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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) AVR, L.P. d/b/a ) Hyperion of Tennessee, L.P. ) Petition for Preemption of ) Tennessee Code Annotated ) CC Docket No. 98-92  65-4-201(d) and Tennessee ) Regulatory Authority Decision ) Denying Hyperion's Application ) Requesting Authority to ) Provide Service in Tennessee ) Rural LEC Service Areas ) MEMORANDUM OPINION AND ORDER Adopted: May 14, 1999 Released: May 27, 1999 By the Commission: 1. On May 29, 1998, AVR, L.P. d/b/a/ Hyperion of Tennessee, L.P. (Hyperion) filed the above-captioned petition (Petition) asking the Commission to: (i) preempt Tenn. Code Ann.  65-4-201(d), and (ii) preempt the enforcement of the April 9, 1998, order of the Tennessee Regulatory Authority (Authority or Tennessee Authority) denying Hyperion a Certificate of Public Convenience and Necessity (CPCN) to provide local exchange service in areas of Tennessee served by the Tennessee Telephone Company (Denial Order). Hyperion also asks the Commission to direct the Tennessee Authority to grant Hyperion's application for a CPCN. Hyperion asserts that the Tennessee Authority's Denial Order and Tenn. Code Ann.  65-4- 201(d) violate section 253(a) of the Communications Act of 1934, as amended, fall outside the scope of authority reserved to the states by section 253(b) of the Act, and thus satisfy the requirements for preemption by the Commission pursuant to section 253(d) of the Act. 2. For the reasons described below, we grant Hyperion's Petition in part and deny it in part. Specifically, we preempt the enforcement of the Tennessee Authority's Denial Order and Tenn. Code Ann.  65-4-201(d), but we decline to direct the Tennessee Authority to grant Hyperion's CPCN application. We expect, however, that upon a request from Hyperion, the Authority will expeditiously reconsider Hyperion's CPCN application in a manner consistent with the Communications Act and with this Memorandum Opinion and Order. II. BACKGROUND 3. Hyperion is a facilities-based competitive local exchange carrier operating in twelve states. Hyperion has constructed a fiber-based network in the Nashville, Tennessee area, and is in the process of extending that network into outlying areas of Tennessee, including areas currently served by the Tennessee Telephone Company (Tennessee Telephone). Tennessee Telephone serves fewer than 100,000 residential and business customers in Tennessee. 4. On August 24, 1995, the Tennessee Public Service Commission (TPSC, the predecessor to the Tennessee Authority) found that Hyperion possessed the requisite technical, managerial, and financial qualifications to render local exchange services, and granted Hyperion a CPCN to provide such services in Tennessee. The following March, however, the TPSC issued an order limiting Hyperion's certificate to only those areas of Tennessee that are served by companies having 100,000 access lines or more within the state. The TPSC explained that, under Tennessee law, incumbent LECs serving fewer than 100,000 access lines were protected from competition "until the incumbent LEC either '. . . voluntarily enters into an interconnection agreement with a Competing Telecommunications Service Provider' or the incumbent LEC . . . 'applies for a certificate to provide telecommunications services in an area outside its service area.'" 5. Hyperion, believing the restriction to be inconsistent with the 1996 Act, petitioned the Tennessee Authority on January 2, 1998, for permission to extend its service into the areas served by Tennessee Telephone. On April 9, 1998, the Authority denied Hyperion's application. The Authority based its denial on Tenn. Code Ann.  65-4-201, which in relevant part provides: (c) After notice to the incumbent local exchange telephone company and other interested parties and following a hearing, the authority shall grant a certificate of convenience and necessity to a competing telecommunications provider if after examining the evidence presented, the authority finds: (1) The applicant has demonstrated that it will adhere to all applicable commission policies, rules, and orders; and (2) The applicant possesses sufficient managerial, financial, and technical abilities to provide the applied for services. ***** (d) Subsection (c) is not applicable to areas served by an incumbent local exchange company with fewer than 100,000 total access lines in this state unless such company voluntarily enters into an interconnection agreement with a competing telecommunications service provider or unless such incumbent local exchange telephone company applies for a certificate to provide telecommunications services in an area outside its service area existing on the June 6, 1995. 6. The transcript of the Tennessee Authority's March 10, 1998, hearing denying Hyperion's application reveals that disagreement arose within the Authority on the effect of Tenn. Code Ann.  65-4-201(d) on Hyperion's petition. The incumbent LEC into whose service territory Hyperion wished to expand, Tennessee Telephone, served fewer than 100,000 access lines in Tennessee, so it clearly fell within the class protected from competition by Tenn. Code Ann.  65-4-201(d). During the hearing, however, the Authority's Chairman argued that subsection (d) was inconsistent with the 1996 Act's purpose and the plain meaning of section 253(a), which preempts state legal requirements that prohibit the provision of telecommunications service. The Authority's two other Directors argued that subsection (d) lay within the regulatory authority reserved to the states in section 253(b), which excludes from preemption state or local requirements necessary to protect universal service and certain other public interest goals, if such requirements are competitively neutral and consistent with the Act's universal service provisions. In its Denial Order, the Authority concluded that Tenn. Code Ann.  65-4- 201(d) does satisfy the requirements of section 253(b), and that therefore section 253(b) operates as a limitation on Hyperion's challenge under 253(a). Hyperion contends that Tenn. Code Ann.  65-4-201(d) is inconsistent with section 253 and with Commission precedent, and on that basis petitions us to preempt Tenn. Code Ann.  65-4-201(d) and the Tennessee Authority's Denial Order. 7. In assessing whether to preempt enforcement of the Denial Order and Tenn. Code Ann.  65-4-201(d) pursuant to section 253, we first determine whether those legal requirements are proscribed by section 253(a), which states: No State or local statute or regulation, or other State or local requirement, may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service. 8. If we find that the Denial Order and Tenn. Code Ann.  65-4-201(d) are proscribed by section 253(a) considered in isolation, we must then determine whether, nonetheless, they fall within the reservation of state authority set forth in section 253(b), which provides: Nothing in this section shall affect the ability of a State to impose, on a competitively neutral basis and consistent with section 254, requirements necessary to preserve and advance universal service, protect the public safety and welfare, ensure the continued quality of telecommunications services, and safeguard the rights of consumers. 9. If the Denial Order and Tenn. Code Ann.  65-4-201(d) are proscribed by section 253(a), and do not fall within the scope of section 253(b), we must preempt the enforcement of those legal requirements in accordance with section 253(d), which provides: If, after notice and an opportunity for public comment, the Commission determines that a State or local government has permitted or imposed any statute, regulation, or legal requirement that violates subsection (a) or (b), the Commission shall preempt the enforcement of such statute, regulation, or legal requirement to the extent necessary to correct such violation or inconsistency. 10. Hyperion maintains that because it has met the technical, managerial, and financial qualifications to provide service, only Tenn. Code Ann.  65-4-201(d)'s protection of incumbent LECs serving fewer than 100,000 lines, and the Denial Order enforcement of that statutory provision, prevented Hyperion from providing local exchange service in Tennessee Telephone's service areas. Hyperion further maintains that these legal requirements fall squarely within section 253(a)'s proscription of state legal requirements that prohibit the ability of any entity to provide any telecommunications service. According to Hyperion, Tenn. Code Ann.  65-4- 201(d) and the Denial Order are virtually identical to two previous state requirements which ran afoul of section 253(a), and which the Commission preempted in the Texas Preemption Order and Silver Star Preemption Order decisions. 11. Neither the Tennessee Authority nor TDS Telecommunications Corporation (TDS) argues that the Denial Order or Tenn. Code Ann.  65-4-201(d) can survive section 253(a) considered in isolation, but they insist that the statutory provision and the Denial Order fall within the reservation of state authority provided in 253(b). Specifically, the Tennessee Authority argues that Tenn. Code Ann.  65-4-201(d) falls within section 253(b) because the provision is necessary to preserve and advance universal service and other public welfare goals, and because the provision applies in a competitively neutral manner to all non-incumbent LECs. The Authority explains that Tenn. Code Ann.  65-4-201(d) is competitively neutral because the restriction on entry into the service areas of small LECs applies to all providers within the state, and thus they argue that no provider is given a competitive advantage over any other. TDS likewise maintains that the Authority's denial of Hyperion's application is a proper exercise of state authority under 253(b) because it is consistent with the universal service provisions of the 1996 Act, is necessary to protect consumer interests, and is competitively neutral. TDS contends that potential competing LECs are not subject to the same terms and conditions as incumbent LECs, and that the Tennessee Authority may therefore treat them differently and still maintain competitive neutrality. Hyperion and its supporters disagree, and argue that section 253(b) does not exempt Tenn. Code Ann.  65-4-201(d) and the Denial Order from preemption, because the code and the Denial Order favor the incumbent LEC over new entrants, and are therefore not "competitively neutral" under section 253(b). III. Discussion 12. We conclude that, in denying Hyperion the right to provide competing local exchange service in the area served by Tennessee Telephone, Tenn. Code Ann.  65-4-201(d) and the Tennessee Authority's Denial Order violate section 253(a). We further conclude that, because these state and local legal requirements shield the incumbent LEC from competition by other LECs, the requirements are not competitively neutral, and therefore do not fall within the reservation of state authority set forth in section 253(b). Finally, we conclude that, because the requirements violate section 253(a), and do not fall within the boundaries of section 253(b), we must preempt the enforcement of Tenn. Code Ann.  65-4-201(d) and the Denial Order, as directed by section 253(d). 13. The case before us is similar to two cases the Commission has previously decided. In the Silver Star Preemption Order, the Commission preempted the enforcement of a provision of the Wyoming Telecommunications Act of 1995 that empowered incumbent LECs serving 30,000 or fewer access lines in Wyoming to preclude anyone from providing competing local exchange service in their territories until at least January 1, 2005. The Commission also preempted the enforcement of an order of the Wyoming Public Service Commission denying, on the basis of that provision, the application of Silver Star Telephone Company to provide competing local service in a neighboring incumbent's local exchange area. In ordering the preemption, the Commission determined that the rural incumbent protection provision and the Wyoming Commission's Denial Order fell within the proscription of entry barriers set forth in section 253(a) because they enabled certain incumbent LECs to bar other entities from providing competing local service. The Commission found that the rural incumbent protection provision's lack of competitive neutrality placed the Wyoming legal requirements outside the authority reserved to the States by section 253(b). 14. Similarly, in the Texas Preemption Order, the Commission preempted a section of the Texas Public Utility Act of 1995 that prohibited the Public Utilities Commission of Texas from permitting certain competitive LECs to offer service in exchange areas of incumbent LECs serving fewer than 31,000 access lines. The Commission found that the moratorium on competition violated the terms of section 253(a) of the Act. The Commission also found that the Texas provision did not fall within the exempted state regulation described in section 253(b), because the prohibition was neither competitively neutral nor necessary to achieve any of the policy goals enumerated in section 253(b). 15. Our decision here to preempt is consistent with these precedents and comports with the analysis set forth therein. Tennessee's restriction of competition in service areas with fewer than 100,000 access lines is essentially the same as the attempt of both Wyoming and Texas to shield small, rural LECs from competition, and cannot be squared with section 253(a)'s ban on state or local requirements that "may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service." Also, as in both the Silver Star and Texas Preemption Orders, we find that the lack of competitive neutrality renders the Tenn. Code Ann.  65-4-201(d) and the Denial Order ineligible for the protection of section 253(b). 16. We reject the Tennessee Authority's contention that "competitive neutrality" can be interpreted under section 253(b) to mean only that non-incumbents must be treated alike while incumbents may be favored. As we explained in our Silver Star Reconsideration, a state legal requirement would not as a general matter be "competitively neutral" if it favors incumbent LECs over new entrants (or vice-versa). Neither the language of section 253(b) nor its legislative history suggests that the requirement of competitive neutrality applies only to one portion of a local exchange market new entrants and not to all carriers in that market. The plain meaning of section 253(b) and the predominant pro-competitive policy of the 1996 Act undermine the Authority's argument. Indeed, in various similar contexts the Commission has consistently construed the term "competitively neutral" as requiring competitive neutrality among the entire universe of participants and potential participants in a market. We reaffirm our holding in the Silver Star Reconsideration that section 253(b) cannot save a state legal requirement from preemption pursuant to sections 253(a) and (d) unless, inter alia, the requirement is competitively neutral with respect to, and as between, all of the participants and potential participants in the market at issue. 17. TDS elaborates on the Authority's argument by contending that competing LECs do not operate under the same terms and conditions as incumbent LECs, and that this disparity in their regulatory obligations permits the Tennessee Authority to treat them differently and still maintain competitive neutrality. TDS thus argues that the principle of "competitive neutrality" does not preclude carriers in dissimilar situations from being treated somewhat differently. Providing for "somewhat" different treatment, however, is an entirely distinct proposition from barring competitive entry altogether. At the very least, "competitive neutrality" for purposes of 253(b) does not countenance absolute exclusion, and we need not and therefore do not reach the question of the extent to which state commissions may treat competing LECs differently from incumbent LECs in certain instances. We find here that because Tenn. Code Ann.  65-4-201(d) favors incumbent LECs with fewer than 100,000 access lines by preserving their monopoly status, it raises an insurmountable barrier against potential new entrants in their service areas and therefore is not competitively neutral. 18. That Tenn. Code Ann.  65-4-201(d) and the Denial Order are not competitively neutral suffices of itself to disqualify these requirements from the 253(b) exception. Therefore, we need not reach the question of whether Tenn. Code Ann.  65-4-201(d) and the Denial Order are "necessary," or "consistent with section 254" within the meaning of section 253(b). We note, however, that, for the reasons we gave in response to similar arguments that were raised in our Silver Star Preemption Order decision, we remain doubtful that it is necessary to exclude competing LECs from small, rural study areas in order to preserve universal service. Moreover, by requiring competitive neutrality, Congress has already decided, in essence, that outright bans of competitive entry are never "necessary" to preserve and advance universal service within the meaning of section 253(b). 19. TDS introduces three arguments by which it attempts to distinguish the case before us from other cases we have decided under section 253. First, TDS points out that the Tennessee legislature provided for Tenn. Code Ann.  65-4-201(d) to be examined every two years to reevaluate the "transitional distinction" in treating applications to serve areas served by incumbent LECs with fewer than 100,000 access lines, and contrasts Tennessee's biennial review with the Wyoming statue at issue in the Silver Star Preemption Order, which gave rural incumbent LECs a veto provision that would apply until 2005. This is a distinction without a difference for purposes of our analysis because, as we held in the Silver Star Preemption Order, even a temporary ban on competition can be an absolute prohibition, and section 253 does not exempt from its reach State-created barriers to entry that may expire at some later date. 20. Second, TDS argues that "unanticipated confusion and controversy surrounding the universal service plan" justifies the Tennessee Authority's delay of competitive entry into rural areas. As the Commission has previously stated, we reject the assumption that competition and universal service are at cross purposes, and that in rural areas the former must be curtailed to promote the latter. Section 253 is itself evidence that Congress intended primarily for competitive markets to determine which entrants should provide the telecommunications services demanded by consumers. We continue to believe that Congress intended new competitors to bring the benefits of competition to rural as well as populous markets. 21. Third, TDS contends that even if the Commission is correct in preempting enforcement of the Authority's Denial Order, the Commission should not preempt Tenn. Code Ann.  65-4-201(d) itself. TDS argues that although the Authority has applied the statute to preclude competition in this case, the statute permits the Authority to allow competition in other circumstances. TDS suggests that Tenn. Code Ann.  65-4-201(d) might therefore be applied in way that would not offend section 253, and therefore should be left standing, in obedience to 253(d)'s instruction to the Commission to preempt only "to the extent necessary to correct such violation or inconsistency." 22. We are mindful of the limits that section 253 (d) places on our preemption authority. Further, the construction of a state statute by a state commission informs our determination of whether the statute is subject to preemption under section 253. In this case, however, TDS's construction of Tenn. Code Ann.  65-4-201(d) conflicts with that of the Tennessee Authority, which we regard as dispositive. According to the Authority, Tenn. Code Ann.  65-4-201(d) does require the Tennessee Authority to deny any and all CPCN applications within its scope. For this reason we reject TDS's argument that Tenn. Code Ann.  65-4-201(d) may stand even if the Authority's Denial Order must fall. We decline, however, to grant Hyperion's request that we direct the Tennessee Authority to grant Hyperion's application for a CPCN because we do not believe such a step is necessary at this time. Based on our explanation regarding the force and effect of section 253 in this case, we expect that the Authority will respond to any request by Hyperion to reconsider Hyperion's application for a concurrent CPCN consistent with the Communications Act and this decision. 23. Hyperion brings to our attention that states other than Tennessee have legal requirements that appear to be similar to Tennessee's Section 65-4-201(d), and maintains that these requirements may also restrict competition in the way we have found unlawful here and in the Silver Star and Texas Preemption Orders. Hyperion urges us to clarify generally the scope of section 253 as it might apply in such cases. While the requirements of other states are not before us at this time, we would expect to apply a similar analysis to other state statutes. Thus, we encourage these and any other states, as well as their respective regulatory agencies, to review any similar statutes and regulations, and to repeal or otherwise nullify any that in their judgement violate section 253 as applied by this Commission. IV. ORDERING CLAUSE 24. Accordingly, IT IS ORDERED, pursuant to section 253 of the Communications Act of 1934, as amended, 47 U.S.C.  253, that the Petition for Preemption and Declaratory Ruling filed by AVR, L.P. d/b/a/ Hyperion of Tennessee, L.P. on May 29, 1998, IS GRANTED to the extent discussed herein, and in all other respects IS DENIED. 25. IT IS FURTHER ORDERED, pursuant to section 253 of the Communications Act of 1934, as amended, 47 U.S.C.  253, that the enforcement of Tenn. Stat. Ann.  65-4-201(d) and the Denial Order are preempted. FEDERAL COMMUNICATIONS COMMISSION Magalie Roman Salas Secretary