video dialtone platform to ensure that carrier dealings with programmer- customers are just, reasonable, and not unreasonably discriminatory. As discussed previously, we conclude that NJB's platform has sufficient capacity. Thus, programmer-customers other than FutureVision should be able, first, to obtain capacity irrespective of the prior arrangements. In addition, all programmers, even those with prior contractual arrangements, will be required to pay the tariff rates. We note that issues involving allegedly unreasonable discrimination in rates, terms or conditions contained in a video dialtone tariff can be addressed in the tariff review process. 18. Thus, we find NJB's proposed platform satisfies our requirements for video dialtone platforms. B. Section 214 Issues 19. In order to grant an application for authorization under Section 214 of the Communications Act, the Commission must determine that a grant would serve the "public convenience and necessity." 47 U.S.C.  214(a). Traditionally, the focus of the Section 214 review has been "to ensure that carriers prudently invest in equipment so as to avoid waste and unreasonably high rates" for telephone rate payers. As part of the Commission's rules specifying the contents of Section 214 applications, Subsection 63.01(m) of the Commission's rules, 47 C.F.R.  63.01(m), requires the applicant to provide an "[e]conomic justification for the proposed project including . . . estimated added revenues and costs and the basis thereof." The courts have granted the Commission a significant amount of latitude in making its determinations under Section 214. In the VDT Order, we concluded that our existing safeguards were sufficient to protect against potential discrimination and cross-subsidy by telephone companies in their provision of video dialtone. We further stated, however, that we intended to reassess their adequacy as applied to Section 214 applications for specific video dialtone systems. 20. We here find that NJB has provided sufficient information pursuant to our Section 214 filing rules, including economic justification, for us to find that the public convenience and necessity will be served by granting its applications. In addition, as is discussed in Subsection B 2 b ii, infra, the proposed system should result in investment in advanced communications infrastructure, which can contribute to economic growth and the nation's leadership in technology. The system also promises competition to the two local cable companies in the local video distribution markets, diversity of distribution sources and information, increased access to networks and new services, and greater access of program suppliers to consumers and of consumers to additional information services. All of these potential benefits can increase commercial opportunity and the flow of ideas. We conclude that the public interest will be served by grant of the application, subject to the conditions specified below. 1. Comments 21. NJCTA and NCTA contend that NJB's application falls short of providing any cognizable economic evidence that the facilities in question are not being added for predatory purposes, or priced below cost to gain market power or an unfair competitive advantage. NJCTA states that these economic issues should not be deferred to "the truncated tariff review process," but should be addressed by the Commission in its Section 214 evaluation of the public convenience and necessity. 22. NJCTA contends that summary figures, without supporting detail, cannot be accepted as economic justification unless the Commission abandons all efforts at implementing meaningful safeguards as set forth in the VDT Order. NJCTA specifically objects to NJB's assumption in its economic justification that revenues received from end-user subscribers would ultimately be split equally between the service provider and NJB, to NJB's use of an 11.25% discount rate, and to NJB's revenue projections of up to $35 per month for non-entertainment services. In addition, according to NCTA, NJB's revenue projections assume that NJB and its programmer-customers "will receive all video rental revenue generated by subscribers to its system now earned by video stores." 23. In their comments, PaOCA, NJDRC and NJCTA contend that NJB's application is deficient because it does not include all costs relevant to the provision of video dialtone. PaOCA contends that NJB should be required to amend its application to reflect the cost of the fiber optic lines that NJB excluded from its economic justification. Commenters on the Amended Application contend that NJB still has not identified all of the common costs related to video dialtone. PaOCA/NJDRC also state that the revenue projections by NJB indicate that "[b]roadcast CATV revenues are only able to cover 30% of New Jersey Bell's own estimated video dial tone costs," and that the remainder of revenues must come from "programming customers who apparently have not yet committed to providing video services . . . ." If the Commission approves this application, PaOCA proposes that the Commission require NJB to maintain records of the actual costs and revenues and provide this information for public review. 24. In its opposition, NJB claims that its video dialtone service is economically justified, and that the cost and revenue estimates provided are the type of support the Commission has previously found to be adequate. In addition, NJB states that all incremental costs to add video dialtone capability to its network have been included in its economic justification, including the cost of coaxial drops. NJB states that the addition of a video dialtone capability is the only subject of the Commission's Section 214 review, not the overall deployment of fiber, which provides a variety of benefits unrelated to video. In any event, NJB asserts that even if the net cost of all fiber cabling is attributed to video dialtone, it will reach the break-even point near the end of the year 2003. NJB further contends that because service prices are not established in a Section 214 proceeding, there are no issues to be decided as to how NJB should allocate the costs among its regulated services in order to set prices. According to NJB, these issues are premature and should be addressed when NJB files a tariff to provide video dialtone service. 2. Discussion a. Section 214 Legal Standard 25. In order to grant an application for authorization under Section 214 of the Communications Act, the Commission must determine whether a grant would serve the "public convenience and necessity." Courts have found that this statutory standard "is to be construed so as to secure for the public the broad aims of the Communications Act," including the overarching goal expressed in Section 1 of the Communications Act. Section 1 of the Communications Act charges the Commission with the task of making available to the nation a "rapid, efficient, Nation- wide...communication service with adequate facilities at reasonable charges . . . ." Administration of this standard is generally left to the discretion of the Commission: "[I]t is entirely within the Commission's discretion to accept even a minimal showing of financial justification" for approval of a Section 214 application. 26. In its analysis of the public convenience and necessity under Section 214, the Commission has generally focused on the "added," or "incremental," costs and revenues of the facilities for which authorization is sought. We have generally interpreted Section 214 to require some showing that existing or future demand for services provided over the proposed facility will justify these added costs within some reasonable period of time. We note, however, that the Commission has approved Section 214 applications in circumstances where this test was not met. 27. Our rules expressly ask for the "added revenues and costs" generated by the proposed project. Commission orders interpreting our Section 214 rules have relied on an examination of added costs. The Commission has determined, for example, that "estimates of additional . . . costs . . . are the relevant costs to be considered," and that we will not take into consideration "sunk costs" or "embedded costs" already invested in existing facilities. 28. Section 214 authorizations do not require the level of detail demanded by petitioners. For instance, in AT&T Authorization we stated that "[g]enerally the Section 214 proceeding examines cost only insofar as it is necessary to determine, on a prima facie basis, whether costs are so substantial relative to benefits that the public interest would not be served by construction of the project." Similarly, in a cable channel service application, we found it sufficient to rely on summary charts submitted by the applicant. A "[d]etailed economic justification . . . by a carrier [is] not required in a Section 214 authorization. In a Section 214 proceeding, costs are examined only generally . . . ." 29. Nor have we required the level of certainty demanded by petitioners. We have only required a finding that the estimates "do not appear unreasonable." In examining an application for cable channel service, the Bureau recognized that "a degree of risk is inevitable if service offerings of this type are to be developed." Rather than denying the application, the Bureau granted it conditioned on a separate accounting of costs so that shareholders and not ratepayers would bear the burden of failure. In the early stages of the domestic satellite market we stated that "[i]f a carrier waited until it was sure of a large demand for traffic, few stations would ever be built, while initial service demands go unsatisfied." 30. Finally, the Commission's review of a Section 214 application is not restricted merely to the financial aspects of the application. As stated above, the range of the Commission's inquiry into the "public convenience and necessity" is at least as broad as the purposes of the Communications Act. Where a carrier's estimates of viability are not free from doubt, the Commission has found that public interest benefits to be gained from the new technology may nonetheless support a grant of a Section 214 application. Thus, in AT&T, where the applicant proposed supplementing existing facilities with a fiber lightguide cable, the Commission stated that "[t]his experience is necessary to foster the technological developments that will lead to 'learning curve' decreases in cost. Without experience in the early stages of development we may never see some of the advances that fiber technology promises to bring to telecommunications users." b. Application of Section 214 Standard to NJB Application 31. We conclude that a conditioned grant of the NJB application will serve the public convenience and necessity under Section 214. We find that NJB's showings of economic justification satisfy the requirements of our regulations. Our statutory finding is premised as well on the public interest benefits we find in the construction of the video dialtone system and on our imposition of conditions in this authorization for a separate accounting of the costs of the video dialtone system. As part of this examination, we have reassessed the adequacy of our safeguards that would apply to this specific Section 214 application, and conclude, at least during the pendency of the various petitions seeking reconsideration of the VDT Order, that those safeguards, with the conditions we impose on this authorization, will be sufficient to protect against possible anticompetitive conduct by NJB. We note that petitions to deny in this proceeding and petitions for reconsideration of the VDT Order raise issues regarding the need for additional codified safeguards against anticompetitive conduct. Our decision in this adjudication, based on the record in this proceeding, is without prejudice to, and in no way constrains, any action that we may take on reconsideration of the VDT Order. In addition, we condition our grant on the requirement that NJB comply prospectively with any rule changes made on reconsideration of the VDT Order, or other applicable rulemaking proceeding. i. Economic Justification 32. We find that under the standards of Section 214, NJB has submitted sufficient cost and revenue support for the Commission to grant the application. NJB has supplied summaries of the incremental plant investment cost that will be incurred by its proposals. NJB has also supplied a break-even analysis consisting of projected annual revenue and annual costs of the video dialtone system. These summaries appear to include all added revenues and costs directly attributable to the proposed system. Under the applicable legal standard, NJB need not include any additional costs. For purposes of this proceeding, we believe NJB has provided the categories and types of costs required by our Section 214 rules, and in sufficient specificity, to enable us to determine that the public convenience and necessity will be served by construction and operation of the proposed facilities. 33. We also find NJB's revenue estimates generally reasonable. NJB projects an end-user subscriber sign-up rate of approximately 35% of the 38,000 homes passed. This rate, NJB states, reflects the fact that there are two competing cable companies already operating in Dover Township, the proposed video dialtone service area. NJB estimates that in the early years, one hundred percent of revenues will be generated by services analogous to current video entertainment services, such as cable, broadcast and video rentals. Ultimately that percentage is expected to decline to 40- 50% with the balance of the revenues to be obtained from other services. NJB cites statements in the VDT Order and in a study commissioned by the New Jersey Board of Public Utilities as evidence of latent demand for these new services, which range from home shopping to health, education and multimedia research. 34. NJB's revenue figures appear consistent with the available market evidence. NJB estimates that in ten years its monthly revenue-per-subscriber will be $73. Of this amount, $30, or 41%, will be for conventional entertainment services available today, such as cable TV and movies-on-demand. NJB cites a trade study showing that in ten years consumers will be willing to pay $70 a month for these services, which NJB estimates will be divided evenly among the telephone company and programmers. The remaining $43 (59% of $73) of the monthly revenue estimate will be generated by other video information services. Current video trade revenue figures do not include revenues from these other video information services, enhanced and otherwise, but these services also should bring additional revenues to the NJB platform. The Commission has stated that there appears to be a potential market for such services, and NJB has cited its own evidence. 35. We also find that the discount rate of 11.25% selected by NJB is not unreasonable. That rate is the rate of return for interstate regulated services for rate-of-return telephone companies, and this rate is normally used in pricing new regulated services, such as video dialtone basic common carrier platform services, under price cap regulation. Even though different local telephone companies and different regulated services are today subject to varying degrees of competition, we have prescribed a unitary rate of return for all exchange carriers and their interstate regulated service offerings. This approach recognizes the fact that the capital marketplace generally rates the risk of entire companies and not individual services. Moreover, determining a reasonable rate of return for individual services can be difficult. Petitioners cite no precedent in which we have required a local telephone company to use a discount rate that exceeds a carrier's authorized rate of return to justify approval under Section 214. For these reasons, we decline to require NJB to justify its Dover Township video dialtone system using a higher discount rate. 36. NJB's economic justification statement indicates that, with volume equipment discounts from suppliers, the project is expected to break even in as early as four years. Without volume discounts the projected break-even time period is six years. NJB adds that even if the net cost of the common fiber cabling is included in the overall cost figures, and volume discounts are included, a break-even point of five years is projected. 37. Without endorsing either NJB's specific figures or projected break-even estimates, we conclude that NJB has made a prima facie showing of the reasonableness of its estimated costs and revenues, sufficient to satisfy the economic justification requirements of Section 214. NJB's figures reasonably relate to a known current market, the home video market, and that market has demonstrated a consistent demand for vido services, as evidenced by the success of the cable industry. NJB also has presented evidence of the potential for revenue from other non-cable related video information services. In all, NJB has presented estimates and other evidence that "do not appear unreasonable." Finally, as described below, we do agree with petitioners' arguments that we should require NJB to account separately for its video dialtone costs. ii. Public Interest Benefits of This Video Dialtone System 38. In finding that video dialtone is in the public interest, the Commission identified various potential benefits that this service is likely to produce. These benefits include: (1) promoting private investment in an advanced telecommunications infrastructure, (2) providing additional competition in the provision of video services, and (3) providing additional opportunities for consumer choice through a diversity of video services. We believe that the NJB Dover video dialtone system will provide these and other benefits. Therefore, in addition to finding that NJB has satisfied the economic justification requirements of Section 214, we also find that NJB's application will help secure for the public the broad aims of the Communications Act, including the provision of a "rapid, efficient, Nation-wide . . . communication service with adequate facilities at reasonable charges." 39. NJB's proposal clearly will produce new investment in an advanced telecommunications infrastructure. The proposed integrated broadband and narrowband digital networks capable of providing at least 384 video channels would stand at the cutting edge of technology. Video servers, video administration modules, remote access modules, host digital terminals, multi-subscriber optical network units and associated software are among the advanced infrastructure elements under development. Some of the plant necessary for video dialtone will be used for services other than video dialtone, so there are benefits from the plant beyond the benefits generated by video dialtone. In addition, investment in these elements benefit the nation in other important ways. Such investment stimulates manufacturing of high technology products, increases employment opportunities, creates potential export markets, and provides many indirect benefits in other fields, including marketing, training, and education. 40. The proposal also promises additional competition in the provision of video services. The system in Dover will compete directly with the two existing cable television systems. The planned 384 channels to be offered by NJB would increase dramatically the number of video channels available to end-user subscribers in the proposed service area of Dover Township. Creating new outlets and opportunities for programmers and other users of system capacity will result in many of the same kinds of economic benefits that arise from investments in advanced infrastructure. These include employment opportunities in information services, potential export opportunities, and secondary stimulative effects on supporting services and industries. 41. Finally, the proposals will give consumers in Dover additional choices. NJB states the system will offer a minimum of 384 channels. While we, and NJB, can anticipate the likely and potential users of system capacity, there is no way of knowing either the precise choices that end-users will find most attractive, or the new choices that will become available in five or ten years. The system will offer open access to multiple service providers, and access to those providers for consumers. This access is consistent with the nation's fundamental commitment to diversity and competition in the flow of ideas, not only with respect to entertainment but also with respect to education, health, and commerce. iii. Accounting Conditions and the Tariffing Process 42. As in Wisconsin Bell, we condition this authorization on a requirement that NJB establish subsidiary accounting records to capture the revenues, investments and expenses associated with the provision of video dialtone service. These subsidiary accounting records shall include the direct costs and overheads associated with video dialtone service. A summary of these records shall be reported to the Commission on a quarterly basis. We delegate to the Chief, Common Carrier Bureau the authority to determine the content and format of the subsidiary accounting records as well as the quarterly reports. Of course, as generally required by our cost allocation rules, any enhanced and non-common carrier services must be reflected in NJB's Cost Allocation Manual (CAM), and we condition its authorization by requiring NJB to make revisions to its manual to ensure that the costs of nonregulated ventures are segregated from the costs of regulated activities in order to prevent any cross-subsidization. At a minimum, we require NJB to revise its CAM to include a list of all accounts affected by its provision of nonregulated video dialtone services and a description of each of those services. Again, we emphasize that the decision we make here, and the conditions we attach to it, are without prejudice to, and in no way constrain, any action that we may take on reconsideration of the VDT Order or other applicable rulemaking proceeding. 43. Our action in this proceeding in no way limits our ability to ensure, in the subsequent tariff review process, that NJB's tariffed rates for video dialtone service are just and reasonable. It is clear that consideration of costs in a Section 214 proceeding is distinct from the examination of rates in the tariff review process. As the Commission staff stated in a 1986 decision, "[a] detailed inquiry into tariff related matters ... would vitiate the distinction between tariff and facilities authorization procedures and would require the Commission to engage in duplicative processes." Prior to providing service, NJB must file tariffs, and cost support information, which will be available for review. In the Part 69 ONA Proceeding, the Commission established pricing standards for new services ("the new services test") offered by companies subject to the price cap method of regulation. In setting an upper bound for such services, the Commission adopted a "flexible cost-based approach to pricing new services." Under this test, the Commission requires LECs introducing new services to submit engineering studies, time and wage studies or other cost accounting studies to identify the direct costs of providing the new service, absent overheads. Once the direct costs have been identified, LECs may add an "appropriate level of overhead costs to derive the overall price of the new service." To provide the flexibility needed to achieve efficient pricing while protecting against excessively high rates, the Commission did not mandate uniform loading, but expected the LECs to justify the loading methodology they selected as well as any deviations from that loading methodology. The purpose of this approach is to provide the LECs sufficient pricing flexibility to encourage innovation and efficient pricing while protecting against either excessively high rates or unreasonably discriminatory or predatory pricing. It is against these standards that we will judge the reasonableness of the tariffed rates NJB proposes for its video dialtone services. Finally, we note that parties to this proceeding raised no concerns about the illustrative tariff submitted by NJB with the Application beyond the concerns about rates, revenues and costs discussed above. IV. NCTA'S MOTION FOR INVESTIGATION 44. On May 4, 1994, the National Cable Television Association, Inc. (NCTA) filed a Motion for Investigation. The Motion alleges that NJB is violating Section 214 of the Communications Act by constructing interstate video dialtone facilities before obtaining the necessary authority from the Commission. We are not persuaded that the evidence in the record demonstrates a violation of Section 214, or that there is any need to investigate further. A. The NCTA Motion and Responses 45. NCTA argues that the Commission has long interpreted Section 214 as requiring telephone companies to obtain prior authorization to construct video distribution facilities. In addition, notes NCTA, the VDT Order specifically requires Section 214 authorization for the provision of video dialtone services. NCTA cites a press story in which an official of NJB's parent company, Bell Atlantic, is reported to have said that substantial construction has already taken place for the Dover system, and that "all that's left to do is insert electronics to make the network capable of delivering video." According to NCTA, NJB's video dialtone application identifies much more investment for interstate video dialtone than merely electronics. NCTA argues that if the press statement is true, NJB appears to be in violation of Section 214's bar on interstate construction prior to Commission approval. NCTA urges the Commission to delay action on NJB's Section 214 application until completion of an investigation. 46. In its response to the NCTA motion, NJCTA raises additional allegations. NJCTA contends that in addition to extensive deployment of fiber optic cables in the Dover Township area, much of the video dialtone equipment and facilities described in NJB's applications are already "on the poles and in the ground." NJCTA presents affidavits and photographs alleging to show extensive construction activity relating to video dialtone service. NJCTA points to two general types of facilities installed by NJB that it alleges are related to video dialtone: fiber and related equipment, and drops. Specifically, NJCTA asserts that NJB has installed optical network units (ONUs) and a number of drops that include both twisted pair and coaxial components. For instance, NJCTA submits a photograph that it describes as showing an ONU in Dover with six video outputs connected to coaxial drop cables. According to NJCTA, the installations it describes are impermissible pending grant of Section 214 authority. 47. In addition, NJCTA argues that NJB's activities are not consistent with New Jersey's regulatory proceedings, or with "Bell Atlantic's state regulatory activities," because the New Jersey Board of Regulatory Commissioners (New Jersey Board) clearly understood that NJB's deployment of an advanced network is far more than an upgrade of the existing network to provide telephone service. Rather, according to NJCTA, one of its principal purposes is to deploy video services. 48. NJB denies that it has constructed video facilities covered by its Section 214 application. NJB argues that all of the fiber and equipment that it is deploying are needed to provide telephone service. NJB states that, for the most part, it "has not . . . taken delivery of video equipment and facilities covered by its application, let alone installed them." NJB, however, does note one apparent exception to this statement. NJB states that, in investigating NJCTA's allegations, it determined that it had taken delivery of a number of reels of coaxial and composite cable and connectors. According to NJB, a previous search to confirm that no video equipment had been delivered did not reveal these items, "presumably because they are normal inventory items in [NJB's] warehouse data base." 49. In the case of equipment that could be used to provide both telephone service and video dialtone service, Bell Atlantic says that it is installing only the portions of the equipment needed for telephone service, and not the additional components needed to add video dialtone capability, pending approval of its Section 214 application. For example, NJB states that it has not installed any of the line card components that are needed to add a video dialtone capability to the ONUs. 50. With regard to the installation of cable coaxial drops, NJB states that the bulk of these drops were connected to ONUs as part of the vendor selection process during a test of the capabilities of four competing vendors. NJB states that a "small number" of additional composite drops, which contain both coaxial and twisted pair wire in a single common sheath, were installed in 1993. NJB asserts that these drops are needed to provide local telephone service as well as video dialtone service, and that it had initially planned to deploy such common facilities along with the network upgrade. NJB asserts that the drops could permissibly have been installed without Section 214 authority, but that it has ceased the installation of such drops pending Section 214 authorization "out of an abundance of caution." 51. NJB argues that while the Commission has required Section 214 approval to provide video dialtone capability, it has never suggested that such approval is needed to upgrade the underlying network to the extent that it will be used to provide local telephone exchange service. NJB argues that any facilities needed to provide local telephone service may be installed as part of its underlying network upgrade, without awaiting approval of its application. Bell Atlantic asserts that the Commission could not require Section 214 certification for two reasons. First, according to NJB, Section 214(a) expressly provides that no authorization is required "for any installation, replacement, or other changes in plan, operation, or equipment." NJB asserts that its underlying network upgrades that will be used to provide local telephone service fall within the scope of this exemption. 52. Second, NJB argues that facilities used to provide telephone exchange service continue to be regulated by state authorities, and that such facilities are excluded from the Commission's reach by both Section 214 and Section 221 of the Act. Citing Kitchen v. Bell Telephone Co. of Pennsylvania, 31 FCC 2d 604 (1971) (Kitchen), aff'd 464 F.2d 801 (D.C. Cir. 1972), NJB states that the Commission has recognized that while the services travelling over local telephone networks may be both interstate and intrastate, the local exchange facilities are predominantly intrastate in nature, and do not require Section 214 approval. 53. Finally, NJB argues that its construction activities are fully consistent with New Jersey's regulatory requirement that it provide broadband capability throughout the state by 2010. 54. In reply, NCTA states that NJB's response lacks specificity and that NJB has failed to clarify exactly which "electronics to make the network capable of delivering video" remain to be put in place. It states that the Commission must determine the purpose of the ONUs and the cable drops referred to in NJCTA's Response before taking action on NJB's Section 214 applications. NCTA denies that NJB's network upgrade is beyond the scope of Section 214. NCTA notes that "twenty-five percent of the intrastate access telephone plant and 100 percent of the video plant is assigned to the federal jurisdiction," and asserts that state jurisdiction cannot usurp Congressionally-established federal responsibility in Section 214. NCTA concludes that "[i]t is impossible based on the evidence submitted by NCTA and NJCTA to conclude that premature construction has not occurred." B. Discussion 55. The issue posed by the NCTA motion and the NJCTA response is whether NJB's construction of facilities as part of its network upgrade before receiving Section 214 certification constitutes a violation of Section 214 of the Communications Act. NCTA and NJCTA have not persuaded us that NJB has violated Section 214, or that any further investigation of this issue is warranted. We conclude that the network upgrades that NJB has undertaken to provide local exchange service do not require Section 214 certification. 56. Section 214(a) of the Communications Act, as amended, prohibits a carrier from constructing a "new line" or an extension of a "new line," or from engaging in transmission over or by means of such a line, "unless and until there shall first have been obtained from the Commission" a certificate of public convenience and necessity. The Act defines "line" as "a channel of communication established by use of appropriate equipment, other than a channel of communication established by the interconnection of two or more existing channels." Section 214 specifically exempts from the certification requirement "a line within a single State unless such line constitutes part of an interstate line." 57. There are three types of facilities at issue in this case: facilities to be used solely for the provision of local exchange telephone service; facilities to be used for both telephony and video dialtone service; and facilities to be used solely for the provision of video dialtone. NJB states that it has begun construction on the first two types of facilities, but not the third -- those facilities used only for video dialtone. NJB certifies that, with the exception of some reels of coaxial and composite cable and connectors, it has not even taken delivery of the video facilities or equipment covered by its application. NJB avers that for those facilities that have joint-use capabilities (such as optical network units), it is only deploying "the components ... needed to provide telephone service, not the additional components needed to add a video dialtone capability." With respect to NJCTA's photograph number 5, showing video outputs connected to coaxial drop cables, NJB indicates that some drops connected to the video posts on the ONUs were installed only as part of its vendor selection process. The number of such drops, moreover, appears to be de minimis. NJB also explains that the ONUs are not operational because no line cards have been installed. NJB further explains that neither line cards nor any other video facilities will be installed until Commission approval is granted. Thus, with the minimal exception noted above, the record indicates that the facilities that NJB is currently constructing are all needed for the provision of local exchange service. The issue, then, is whether such facilities should be viewed as intrastate, or as part of an interstate line. If the former, no Section 214 certification is necessary at this time. 58. The courts have recognized that whether a facility is intrastate or interstate depends on the character of service for which it is used. Because local exchange facilities almost always connect at some level with facilities dedicated to interexchange interstate services, one could read Section 214 to require FCC certification before construction of any local exchange facilities. That reading, however, would eviscerate the notion of purely intrastate facilities, and has not been our practice. In Kitchen, supra, the Commission found that no Section 214 authority was needed to construct a building to house switching equipment, stating that "clearly some division between interstate and intrastate authority must be made, and [what is proposed] is primarily, if not exclusively, related to an intrastate activity under the jurisdiction of the State regulatory Commission." 59. In this case, prior to approval of NJB's video dialtone Section 214 application, intrastate telephone service will constitute the primary, if not the exclusive, use of the facilities constructed by NJB. Much like the building at issue in Kitchen, the upgraded network construction that Bell Atlantic will use for local exchange service is primarily, if not exclusively, intrastate. We conclude, therefore, that it is not subject to the requirement of Section 214 certification. In sum, no Section 214 certification is required because the record shows that the facilities that NJB has constructed to date will be used to provide local exchange, but not video dialtone, service. 60. NJCTA argues that NJB's network upgrade is inconsistent with "Bell Atlantic's New Jersey regulatory activities," and that it cannot be viewed as just local exchange service construction because video dialtone was understood by the New Jersey Board to be part of NJB's plan. We disagree with the contention that NJB's plans to add video dialtone capability in the future turn its network upgrade into an interstate construction. Section 214 does not require NJB to obtain authorization before its network upgrades begin, but only before those facilities unrelated to local exchange service that will allow for interstate (video dialtone) usage are actually constructed. 61. As the Common Carrier Bureau held in Northwestern Telephone Systems, Inc., a carrier can construct facilities for intrastate use without obtaining a Section 214 certification, even if it plans further construction to allow for interstate use, "as long as the interstate use of the lines does not occur prior to acquisition of necessary federal authority." The Bureau there rejected a claim that the applicant should have filed a Section 214 application before constructing a purely intrastate special access facility, even though the applicant intended to use the facility for interstate service in the future after connecting it with additional facilities. The Bureau stated that the applicant only need obtain a Section 214 certificate before using the facility for interstate service. 62. Here, NJB need not obtain Section 214 authorization until it begins to construct the video-dialtone-only portions of its network. Before adding video dialtone facilities unrelated to the provision of local exchange service, however, NJB must obtain Section 214 certification, as the addition of video dialtone capability will alter the character of the service provided over these facilities. We emphasize that this conclusion does not in any way impair our jurisdiction to regulate any interstate services, such as interstate access, that may be provided over those facilities once constructed. 63. Our interpretation of the application of Section 214 of the Act to NJB does not place interstate ratepayers at risk. The Commission stated in the VDT Order that it would use the Section 214 process to apply its antidiscrimination and cost allocation safeguards to specific video dialtone proposals, and we have done so here. NJB's construction of part of its broadband network pursuant to the decision of the New Jersey Board before obtaining a Section 214 certification will not eliminate the Commission's ability to apply its safeguards. No costs related specifically to video dialtone can be allocated to the interstate jurisdiction until the Commission grants Section 214 certification. 64. To the extent that NJCTA is arguing that the New Jersey Board would not have approved NJB's plans as a local exchange-only upgrade, we see no reason to withhold approval of the Section 214 application or to investigate further. NJCTA, while citing to several sections of the New Jersey Board order, cites to no language that we can interpret as conditioning approval of the "Opportunity New Jersey" plan on the provision of interstate video dialtone services. Nor have we identified any such language in our own review. At the time that the New Jersey Board approved NJB's "Opportunity New Jersey" plan, it was clearly aware that New Jersey Bell's Section 214 application for video dialtone was still pending, and had not been granted. As the New Jersey Board chose to go forward in approving the plan nevertheless, we must assume that it was willing to bear the risk that the network upgrades might be used only for telephony. C. Other Allegations and Issues 65. NJCTA contends that a software licensing agreement between NJB and FutureVision may violate the telephone company- cable television cross-ownership rules regarding permissible affiliations. According to NJCTA, a trade press article reporting that NJB and FutureVision have entered into a licensing agreement for providing software for the Dover video dialtone system indicates a closer relationship than is revealed in NJB's Section 214 application. In addition, NJCTA states that, based on information in the trade press article, NJB plans to engage in cross-promotional activities among programmers and local and national advertisers to provide subscribers coupons and other promotional items after the subscriber has made specific service choices over the interactive system. NJCTA asserts that these and other services may impact NJB's cost allocation methodology. 66. NJB states that the software that is the subject of the FutureVision-NJB licensing agreement "is not part of the regulated video dial tone service and therefore is irrelevant to Bell Atlantic's 214 applications." NJB explains that in order to interconnect with its basic service platform, video programmer- customers must have software to interface with NJB's video administration module (VAM), which is part of the network. NJB states that interconnection with the VAM is necessary so that programmer-customers can add and delete individual subscribers' video service, schedule video programming, retrieve billing information, and edit individual channel parameters. According to NJB, FutureVision developed its own version of this software, based on technical data purchased from NJB, and subsequently offered to allow NJB to license the software to other video programmer- customers. NJB states that other programmer-customers can license the software from NJB, or directly from FutureVision, or can develop their own software. NJB also states that NJB obtained no ownership interest in FutureVision by virtue of the licensing agreement. 67. The telephone company-cable television cross-ownership rules allow telephone companies to exceed the carrier-user relationship with a video programmer by providing services and engaging in activities, not related to the provision of video programming directly to subscribers by the telephone company. Telephone companies may provide services and engage in activities related to video programming as long as the video programmer is a customer of, interconnects with, or shares the construction and/or operation of, the basic common carrier platform. We conclude that the software licensing agreement between NJB and FutureVision does not violate the cross-ownership rules. In the VDT Order, we stated that joint ventures, interconnection agreements, consultant- client relationships, and other relationships that do not constitute ownership or control of the video programmer are permitted between telephone companies and video programmers provided that the affiliation does not involve telephone company provision of video programming directly to subscribers. The licensing agreement concerns software necessary to facilitate video programmer interconnection to NJB's basic platform. Based on the information in the record, this agreement does not involve the provision of video programming directly to subscribers by NJB. Furthermore, NJB avers that it obtained no ownership interest in FutureVision as a result of the licensing agreement. Thus, NJB does not appear to have a cognizable financial interest in video programming provided directly to subscribers. 68. In connection with NJCTA's allegation that cross- promotional activities may impact its cost allocation methodology, we require that to the extent NJB provides enhanced and non-common carrier services, these services are reflected in NJB's cost allocation manual (CAM) and are provided in compliance with the conditions set forth above. V. CONCLUSION 69. We find that NJB's proposed video dialtone system for Dover Township, as presented in the Amended Application, will serve the public convenience and necessity. NJB has supplied the information necessary to demonstrate the fulfillment of the requirements set forth in the VDT Order and our rules. With the conditions we attach to the grant of authority, we assure sufficient protections to guard against unreasonable discrimination and improper cross-subsidy. The public interest will be served by expeditious implementation of the projects. Our action herein is without prejudice to any subsequent action that might be taken in response to tariffs filed for these projects, or in rulemaking or other proceedings. VI. ORDERING CLAUSES 70. Accordingly, IT IS ORDERED that, pursuant to Section 214 of the Communications Act of 1934, as amended, 47 U.S.C.  214, the application of New Jersey Bell Telephone Company (File No. W-P-C 6840), subject to the conditions stated below, IS GRANTED, effective upon the release of this order. New Jersey Bell Telephone Company is authorized to provide video dialtone, within its service area as described in its application. 71. IT IS FURTHER ORDERED that the petitions to deny filed by Adelphia Communications Corporation, the Association of Independent Television Stations, Inc., the National Association of Broadcasters, the National Cable Television Association, the New Jersey Cable Television Association, the Monmouth Cablevision Associates, and the Public Service Commission of the District of Columbia ARE DENIED; that the Request by the Pennsylvania Office of Consumer Advocate and the New Jersey Department of Public Advocate, Division of Rate Counsel for Consumer Safeguards is DENIED; that the requests in the Consumer Federation of America's Letter of Opposition are DENIED; that the Motion for Extension of Time by the New Jersey Cable Television Association is GRANTED IN PART, and time to file comments on the New Jersey Bell Amended Application IS EXTENDED until September 30, 1993; and that the National Cable Television Association's Motion for Investigation is DENIED. 72. IT IS FURTHER ORDERED, that grant of this application IS SUBJECT TO the following conditions: a) That New Jersey Bell obtain Commission approval of any revisions to its Cost Allocation Manual (CAM) prior to providing any enhanced and non-common carrier services. b) That New Jersey Bell create subsidiary accounting records to capture the revenues, investments and expenses associated with the provision of video dialtone service and file accurate copies of those records for public inspection with the Secretary of the Federal Communications Commission on a quarterly basis. We delegate to the Chief, Common Carrier Bureau the authority to determine the content and format of the subsidiary accounting records as well as the quarterly reports. NJB is further required to keep subsidiary accounting records to identify by each Part 32 account the amount of all plant that is being replaced (that is, no longer used or useful) as a result of the deployment of video dialtone plant. c) That New Jersey Bell provide all video programmers access to the basic platform under the same terms and conditions; In addition, that New Jersey Bell shall report to the Chief, Common Carrier Bureau, within five days of denying any video programmer access to the platform due to capacity limitations, in whole or in part, and on the steps taken to expand the capacity of the platform to accommodate demand. d) That any video dialtone service offered in Dover Township through January 3, 1995, must have at least 64 channels, and that after January 3, 1995 any such service must have a capacity of at least 384 channels. e) That New Jersey Bell comply prospectively with any changes in our rules that result from rulemakings or from reconsideration of our Second Report and Order in CC Docket 87-266. f) That NJB and its affiliates not directly provide video programming on this video dialtone system. 73. Pursuant to Section 214(c) of the Communications Act of 1934, as amended, 47 U.S.C.  214 (c), the grant of New Jersey Bell's application to provide each video dialtone service is subject from the date of issuance of this grant to the conditions provided herein, and is also subject to any Commission rules and/or orders that result from any existing or future proceeding or proceedings that address video dialtone cost allocations, jurisdictional separations, and pricing issues. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary APPENDIX: Pleadings Filed Application, New Jersey Bell (Application) Petitions to Deny: Adelphia Communications Corp. (Adelphia Petition) Association of Independent Television Stations, Inc. (INTV Petition) National Association of Broadcasters (NAB Petition) National Cable Television Association (NCTA Petition) New Jersey Cable Television Association (NJCTA Petition) Monmouth Cablevision Associates (Monmouth Petition) Public Service Commission of the District of Columbia DCPSC (DCPSC Petition) Letter of Opposition to the Application, Consumer Federation of America (CFA Opposition) Request for Consumer Safeguards, The Office of Consumer Advocate for the Commonwealth of Pennsylvania (PaOCA) and the New Jersey Department of Public Advocate, Division of Rate Counsel (NJDRC), jointly (PaOCA/NJDRC Request) Opposition to Petitions to Deny, New Jersey Bell (NJB Opposition) Replies to Opposition to Petitions to Deny: Adelphia (Adelphia Reply) Monmouth (Monmouth Reply) NCTA (NCTA Reply) NJCTA (NJCTA Reply) Response to Informal FCC Questions, NJB (NJB Answers) Comments on NJB Answers Adelphia Comments (Adelphia Response) NJCTA Replies (NJCTA Response) NJB Amendment and Clarification (Amended Application) Erratum to New Jersey Bell Amended Section 214 Application Comments on the Amendment and Clarification: Adelphia (Adelphia Comments) DCPSC (DCPSC Comments) NAB (NAB Comments) NCTA (NCTA Comments) NJCTA (NJCTA Comments) Monmouth (Monmouth Comments) PaOCA/NJDRC (PaOCA/NJDRC Response) Reply to Comments, NJB (NJB Reply) Motion for Investigation, NCTA (NCTA Motion) Opposition to Motion for Investigation, NJB (NJB Opposition to NCTA) Response in Support of Motion for Investigation, NJCTA (NJCTA Response) Reply of Bell Atlantic (New Jersey Bell) to Response in Support of Motion for Investigation, NJB (NJB Reply to NJCTA) Reply to Opposition to Motion for Investigation, NCTA (NCTA Reply to Opposition to Motion)