Telephone Company-Cable Television Cross-Ownership Rules and Regulatory Procedures for Video Dialtone Service

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 63

[CC Docket No. 87-266; FCC 94-269]

Telephone Company-Cable Television Cross-Ownership Rules and

Regulatory Procedures for Video Dialtone Service

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: In a Memorandum Opinion and Order on Reconsideration in Common

Carrier Docket 87-266, the Commission substantially affirmed the Second

Report and Order, while modifying and clarifying that Order in various

respects. Among the more significant actions, we first reaffirm the

basic video dialtone regulatory construct adopted in the Second Report

and Order. Local exchange carriers (LECs) offering video dialtone

service must make available a common carrier platform that provides

sufficient capacity to serve multiple video programmers, and may not

allocate all or substantially all analog capacity to a single ``anchor

programmer.'' Second, we clarify and modify our video dialtone policy

to help ensure that telephone ratepayers do not have to bear the costs

of video dialtone. These measures should also protect cable operators

from potential anticompetitive actions by LECs, stemming from LEC

incentives and opportunities to price video dialtone service

unreasonably low relative to the cost of providing such service. For

instance, we set forth specific guidance for application of our pricing

rules to ensure that interstate video dialtone rates cover video

dialtone costs--both the incremental costs of video dialtone and a

reasonable allocation of shared plant costs and overheads. We also

establish a data collection program to monitor the impact of video

dialtone deployment on local rates as well as on separation results.

Third, we modify our assertion of exclusive jurisdiction over all video

dialtone services to recognize that states have jurisdiction over

intrastate video dialtone services. This modification should provide a

sound jurisdictional basis for the exercise of federal and state

regulatory authority over video dialtone services. Finally, we issue a

Third Further Notice of Proposed Rulemaking seeking additional

information and comment on various issues not adequately addressed in

the record currently before us.

EFFECTIVE DATE: January 11, 1995 except that paragraphs 7, 80, 85, and

86 of this Federal Register Summary shall be effective March 14, 1995.

FOR FURTHER INFORMATION CONTACT:

Jane Jackson, (202) 418-1593 or Gary Phillips, (202) 418-1573, Policy

and Program Planning Division, Common Carrier Bureau.

SUPPLEMENTARY INFORMATION: This is a synopsis of the Memorandum Opinion

and Order on Reconsideration in Common Carrier Docket 87-266: Telephone

Company-Cable Television Cross-Ownership Rules, Sections 63.54-63.58,

adopted October 20, 1994, and released November 7, 1994. The complete

text of this Memorandum Opinion and Order on Reconsideration is

available for inspection and copying, Monday through Friday, 9 a.m.-

4:30 p.m., in the FCC Reference Room (room 239), 1919 M Street NW.,

Washington, DC 20554. The complete text of the Memorandum Opinion and

Order on Reconsideration may also be purchased from the Commission's

copy contractor, International Transcription Services, Inc., 2100 M

Street NW., suite 140, Washington, DC 20037, (202) 857-3800.

Paperwork Reduction Act

1. In the Memorandum Opinion and Order on Reconsideration, the

Commission added video dialtone service to the basic service categories

for which it requires that LECs report installation and maintenance

activities. In addition, the Commission required that each of the Bell

Operating Companies (BOCs) and GTE Service Corporation (GTE) to file,

by March 14, 1995, a detailed description of the types of CPNI to which

it anticipates having access as a provider of video dialtone service.

The Commission directed the BOCs and GTE to explain how they would plan

to use such information in marketing video dialtone services to video

programmers or consumers. The Commission also required LECs providing

video dialtone service to notify the Chief of the Common Carrier

Bureau, of any anticipated or existing capacity shortfall in their

video dialtone platform and of plans for addressing such shortfall.

Such notice must be provided within thirty days after the LEC becomes

aware of an anticipated shortfall or within five days after denying

capacity to a video programmer, whichever occurs first. The public

reporting burden for these collections of information is estimated to

average approximately 200 hours per response, including the time for

reviewing instructions, searching existing data sources, gathering and

maintaining the data needed, and completing and reviewing these

collections of information. Send comments regarding this burden

estimate or any other aspect of these collections of information,

including suggestions for reducing the burden, to the Federal

Communications Commission, Records Management Branch, Paperwork

Reduction Project (3060-0149), Washington, DC 20554 and to the Office

of Management and Budget, Paperwork Reduction (3060-0149), Washington,

DC 20503.

Synopsis of Memorandum Opinion and Order on Reconsideration

2. The Memorandum Opinion and Order on Reconsideration clarifies or

modifies the Second Report and Order, 57 FR 41106 (September 9, 1992),

in several respects. These modifications are consistent with the

Commission's intent to eliminate artificial regulatory barriers to

competitive entry and to efficient investment, thereby facilitating

competition in video delivery services, promoting investment in

infrastructure, and fostering greater diversity in video programming.

A. Sufficient Capacity to Serve Multiple Service Providers

3. We affirm our requirement that telephone companies wishing to

offer video dialtone service must make available a basic common carrier

platform offering sufficient capacity to serve multiple video

programmers. This requirement will enable multiple video programmers to

obtain access on nondiscriminatory terms to LEC video delivery

capabilities, thereby fostering new and diverse sources of video

programming and generating competition in the provision of such

programming to end users. Such competition will be generated both among

users of the video dialtone platform and among such users and video

programmers that use other systems, such as cable systems, to

distribute their products to end users in the same geographic area.

4. We also affirm our requirement that video dialtone common

carrier platforms offer sufficient capacity to serve multiple video

programmers. Without this requirement, video dialtone would not be as

effective in achieving our goal of fostering a diversity of information

sources to the public. This goal was and remains one of the key

purposes of our video dialtone policy.

5. We reject requests that LECs be permitted to allocate all or

substantially all analog capacity to a single ``anchor programmer.''

These requests appear to be premised on the assumption that only analog

capacity allows a viable alternative to cable service in the short

term. To grant these requests would thus be inconsistent with the

common carrier model for video dialtone and our requirement that LECs

offer sufficient capacity to accommodate multiple video programmers.

6. Finally, we affirm our expandability requirement, subject to the

modification discussed below. This requirement, we believe, compounds

the benefits of video dialtone by ensuring greater diversity in the

sources of video programming and fostering infrastructure development.

This requirement is also a critical factor in reducing the ability of

LECs to discriminate in their provision of video dialtone service.

7. While we affirm our capacity and expandability requirements, we

take this opportunity to elaborate on the scope of the expandability

obligation. As critical as this obligation is to our video dialtone

construct, it would not be reasonable to require LECs to expand to meet

all demand, regardless of technical and economic considerations.

Indeed, such a requirement might well discourage LECs from constructing

and operating video dialtone systems because of the risk of excessive

idle investment. We therefore clarify that, under our video dialtone

requirements, LECs are required to expand whenever, and to the extent

that, expansion is technically feasible and economically reasonable. A

LEC may not refuse to expand simply because it does not wish to permit

video programmers to offer certain types of video programming on its

video dialtone system. We will address claims by LECs that expansion is

not technically feasible and economically reasonable on a case-by-case

basis in light of all relevant circumstances. In this review process,

we will look to all relevant information and data, including the

capacity offered on other video dialtone systems, data relating to

demand for video delivery in the LEC's region or in comparable regions,

and technical data. To monitor LEC progress in expanding capacity and

to ensure that LECs expand in accordance with the standards set forth

herein, we require LECs to notify the Chief of the Common Carrier

Bureau of any anticipated or existing capacity shortfall and of plans

for addressing such shortfall. Such notice must be provided within

thirty days after the LEC becomes aware of an anticipated capacity

shortfall or within five days after denying capacity to a video

programmer, whichever occurs first. To the extent a LEC concludes that

expansion is not technically feasible or economically reasonable at

that time, the LEC must explain in detail the basis for its

determination and indicate when it anticipates expansion would be

technically feasible and economically reasonable.

B. Acquisition of Cable Facilities

8. We substantially affirm our decision in the Second Report and

Order, to prohibit telephone companies from acquiring cable facilities

in their telephone service areas for the provision of video dialtone.

We believe that generally retaining the ban will benefit the public by

promoting greater competition in the delivery of video services,

increasing the diversity of video programming, and advancing the

national communications infrastructure. At the same time, however, we

recognize that the ban may effectively preclude the deployment of video

dialtone systems in markets that cannot support an additional wired

video delivery system and could in those markets impede our goal of

eliminating regulatory barriers to investment. In the Third Further

Notice of Proposed Rulemaking, we seek information and comment that

would permit us to develop criteria for identifying those markets. We

also propose to amend our rules so that these criteria serve as the

basis for either an automatic exception to the ban or a presumption

that the ban should not apply.

9. In general, opponents of the ban assert that it is an

inefficient and counterproductive means of implementing video dialtone,

and one that is likely to deter widespread deployment of video

dialtone. Contrary to these assertions, we believe that retaining the

ban in areas where facilities-based competition is viable will spur the

development of competitive wire-based video delivery systems, thereby

offering significant benefits to consumers. First, the added

competition will likely provide a check on both cable and video

dialtone rates. LECs that charge too much for video dialtone delivery

services will face the risk that video programmers will forgo video

dialtone service and rely on cable systems for distribution of their

product. To the extent that competition can provide a check on video

dialtone rates, video programmers will be able to lower their rates to

consumers. This, in turn, would constrain cable rates. Second,

competition between cable operators and LECs would give both incentives

to invest in infrastructure and develop new and innovative services to

increase the attractiveness of their products to consumers. Third, the

availability of additional distribution systems would offer increased

channel capacity, thereby fostering greater diversity of programming

options for consumers. Retaining the ban could also facilitate the

development of competitive local telephone networks by cable operators.

10. By contrast, if we eliminate the ban, LECs might seek to

acquire cable systems in their service areas to eliminate competition

in the provision of video delivery services. They might also have

incentives to acquire cable facilities to eliminate a likely competitor

in the provision of local telephone services. At the same time,

elimination of the ban would unacceptably increase cable operator's

incentives to move their video programming to a LEC's video dialtone

system, rather than make the changes necessary to respond effectively

to competition. We therefore disagree with parties who argue that

eliminating the ban would allow market forces to dictate the deployment

of video dialtone technology.

11. While we thus generally retain the ban on acquisitions of cable

facilities for provision of video dialtone, we conclude that allowing

telephone companies to lease cable company drop wires, if the lease is

limited in scope and duration, should be permitted. Our prohibition on

acquisitions of in-region cable facilities is intended generally to

encourage the development of competing LEC and cable video delivery

systems. We do not believe that permitting LECs to lease drop wires

from a cable operator for a limited term of three years on a non-

exclusive basis will impede the realization of this goal. In

particular, we do not believe that any revenues that a cable operator

may derive from such leases would be sufficient to affect materially

its decision to use video dialtone or provide a competitive

transmission service. Moreover, permitting LECs to lease cable drops

could accelerate the delivery of video dialtone services to end users

and thus increase competition in the video marketplace. Therefore, we

do not prohibit such leasing arrangements, provided they are executed

for non-renewable terms no longer than three years. At the conclusion

of the three-year period, LECs are prohibited from acquiring the cable

drop wires.

12. We also prohibit LECs from acquiring exclusive rights to use

cable drops. Specifically, LECs may not unreasonably restrict the

access of any video programmer to leased cable drops, nor may they

restrict cable operators from providing to third parties drops not

covered by the LEC lease. We will require any LEC proposing to lease

cable drop wires to describe in its Section 214 video dialtone

application the material terms of that lease, including the cost of the

lease to the LEC. We will scrutinize these terms to ensure that they

are reasonable and, in particular, do not undermine our goal of

promoting competitive wire-based video systems.

C. Ownership Affiliation Standards

13. We affirm the ownership affiliation standard of up to 5%, as

adopted in the Second Report and Order. We modify the Second Report and

Order, however, by defining more clearly the application of the

standard. For example, we hold that, while a nonvoting ownership

interest, which confers no power to control or influence decision

making, may not implicate the purposes of the mass media multiple

ownership rules, that same interest may raise concern about incentives

for discrimination. The same could be true for a 49% interest in an

entity with a single majority shareholder. In light of these different

goals, we decline to apply all aspects of the mass media multiple

ownership rules to video dialtone. We do, however, modify the Second

Report and Order, by clarifying that the provisions of our mass media

multiple ownership standards relating to vertical ownership chains, not

involving investment companies, do apply in the video dialtone context.

While the Second Report and Order did not specifically address this

issue, these rules are essential to ensure that LECs cannot avoid

ownership limitations by using intervening corporate entities. We also

hold that, consistent with the statutory prohibition on provision by

LECs of video programming to subscribers in their telephone service

areas, an LEC may not hold an ownership interest of 5% or greater in a

video programmer that offers service in the LEC's telephone service

area. For purposes of the video dialtone rules, we define a video

programmer as any person who provides video programming directly, or

indirectly through an affiliate, to subscribers. Any entity shall be

deemed to ``provide'' video programming if it determines how video

programming is presented for sale to subscribers, including making

decisions concerning the bundling or ``tiering'' of the programming or

the price, terms, or conditions on which the programming is offered to

subscribers.

14. We clarify that our cross-ownership rules do not prohibit LECs

from owning video programming, even programming that another,

independent programmer (i.e., a programmer neither owned nor controlled

by the LEC) provides over the LEC's video dialtone system. Nor is any

LEC prohibited from owning entities that provide video programming

outside its service area. LECs may not, however, provide or distribute

any video programming directly to subscribers in their telephone

service area. Further, LECs may not hold a cognizable ownership

interest, as defined above, in any entity that provides video

programming directly to subscribers in their telephone service area.

D. Non-Ownership Relationships and Activities Between Telephone

Companies and Video Programmers

15. We affirm our decision to permit LECs to enter into non-

ownership relationships that exceed a carrier-user relationship with

video programmers, but modify our rules in this area in several

respects. We relax these rules in two respects: First, we permit LECs

to offer enhanced and other nonregulated services related to video

programming to any video programmer, in areas substantially served by a

video dialtone platform, without regard to whether the video programmer

purchasing such services has a nexus to that platform. An area shall be

considered substantially served by a video dialtone platform if video

dialtone service is available to a significant majority--i.e., 70%--of

the households in that area. Second, we permit LECs to enter into

certain other types of non-ownership relationships with video

programmers who are not franchised cable operators, without regard to

the existence of a video dialtone platform.

16. We also tighten the non-ownership rules in two respects. First,

we generally prohibit LECs from exceeding the carrier-user relationship

in their telephone service area with franchised cable operators, except

to provide enhanced or other nonregulated services related to the

provision of video programming in areas substantially served by a video

dialtone platform, or to lease cable drop wires. Second, we generally

prohibit affiliations between LECs and any video programmer for the

purpose of operating a basic video dialtone platform.

17. We relax our non-ownership rules as described above because

those rules as originally structured appear to be more restrictive than

necessary to achieve our objectives. In the Second Report and Order, we

permitted LECs to exceed the carrier-user relationship with a video

programmer, but only if that programmer was a customer of,

interconnected with, or shared the construction or operation of the

basic video dialtone platfrom. In requiring this connection, we

explained that we believed it necessary ``to assure that, in exceeding

the current carrier-user relationship, telephone companies will both

provide the basic platform to video programmers and use it as the basis

for their own participation in the video marketplace.'' We were

concerned that, absent this link, telephone companies might forego

investing in video dialtone, limiting themselves instead to providing

services on existing cable facilities.

18. We conclude that our goal of encouraging LECs to build and use

basic video dialtone platforms can be achieved without requiring that

purchasers of LEC enhanced or other nonregulated services related to

the provision of video programming maintain a nexus to those platforms.

So long as a LEC has built a basic platform that satisfies our video

dialtone requirements, and that is available in a particular video

programmer's service area, there is no public interest justification

for prohibiting the LEC from offering enhanced or other nonregulated

services to that video programmer, even if the programmer has no nexus

to the platform. Indeed, permitting that video programmer to purchase

such services from the LEC expands the range of potential customers of

LEC enhanced and nonregulated services, thereby increasing LEC

incentives to build video dialtone systems. At the same time,

permitting LECs to provide services to video programmers who have no

nexus to a video dialtone platform, including cable operators, benefits

video programmers by enabling them to take advantage of such services,

even if they choose not to use video dialtone as their transmission

medium.

19. We recognize that a video programmer's service area often will

not coincide precisely with the area served by a video dialtone

platform. For example, a cable operator's franchise service area that

substantially overlaps a video dialtone service area may include

households outside the video dialtone service area. In that situation,

so long as the LEC has made video dialtone available to a significant

majority of the households in the area in which the cable company seeks

enhanced or other nonregulated services from the LEC, there would be no

reason to prohibit the LEC from providing enhanced or other

nonregulated services to that cable operator. We therefore hold that

LECs may provide enhanced and other nonregulated services within their

telephone service area to a video programmer if video dialtone is

available to a significant majority of the households in the area in

which the video programmer seeks such services. We also hold that, for

purposes of applying this rule, 70% of the households in the area in

which a video programmer seeks enhanced or other nonregulated services

would constitute a ``significant majority.'' We acknowledge that this

seventy percent standard is not the only standard that we could have

adopted. We believe, however, that this standard is reasonable because

it does require that video dialtone be available to a significant

majority of households within the area in which the video programmer

seeks to take LEC nonregulated services and thus provides LECs with the

necessary incentives to deploy video dialtone.

20. We also permit LECs to enter into certain other non-ownership

relationships (e.g., joint ventures and debt financing) within their

service area with video programmers who are not cable operators,

without regard to the existence of a video dialtone platform.

Eliminating the requirement that LECs build a video dialtone platform

before establishing these other relationships will not compromise our

goal of encouraging video dialtone deployment. The revenues offered by

a video dialtone system, including the ability of LECs to provide

enhanced and other nonregulated services in areas substantially served

by video dialtone, should provide ample incentives for LECs to

construct video dialtone platforms. Indeed, it is not clear that the

rule adopted in the Second Report and Order, would further the goal of

ensuring widespread deployment of video dialtone systems. Under that

rule, it could be argued that a LEC could enter into a non-ownership

relationship with any video programmer who had a nexus to a single

video dialtone platform of that LEC. Thus, for example, a LEC could

provide debt financing to a national video programmer if that

programmer offered one program on one video dialtone platform operated

by that LEC. We do not believe that this required nexus has a

sufficiently compelling relationship to our goals to retain it.

21. While we thus liberalize our non-ownership relationship rules

in certain respects, we also narrow these rules in other respects.

First, we generally prohibit LECs from exceeding the carrier-user

relationship in their telephone service area with any franchised cable

operator, except (as described above) to provide enhanced or other

nonregulated services related to the provision of video programming in

an area substantially served by a video dialtone platform, or to lease

cable drop wires. One of the primary goals of this proceeding is to lay

the groundwork for the development of competition in wire-based video

delivery services. We believe that allowing a broad range of

affiliations between LECs and cable operators in a LEC's telephone

service area could undermine this goal. For example, permitting LECs

and cable operators to construct or operate jointly a video dialtone

platform could encourage cable operators to abandon their facilities in

favor of the video dialtone platform. Indeed, we consider it highly

unlikely that a cable operator would participate in the construction or

operation of a video dialtone system unless it planned to use or was

using that platform. In that event, the public would lose the benefit

of competition provided by the cable system. Conversely, LECs might be

inclined to underwrite a cable operator instead of building competing

video distribution systems. Moreover, even in markets in which LECs

build video, dialtone systems, incentives to compete vigorously could

be tempered by debt financing, joint ventures, and other non-ownership

relationships with the cable operator. We are particularly concerned

about that possibility given that, in the near-term, the LEC and cable

operator are likely to be the only two wire-based video systems in most

markets. Under the circumstances, the risks of anticompetitive

consequences outweigh any public gain that could be offered by

permitting such relationships.

22. Second, we generally prohibit cable operators or any other

video programmers from participating in the operation of a basic video

dialtone platform. Unlike LECs, which are subject to Title II of the

Communications Act, and, in the case of the largest LECs, nonstructural

safeguards designed to prevent or reveal discrimination, video

programmers are subject to no Title II nondiscrimination obligations or

requirements. We therefore conclude that, without special safeguards,

permitting video programmers wide latitude in participating in the

operation of the basic video dialtone platform raises too great a risk

of discrimination. Nevertheless, we may permit discrete roles for video

programmers in operating the video dialtone platform if we conclude

that the benefits of permitting such roles outweigh any risk of

discrimination that they raise.

23. These modifications, aside, we otherwise affirm our rules

governing non-ownership affiliations. We also affirm that we are not

statutorily precluded from allowing LECs to exceed the carrier-user

relationship in providing video dialtone service.

24. To summarize, LECs may provide enhanced or other nonregulated

services related to the provision of video programming to any video

programmer, including a cable operator, in areas substantially served

by a video dialtone platform. LECs may also enter into other types of

non-ownership relationships with video programmers that are not

franchised cable operators, except that they generally may not jointly

operate the video dialtone platform. LECs may not, however, otherwise

exceed the carrier-user relationship in their telephone service area

with franchised cable operators, except to lease cable drop wires. We

believe that these modifications of the non-ownership affiliation rules

make them more consistent with our overall video dialtone policies.

25. We note that LECs remain unrestricted in the provision of

enhanced or other nonregulated services unrelated to the provision of

video programming, whether within or outside the LEC service area. LECs

also remain unrestricted in the provision of video programming directly

to subscribers outside their service area. Finally, for purposes of our

non-ownership affiliation rules, we will treat debt that is convertible

to stock as non-cognizable unless the interest is converted, or, based

on an analysis of the specific facts involved, we conclude that the

interest confers control over a video programmer. This is consistent

with our treatment of convertible debt in other areas. Moreover, to the

extent the equity interest would be impermissible, LECs would be unable

lawfully to convert the debt. Therefore, it is proper to view it as

debt, rather than equity, unless and until any such conversion occurs.

E. Definition of Video Programming

26. We affirm our interpretation of the statutory definition of

video programming set forth in the Second Report and Order. We believe

that the Commission's interpretation most closely comports with

congressional intent in enacting the 1984 Cable Act. We also affirm the

Commission's conclusion that video-on-demand images can be severed from

the interactive functionalities and thereby constitute video

programming.

F. Federal and State Jurisdiction

27. We modify our assertion in the Second Report and Order, of

exclusive jurisdiction over all video dialtone services. We hold that

we have exclusive jurisdiction over only interstate video dialtone

services, which include services involving delivery of video

communications that are part of a continuous stream of communication

provided at least partially by means of radio waves. We hold that

states have jurisdiction over intrastate video dialtone services.

28. In General Telephone of California v. FCC, the court held that

channel service provided by a LEC for a cable operator, formerly known

as a community antenna television operator, is ``an integral component

in an indivisible dissemination system which forms an interstate

channel of communication from the broadcaster to the viewer.'' The

court held that the Commission has exclusive jurisdiction over LEC

provision of services that form part of a broadcast transmission.

Because broadcasting is inherently interstate, the court held, LEC

delivery of signals that have been broadcast over radio waves is

interstate, even if the LEC delivers such signals over physically

intrastate facilities.

29. Consistent with General Telephone of California v. FCC, we

conclude that broadcast or other radio-based video signals delivered by

a LEC over a video dialtone system constitute an integral part of an

interstate radio transmission service. Accordingly, we have exclusive

jurisdiction over video dialtone services involving delivery of video

communications that are part of a continuous stream of communication

provided at least partially by means of radio waves. A determination of

whether certain other, non-radio-based video dialtone services are

interstate and thus within our exclusive jurisdiction depends upon the

nature of the communication, as in the telephone context. For example,

we have exclusive jurisdiction over all video dialtone services

provided between two or more states because such services are

interstate. In contrast, under Section 2(b) of the Communications Act,

states retain authority to regulate intrastate video dialtone service

to the extent such regulation has not been preempted by the Commission

under the standards set forth in Louisiana Public Service Commission v.

FCC and its progeny. For example, states have jurisdiction over the

delivery by wire of video programming between a video library and an

end-user located within the same state, as part of a video-on-demand

service.

30. While we do not in this proceeding preempt any state regulation

of intrastate video dialtone services, we note that we have already

preempted certain state regulations of BOC provision of enhanced

services in the BOC Safeguards Order, 57 FR 4373 (February 5, 1992). In

that decision, we preempted any state regulation requiring (1)

Separation of facilities and personnel to provide the intrastate

portion of jurisdictionally mixed enhanced services; or (2) prior

authorization for use of Customer Proprietary Network Information

(CPNI) whenever such authorization is not required by our rules.

Because we have explicitly applied our existing enhanced services

safeguards to video dialtone, state regulation in the areas preempted

in the BOC Safeguards Order, are also preempted by that decision in the

video dialtone context. We reject various parties' requests for broader

preemption at this time, but we will consider preempting any state

regulation of intrastate video dialtone service that is not severable

from interstate service if such regulation would negate federal policy.

G. Section 214 Process

31. We now affirm our decision to require LECs to obtain approval

pursuant to Section 214 of the Act before beginning construction of

video dialtone facilities or offering video dialtone service. We reject

arguments that we lack authority to require such approval or that we

should refrain from exercising that authority at this time. Because

video dialtone is based upon new and evolving technologies, the Section

214 process is critical to our ability to ensure that video dialtone is

implemented in a manner that best serves the public interest.

Nevertheless, we permit LECs to seek generic approval of those aspects

of a video dialtone system that do not require case-by-case review. In

addition, we anticipate that, over time, as the service evolves and

precedents are established, it may no longer be necessary to require

the same level of Section 214 scrutiny to future video dialtone

offerings. We will consider, at that time, on our own motion or on

petitions of parties, streamlining our Section 214 requirements for

video dialtone offerings.

1. FCC Authority to Require Section 214 Certification

32. As an initial matter, we conclude that the Commission has

jurisdiction to require LECs to obtain Section 214 certification to

upgrade existing facilities to provide video dialtone. Section 214(a)

requires a carrier to obtain certification before constructing or

extending a line it will use for interstate communications. Even

facilities that are wholly located within a state are interstate for

Section 214 purposes, if a LEC uses those facilities at least in part

for interstate communications.

33. We conclude further that an upgrade of LEC facilities to offer

video dialtone service constitutes the establishment or extension of a

``line'' pursuant to Section 214. In 1944, Congress amended Section 214

to define ``line'' as a ``channel of communication established by

appropriate equipment * * *.'' Because video dialtone systems create

new channels of communication, the systems constitute the establishment

of lines under Section 214.

34. We also conclude that video dialtone systems involve ``new

construction.'' The exemption in Section 214 for ``any installation,

replacement, or other changes in plant, operation, or equipment, other

than new construction'' applies only if no new construction occurs, or

any new construction or installation is minor. The upgrading of

existing facilities to be used for video dialtone thus does not fall

within this exemption.

35. Furthermore, we conclude that new construction occurs even when

LECs upgrade existing facilities to provide video dialtone through the

addition of small amounts of equipment, because such upgrades enable

the LECs to offer a new and different type of interstate service.

Section 214 requires a carrier to obtain certification before upgrading

existing intrastate facilities for interstate service. Thus, upgrading

customer loops, which are currently used primarily for intrastate local

exchange service, to provide video dialtone service, constitutes ``new

construction,'' and Section 214 certification is required. Moreover,

because the construction of video dialtone systems does not constitute

the construction of ``local, branch, or terminal lines not exceeding

ten miles in length,'' we reject arguments that we should apply the

statutory exemption contained in Section 214(a)(2) of the

Communications Act to LEC video dialtone Section 214 applications.

2. Elimination or Streamlining of Section 214 Requirement for Video

Dialtone

36. We decline to eliminate or streamline the Section 214

certification process at this time. We reject arguments that the tariff

review process is at this time, by itself, an adequate mechanism for

overseeing video dialtone deployment. Because video dialtone is an

emerging technology, and because we anticipate and encourage variations

in networks, architectures, technology, and services, many important

policy issues would likely be raised only in connection with specific

video dialtone proposals. Therefore, streamlining our Section 214

process could preclude us from properly overseeing video dialtone

deployment.

37. For similar reasons, we also decline to limit the type of

construction or deployment subject to full Section 214 review.

Particularly during the early stages of video dialtone implementation,

even those applications that propose previously approved architectures

may pose other issues that warrant careful consideration in the context

of that specific proposal.

38. While we do not streamline our Section 214 process at this

time, we will consider generic applications for approval of those

aspects of a Section 214 application that do not require case-by-case

consideration. These generic applications can serve to narrow the range

of issues to be considered in the Section 214 process. We also note

that we anticipate that, as video dialtone evolves, and we develop a

body of precedent governing its implementation, the Section 214 process

may become a less critical vehicle for identifying and addressing

policy issues, thereby making streamlining appropriate at that time.

39. Finally, as another possible means of expediting the Section

214 process, we direct the Bureau to consider whether it would serve

the public interest to clarify in a Public Notice the basic information

that the Commission requires in a video dialtone Section 214

application. We note that the Bureau has found it necessary to request

additional information from LECs in connection with the Bureau's review

of virtually every application that has been filed for Section 214

authorization to construct a commercial video dialtone system. Further

clarification of the information required in a Section 214 application

could help LECs avoid the delays that necessarily result when

applications have to be supplemented.

3. Delaying Section 214 Certifications

40. We determined in the Second Report and Order, and affirm now

that our existing rules and safeguards generally will prevent improper

cross-subsidization and discrimination by LECs in the provision of

video dialtone. Therefore, we do not believe that an additional

comprehensive review of these rules is necessary prior to the

implementation of video dialtone service. Indeed, to the extent that

any further changes in these rules may be necessary, permitting

deployment of video dialtone should provide us with a better basis for

fashioning such changes. While we thus decline to defer consideration

of Section 214 applications pending a comprehensive review of our

rules, we will condition the granting of each Section 214 certificate

on implementation of any accounting and other safeguards that we have

adopted or subsequently adopt.

H. Cross-Subsidy/Pricing Issues

1. Overview

41. We conclude that initial video dialtone service offerings by

LECs subject to price cap regulation should be subject to the existing

price cap rules. Proceeding under existing price cap rules is

consistent with eliminating regulatory barriers and distorted

incentives to efficient investment in telecommunications facilities,

thereby serving our goals of increasing video services competition and

investment in telecommunications infrastructure, and promoting greater

diversity of video programming. We also conclude that these rules, as

further delineated below, should protect telephone ratepayers from

improperly subsidizing video dialtone service.

42. As Joint Petitioners point out, LECs, along with other

telecommunications providers, may, over time, invest billions of

dollars to build a modern telecommunications infrastructure. We share

their concern regarding possible effects of video dialtone investment

on basic regulated telephone rates, and possible anticompetitive

results with respect to cable television service and other multichannel

video programming distributors. We are committed to implementing video

dialtone in a manner that does not subject basic telephone ratepayers

to unreasonable rate increases or allow improper cross-subsidization.

We do not, however, agree that ratepayer protection requires that this

Commission adopt comprehensive, video dialtone-specific accounting and

cost allocation rules before authorizing video dialtone services.

43. Contrary to the arguments of the Joint Petitioners, this

Commission's actions in authorizing interstate video dialtone services

will not require increases in telephone rates on the order of $20 per

month to pay for the cost of a nationwide fiber-to-the-home network. No

LEC Section 214 application for video dialtone service has proposed a

fiber-to-the-home architecture, and it appears unlikely based on the

record that anyone will. In addition, where integrated networks are

proposed, much of the investment will be used in the provision of

intrastate telephone services, and will require the necessary state

regulatory approvals. We also note that investment in video dialtone

will, of necessity, proceed over a period of years, permitting Federal

and State regulators to monitor the results of the initial deployments

and take any actions that might be needed to prevent large amounts of

video dialtone investment from being improperly shifted to ratepayers.

44. We decline, however, to adopt technology-specific cost

accounting rules. The record in this proceeding demonstrates that such

cost accounting rules can be rapidly overtaken by technological or

marketplace changes. Joint Petitioners, for example, supported in their

pleadings the establishment of accounts to identify loop investment as

either copper or fiber. Such accounts, had we adopted them in 1992,

would no longer serve the purposes envisioned by their proponents

because carriers have since that time developed proposals to

incorporate a third transmission medium, coaxial cable, into the loop.

45. While we do not propose to amend Parts 32, 64, 36, and 69 of

our rules before authorizing video dialtone services, we find that

adjustments are necessary to fit video dialtone into our regulatory

program. These adjustments, which will be implemented on a case-by-case

basis and do not require further rulemaking at this time, are explained

below.

46. We view the price cap regulatory regime, and not the Part 36/

Part 69 cost allocation scheme, as our primary means of protecting the

telephone customers of price cap LECs from unreasonably high rates.

Under price caps, a LEC has no guarantee that it will be able to

recover increased costs in telephone rates. Its incentive to ``shift''

costs from video dialtone to regulated telephone services is thus

greatly reduced.

47. In addition, the price cap baskets and service categories limit

the extent to which price reductions in one service can be offset by

price increases in another. We conclude that a separate price caps

basket for video dialtone services may be necessary both to protect

interstate telephone ratepayers and to deter anti-competitive pricing

of video dialtone services. Therefore, in the Price Caps Performance

Review docket, 59 FR 23042 (May 4, 1994), we will seek comment on a

proposal to establish that basket.

48. We recognize that LECs under rate base/rate of return

regulation (ROR) or the optional incentive plan may also wish to

develop video dialtone services. Such carriers will bear the burden of

demonstrating to us how they will ensure that the costs of video

dialtone will not be improperly recovered in the rates charged for

other interstate services. They, like the price cap LECs, will also be

required to comply with the other safeguards adopted in the Memorandum

Opinion and Order on Reconsideration.

49. We deny requests by parties that seek a comprehensive

examination of both jurisdictional separations and access charge rules

in this proceeding. As explained above, we believe our existing rules

adequately protect consumers against improper cross-subsidy and anti-

competitive activity at this time. As video dialtone systems are

implemented and we gain more experience with this new service, we can

amend our rules if necessary or appropriate to address unanticipated

problems or results. We agree that long-term video dialtone cost

allocation issues would be a part of any comprehensive review of Parts

36 or 69. We do not think, however, that the public interest would be

well served by postponing for consumers the benefits that video

dialtone services may offer pending the commencement and completion of

such proceedings. Therefore, and for the reasons discussed in more

detail below, we reject requests for adoption of video dialtone-

specific accounting, cost allocation, separations, and pricing rules

prior to granting video dialtone authorizations.

2. Part 32--Uniform System Accounts for Telecommunications Companies

50. We reject the parties' requests that we amend our accounting

rules to require carriers providing video dialtone to segregate all

video plant investment in new Part 32 accounts or separate subaccounts.

Part 32 accounting rules were designed to create a stable basic account

structure that would not require modifications as technologies,

services, or reporting requirements change.

51. We further conclude that, in the case of video dialtone, our

regulatory information needs can be satisfied without making permanent

changes to the accounting system at this time. Because it would help

our monitoring effort and tariff review process to have a record of LEC

video dialtone costs, we hereby require that LECs offering video

dialtone identify all video dialtone costs by establishing two sets of

subsidiary accounting records: one to capture the revenues, investments

and expenses wholly dedicated to video dialtone, the other to capture

any revenues, investments and expenses that are shared between video

dialtone and the provision of other services. These accounting records

will also assist state regulators in assuring that video dialtone costs

are not improperly included in local rates. LECs authorized to provide

video dialtone must file a summary of these subsidiary records with the

Commission on a quarterly basis. All video dialtone Section 214

authorizations will be conditioned upon compliance with this

requirement. 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.

3. Part 64--Separation of Regulated and Nonregulated Costs

52. We reject claims that we should amend Part 64 because current

rules would not prevent LECs from improperly subsidizing video dialtone

nonregulated services. To the contrary, we conclude that existing Part

64 rules do not require modification to prevent such an outcome.

53. The Joint Cost rules set forth in Part 64 were formulated to

accommodate new enhanced services offerings in an increasingly

competitive telecommunications environment. Part 64, for the most part,

does not prescribe cost categories or allocation factors. Rather, each

carrier selects, subject to public comment and Commission review, the

cost pools and allocators it needs to identify the costs of all of its

nonregulated activities. The Commission chose this approach because it

believed that the mix of nonregulated activities and the organizational

structure would vary widely from carrier to carrier, and that a single,

prescribed manual could not adequately encompass the possible

variations. No party has shown that video dialtone-related nonregulated

products and services will exhibit, initially, less variety than other

nonregulated activities, or will be more amenable to uniform treatment.

Similarly, parties that object to the aggregation of video dialtone-

related nonregulated costs with the costs of other nonregulated

activities fail to explain what valid regulatory purpose of this

Commission would be served by revisiting our determination in the Joint

Cost Order, 52 FR 6557 (March 4, 1987), to avoid product-specific cost

allocations to nonregulated products and services. Therefore, we

decline to promulgate video dialtone-specific cost allocation rules for

nonregulated activities related to video dialtone service at this time.

However, we may require uniformity in the video dialtone cost

allocation procedures in the future as we gain experience with video

dialtone services and LEC Part 32 subsidiary accounting records.

54. Under our rules, interested parties, as well as the Commission,

will have ample opportunity to review the application of Part 64 to

video dialtone-related nonregulated offerings. All LECs with $100

million or more in annual operating revenues are required to keep their

current Part 64 Cost Allocation Manuals (CAMs) on file with this

Commission. To assist State regulators and other interested parties in

tracking video dialtone-related CAM filings, we hereby require that any

LEC receiving authorization to provide video dialtone file CAM

amendments within thirty days after the effective date of the Section

214 authorization and at least sixty days prior to providing

nonregulated products or services related to video dialtone. Video

dialtone-related CAM amendments are subject to public comment and will

be closely scrutinized by the Commission. Changes to time reporting

procedures, cost apportionment tables, and the affiliate transactions

statement can, if necessary, be suspended for up to 180 days, after

which the Bureau may either allow the new procedures to become

effective or prescribe different procedures.

4. Part 36--Jurisdictional Separations

55. We decline the parties' requests that we institute at this time

Federal-State Joint Board proceedings to amend our Part 36

jurisdictional separations rules for video dialtone service. For the

time being, LECs will allocate regulated video dialtone investment and

expenses between the State and Federal jurisdictions in accordance with

existing rules. To ensure that our decisions do not have untoward

effects outside of our regulatory jurisdiction, we are directing the

Common Carrier Bureau to monitor the impact of video dialtone on

separations results and on intrastate local telephone rates, and to

report its findings periodically to this Commission. This course of

action will provide us and State regulators with the practical

experience and the data necessary to make appropriate decisions

concerning the future of the Part 36 rules.

56. Joint Petitioners and others have complained that existing

separations rules would assign to the States 75% of increased loop

costs attributable to video dialtone, but no video dialtone revenues.

This argument is premised on our jurisdictional determination in the

Second Report and Order, which we now modify on reconsideration. Thus,

regulated video dialtone services of a purely intrastate nature may be

tariffed in the intrastate jurisdiction. The availability of intrastate

video dialtone revenues should help offset any increase in intrastate

costs caused by LEC provision of video dialtone services and help

prevent any local rate increases.

57. In declining to institute a Joint Board proceeding to address

issues raised by the particular video dialtone proposals now pending

before the Commission, we do not mean to imply that we will never

revisit Part 36. Indeed, it appears likely that, as telecommunications

networks and the marketplace evolve, the separations rules will require

revision. In our judgment, however, it is too soon to begin proceedings

to propose specific rule changes in this area. Video dialtone is but

the first of what we expect to be an array of broadband services, and

the current video dialtone proposals may or may not be representative

of the manner in which those services will use network facilities, or

of the jurisdictional mix of those services. Under these circumstances,

scarce Federal and State regulatory resources should not be expended to

craft separations rules tailored to video dialtone.

58. We will take the following steps to help ensure that local

telephone ratepayers are not being harmed by the advent of video

dialtone--a preeminent concern of State commenters. We direct the

Common Carrier Bureau to develop a data collection program that will

track the impact of video dialtone on both separations results and

intrastate telephone rates. As part of this program, the Bureau will

require all carriers offering video dialtone to submit detailed

explanations of how they are applying the Part 36 rules, as well as

Parts 32, 61, and 64, to video dialtone investments and expenses. The

Bureau will report is results periodically so that this Commission and

State regulators can determine when and if rule changes or other

actions appear necessary.

59. We also will open an inquiry proceeding focusing on a matter of

paramount concern to both Federal and State regulators--the

implications for the jurisdictional separations process of the

introduction of new technologies, including broadband technology, into

LEC networks. This proceeding will provide a forum for exploring the

broader separations policy issues raised by continuing changes in

network technology, of which video dialtone is but one example. The

inquiry also will be a vehicle for updating, in light of actual video

dialtone experience, the record created in the instant proceeding. We

strongly encourage active State commission involvement in our inquiry

and seek to establish a dialogue between State and Federal regulators

on these issues. The information we gather in this inquiry could serve

as a basis for future rulemaking proposals as we examine our existing

rules in light of the evolving nature of LEC networks.

60. State commissions, of course, bear the primary responsibility

for ensuring that intrastate rates are reasonable. We emphasize that

neither our decisions in this proceeding nor our actions on the various

video dialtone Section 214 applications preempt the State commissions

from disallowing from local telephone service rates any video dialtone-

related costs that do not meet their own standards for inclusion in

rates.

61. Finally, some parties contend that Section 410(c) of the

Communications Act legally compels us to refer all separations issues,

including use of common plant for video dialtone, to a Joint Board.

Although Section 410(c) requires the Commission to refer separations

issues to a Joint Board upon instituting a notice and comment

rulemaking proceeding, we are not proposing to modify any separations

rules here but are simply applying our existing rules. We conclude that

we have the authority to apply existing jurisdictional separations

rules during the initial phase of video dialtone service deployment.

Our initial determinations regarding implementation of existing

jurisdictional separations to video dialtone are, of course, subject to

revision as we gain further experience with video dialtone.

5. Part 69--Access Charge-Cost Allocations and Rate Structure

62. We conclude that access to the basic video dialtone platform is

a form of interstate access to the extent it is used to route

interstate video programming to end users. We also conclude that a

separate access charge category for video dialtone may be desirable to

help ensure that interstate video dialtone costs are not recovered

through charges for access services provided to interexchange carriers.

63. We decline, however, to prescribe a new rate element or to

initiate a notice of proposed rulemaking at this time. We recognize

that the access charge rules define rate elements established for

traditional telephone facilities. Video dialtone may use both new and

existing network facilities to deliver services in ways not

contemplated at the time the Part 69 rules were written. Because video

dialtone is a nascent service, though, and in light of the wide variety

of possible video dialtone architectures LECs may employ, we find that

there is a significant risk that any uniform rate structure we would

prescribe now would fail to produce rate elements that logically match

each carrier's video dialtone offering.

64. Instead, as the Commission has done in the past with other new

services, we will require local telephone companies that wish to offer

video dialtone services to file petitions for waiver of our Part 69

rules prior to the establishment of a permanent video dialtone rate

structure. The waiver process, as an interim solution, will afford all

interested parties an opportunity to participate, and challenge or

support the rate structure proposed by the local telephone company. The

waiver process will also provide a forum for reviewing the cost

allocation proposals of ROR and optional incentive plan carriers.

6. Part 61--Price Cap Treatment

65. We conclude that price cap local telephone companies should

continue to be subject to the existing price cap rules for their

provision of video dialtone services.

66. We also conclude that video dialtone service is a ``new

service'' under our price cap rules. New services are services that

``add to the range of options already available to customers.'' In

contrast to restructured services, which involve the rearrangement of

existing services, video dialtone adds to the range of options for

customers because multiple video programmers will have access to a

basic common carrier platform for the first time. Video dialtone thus

differs from a carriers's provision of channel service or other video

transport services.

67. Local telephone companies will be required to make a cost-based

showing under the price caps new services test to establish initial

video dialtone prices. As explained below, this test, as applied in

established tariff review processes, provides an adequate vehicle for

full consideration of the reasonableness of proposed video dialtone

rates. We therefore find it unnecessary to initiate a rulemaking to

develop new, video dialtone-specific tariffing requirements. We also

conclude that, given our current dearth of experience with video

dialtone tariffs, it would be both premature and counterproductive to

attempt to promulgate such rules at this time. The first few tariff

proceedings will provide a far more concrete and realistic factual

context for future decision making than would be developed in a general

rulemaking proceeding.

68. Application of the LEC Price Cap New Services Test. We decline

to amend the new services test specifically for video dialtone

services. The Commission currently has generally applicable rules in

place that specify the cost support that must be submitted with any new

service tariff, including a video dialtone tariff. Pursuant to these

rules, carriers must submit engineering studies, time and wage studies,

or other cost accounting studies to identify the direct costs of video

dialtone. LECs have proposed a number of different network

architectures for video dialtone, and there are wide variations in the

manner in which, and the degree to which, LECs are proposing to

integrate their video dialtone systems with their telephone networks.

This diversity and experimentation, which we view as beneficial to the

development of a modern telecommunications infrastructure, precludes us

from adopting a one-size-fits-all rule for the identification of video

dialtone direct costs. The tariff review process, which includes the

possibility of tariff investigations under Section 204(a), will allow

close examination of each LEC proposal and enable us to require such

cost information as may be necessary to evaluate each proposal. If the

application of our existing rules has unintended consequences, or if

the process reveals systematic problems, we will revisit our

determination to rely on existing procedures.

69. We conclude, however, that it is important that we provide more

specific guidance regarding the identification of direct costs in video

dialtone tariffs than is ordinarily given. LECs may, over time, make

large investments to upgrade their networks for video dialtone and

other broadband services. The large amounts of investment involved, and

the serious concerns about cross-subsidization expressed in the record

of the instant proceeding, suggest that video dialtone rates will be

subject to intense scrutiny. We conclude that the video dialtone tariff

review process will proceed more smoothly, and LECs and interested

parties will be able to participate more constructively, if they better

understand our expectations in advance of tariff filings.

70. Because video dialtone is an essential component of a

multichannel video service that will compete directly with cable

television operators and other multichannel video programming

providers, LECs may have an incentive to understate the direct costs of

the service in order to set unreasonably low prices and engage in

cross-subsidization. Therefore, as explained below, we will require the

LECs to submit with their video dialtone tariffs a more detailed and

complete identification of direct costs than we have generally required

in other new services filings.

71. Under our established practice, direct costs include the costs

and cost components associated with the primary plant investment that

is used to provide the service. In the case of video dialtone, some of

these plant costs will be incremental costs associated with plant

dedicated to video dialtone service. The direct costs of video dialtone

will also include any incremental costs that are associated with shared

plant used to provide video dialtone and other services, that is, costs

of shared plant that are caused by the carrier's decision to offer

video dialtone service. In reviewing video dialtone tariffs, we will

scrutinize the basis on which those costs are identified and included

in the proposed charges for video dialtone services. We recognize and

accept the challenges inherent in determining which costs are truly the

consequences of a carrier's decision to provide video dialtone service,

i.e., are incremental costs.

72. Moreover, we expect LECs to include in direct costs a

reasonable allocation of other costs that are associated with shared

plant used to provide video dialtone and other services. We will

scrutinize the basis on which those costs are identified and included

in the proposed charges. An LEC allocating an extremely low proportion

of these other costs of shared plant to video dialtone will be expected

to provide a strong justification for that approach, and we do not

anticipate accepting a 0% allocation of the common costs of shared

plant as reasonable.

73. Ordinarily carriers decide, in the first instance, whether to

include in their direct cost studies any categories of costs

(investment and expenses) in addition to primary plant. For video

dialtone, however, we direct carriers to treat costs in other accounts

as direct costs if those costs are reasonably identifiable as

incremental costs of video dialtone service. Examples of accounts that

might include reasonably identifiable incremental costs of video

dialtone are those to which carriers book costs associated with land,

buildings, network administration, testing, engineering, plant

operations administration, product management, sales, advertising,

customer services, and legal.

74. For purposes of the new services test, all costs not treated as

direct costs are classified as overheads. Carriers bear the burden of

justifying why their overhead loadings do not produce a final rate that

is unreasonably high. As with shared plant, we will also require a

strong justification for allocation of extremely low overheads to video

dialtone service, and would not anticipate accepting a 0% allocation of

overhead as reasonable. At the same time, we emphasize that we are not

seeking to saddle video dialtone with an unreasonable proportion of

overheads and other common costs. We hope and expect that video

dialtone will be a successful service in the marketplace, and therefore

contribute to the recovery of common costs. We recognize that imposing

excessive cost burdens on video dialtone could diminish demand and

possibly overall revenues and thereby thwart these objectives.

Accordingly, the effects of price changes on video dialtone demand

should be given due consideration in determining what constitutes a

reasonable allocation of common costs and overheads. In this regard, we

will scrutinize the basis for claims and projections of demand

elasticities submitted in support of proposed video dialtone rates.

And, of course, our rules will provide interested parties ample

opportunity to comment on these claims and projections.

75. In implementing this specific guidance, we direct the Chief,

Common Carrier Bureau, to ensure that video dialtone carriers file all

the information necessary for purposes of evaluating the costs of

providing video dialtone service and the reasonableness of the proposed

cost allocations and overhead loadings. We further direct the Chief,

Common Carrier Bureau, to consider whether the Bureau should adopt

specific minimum requirements, including the possible use of

standardized formats, for the supporting documentation that video

dialtone providers must furnish with their proposed tariffs. We note

that the Bureau previously has adopted such requirements in connection

with the LECs' annual access tariff filings, as well as tariffs filed

to provide specific services, such as Open Network Architecture (ONA)

and Expanded Interconnection services. The goal of any such

requirements would be to make the review of video dialtone tariffs by

the Bureau and interested members of the public more expeditious and

less costly. In addition to making the tariff review process more

accessible to interested parties, the establishment of minimum standard

format and information requirements would facilitate their ability to

participate in a meaningful way.

76. We tentatively conclude that a separate price cap basket for

video dialtone would help prevent improper cross-subsidization by

preventing local telephone companies from offsetting a price reduction

for video dialtone service with an increase in rates for other

regulated interstate services. However, it is not necessary to

establish this basket now, on an interim basis. Because no tariffs for

permanent video dialtone service have yet been filed, it is unlikely

that any such tariff will go into effect prior to January 1, 1995. July

1, 1996 is thus the earliest date on which a video dialtone service

could be included in a price cap index. We therefore will seek comment

on establishing a separate price cap basket for video dialtone service

in a supplemental notice in the LEC Price Cap Performance Review.

77. At this time we will not address the merits of whether basket-

by-basket earnings calculation should be required. We recognize that

investment in video dialtone facilities may generate costs that will

have an impact on sharing. Issues regarding sharing, however, are being

examined in the LEC Price Cap Performance Review. In the near term, we

will continue to determine sharing and lower end adjustments on an

overall interstate basis.

I. Two-level Regulatory Framework and Application of Other Enhanced

Service Safeguards

78. We now affirm our decision in the Second Report and Order, to

adopt a two-level regulatory framework for video dialtone services and

to require the BOCs and GTE to comply with our existing enhanced

services safeguards. In adopting a two-level regulatory framework, we

noted that this dichotomy tracks our existing regulatory framework for

LEC basic and enhanced services. We do not think the public interest

would be well-served by adopting a different set of rules for video

dialtone services, particularly given that LECs will provide both video

and non-video offerings through these systems. Moreover, the two-level

framework should promote competition and broaden consumer choice. The

level-one common carrier platform will enable multiple video service

providers, for the first time, to obtain access on a nondiscriminatory

basis to the basic network functions that will allow such service

providers to distribute their services to consumers. Requiring LECs to

offer nonregulated services subject to existing safeguards for the

provision of such services will help ensure that LECs are not able to

compete unfairly with other enhanced service providers and that LECs

cannot bundle enhanced and nonregulated services with basic services in

order to impede competition.

79. We also affirm the Commission's decision to apply existing

enhanced service safeguards to BOC and GTE provision of nonregulated

level-two video dialtone services. No party offers any new evidence or

argument that would persuade us that this decision should be revised.

80. We also reject arguments that we should adopt more stringent

requirements at this time, such as requiring LECs to offer all level-

two services through a separate subsidiary. Here again, commenters have

raised no new issues or arguments. We have found that separate

subsidiary requirements for enhanced services impose inefficiencies and

other costs, and that discrimination and cross-subsidization can be

policed adequately through less onerous means. No party has shown that

provision of video-related enhanced services, which at this time do not

include video programming itself, is so fundamentally different from

provision of other enhanced services as to require a different

regulatory regime. We do, however, make one minor change to our

nonstructural safeguards. Currently, the BOCs and GTE must file

nondiscrimination reports on their installation and maintenance of 49

categories of basic services. To adapt this requirement to video

dialtone, we require the BOCs and GTE to add an additional service

category for video dialtone delivery service. We note that the United

States Court of Appeals for the Ninth Circuit recently vacated in part

and remanded the BOC Safeguards Order, on the ground that the

Commission had not adequately explained how, without full unbundling of

BOC networks under ONA, discrimination could be prevented in the

absence of structural safeguards. We delegate to the Common Carrier

Bureau authority to establish interim measures to govern BOC provision

of enhanced services, including video dialtone-related enhanced

services, if and when this decision becomes effective.

81. Finally, in the Second Report and Order, we stated that we

would review our video dialtone rules and policies in 1995. Such review

no longer appears to be necessary in light of the detailed examination

we have undertaken in the Memorandum Opinion and Order on

Reconsideration of those rules and policies, as well as our continuing

work on major video dialtone issues through the CPNI data request and

the Third Further Notice of Proposed Rulemaking. Indeed, we are

concerned that the regulatory uncertainty that could stem from another

comprehensive review of video dialtone rules and policies could

discourage video dialtone deployment pending that review. For these

reasons, we will not initiate a formal review of our video dialtone

rules and policies in 1995. Nevertheless, we will continue to monitor

the evolution of video dialtone and oversee its implementation in

specific applications through the Section 214 process and the tariff

review process. In addition, if in the future it becomes apparent that

we should modify aspects of our video dialtone rules and policies, we

will initiate a proceeding to do so.

J. Joint Marketing and Customer Proprietary Network Information

82. We affirm our decision to permit LECs to engage in joint

marketing of basic and enhanced video dialtone services, as well as of

basic video and nonvideo services. We also affirm our decision to apply

existing CPNI rules to video dialtone at this time. Nevertheless, we

direct the BOCs and GTE, the carriers to which our CPNI rules currently

apply, to provide us with additional information about the kinds of

CPNI to which they will have access as a result of providing video

dialtone service so that we may obtain a better record in assessing

whether existing CPNI rules best balance the various interests that are

implicated by the use of CPNI in the video dialtone context.

83. We permit LECs to engage in joint marketing of basic and

enhanced video services, and of basic video and nonvideo services,

because we believe that the benefits of permitting joint marketing

outweigh any adverse effect on competition. Joint marketing can offer

consumers the convenience of one-stop shopping both for basic telephone

and video dialtone services and for basic and enhanced video dialtone

services. Through joint marketing, LECs will be able to increase

customer awareness not only of the video dialtone system generally, but

of enhanced features and functions available on that system. This

awareness will benefit programmer-customers as well as end users and

result in greater usage of the video dialtone platform. At the same

time, LECs will be able to market video dialtone services in the most

efficient manner possible, avoiding the costs imposed by structural

separation.

84. The record in this proceeding does not support a finding that

joint marketing of video and telephony services will have an

anticompetitive impact on the provision of video programming services

to end users. While consumers moving to a new residence typically

arrange for telephone service prior to or immediately after the move,

they also will be arranging for other services at that time, including

video programming services. No one has shown that the first call placed

is necessarily to the telephone company. More significantly, the cable

operator, not the telephone company, will be the incumbent video

programming provider in the market. We believe that consumers today are

likely to be aware that they may order video programming services from

the local cable operator. We also believe that they will do so if the

cable operator's rates and programming are preferable to those offered

by programmers on the video dialtone network. Simply because telephone

companies may sometimes have an initial contact with consumers changing

residences in our view does not demonstrate a likely anticompetitive

effect or warrant a prohibition on joint marketing. We also note that

the extent to which LECs will market basic video dialtone service to

end users is unclear, particularly since in some video dialtone

applications, LECs have proposed to charge their programmer-customers,

but not end users, for basic video dialtone service. Moreover, since

telephone companies, as common carriers, are prohibited from favoring a

particular video programmer's product, the ability of LECs to market

video dialtone services to consumers will be constrained in any event.

By contrast, cable companies with authorization to provide telephone

service can jointly market video and telephony services without

restrictions on favoring particular video programmers.

85. We also apply to video dialtone, at this time, our existing

CPNI rules, which were recently upheld by the United States Court of

Appeals for the Ninth Circuit in California v. FCC. No party has

provided evidence that existing CPNI rules do not properly balance our

CPNI goals relating to privacy, efficiency, and competitive equity in

the video dialtone context. Nevertheless, because of the significant

privacy issues that are potentially implicated by video dialtone-

related CPNI, we believe we should obtain additional information about

such CPNI so that we may carefully assess whether existing CPNI rules

sufficiently protect customer privacy in the video dialtone context.

For example, we seek information as to whether LECs, in providing video

dialtone, will have access to information about the types of

programming that each customer views. This information would raise

greater privacy concerns than other CPNI, which does not generally

include information about the content of customer communications. We

are also interested in assessing the competitive value of CPNI obtained

from video dialtone, as well as the extent to which access to this

information promotes the efficient provision of regulated and

nonregulated services by LECs.

86. In order to obtain a better record for addressing these issues,

we direct each of the BOCs and GTE to file, within ninety days of

publication of a summary of the Memorandum Opinion and Order on

Reconsideration in the Federal Register, a detailed description of the

types of CPNI to which it anticipates having access as a provider of

video dialtone service. We also direct each to explain how it would

plan to use such information in marketing video dialtone services to

video programmers or consumers. Other interested parties, including,

but not limited to, independent LECs, may also file at that time any

information responsive to these issues. After this information is

filed, we will issue a public notice establishing a supplemental

pleading cycle that will give all interested parties the opportunity to

comment. Based on this record, we will then reassess whether the public

interest would be served by modifying existing CPNI rules for video

dialtone service and propose any changes in those rules that may be

warranted.

K. Preferential Access to Video Dialtone

87. In the Second Report and Order, we decided not to mandate

preferential treatment for certain classes of video programmers largely

because we concluded that mandatory preferential treatment is generally

inconsistent with a Title II common carrier regime, the cornerstone of

which is the provision of service to the public on the basis of rates,

terms, and conditions that are not unreasonably discriminatory. We

still have concerns about this issue. A system of discounts or free

access for certain video programmers could also introduce economic

distortions that would restrict demand for video dialtone service. For

these and other legal and policy reasons, mandating preferential rates

for any specific class of programmer may not be compatible with the

public interest. On the other hand, however, the continued availability

of diverse sources of programming clearly serves the public interest.

88. We have recognized exceptions to the general principle of

nondiscrimination in the provision of common carrier services. These

exceptions have been based upon a compelling showing of need and strong

public policy concerns. Based on our review of the record, we conclude

that we do not currently have a sound basis for determining whether a

similar exception should be made here, and if so, for which

programmers, and to what extent. In the Third Further Notice of

Proposed Rulemaking, we seek comment on these issues. We also seek

comment on whether a proposal by Bell Atlantic that seeks to permit

LECs voluntarily to provide preferential rates to certain classes of

programmers is or could be lawful.

L. Special Incentives

89. The petitioners have not presented any persuasive basis for the

Commission to modify its decision in the Second Report and Order,

regarding special incentives. In particular, they have not persuaded us

that our existing practices for prescribing depreciation rates pose an

impediment to the deployment of new technologies. Under our existing

rules, the Commission reviews the depreciation rates of each carrier on

a three year rotating cycle. Carriers may also seek interim updates of

their depreciation rates. Based on a review of a variety of service

life indicators, the Commission establishes depreciation rates for each

major category of plant designed to recover the carrier's investment

over the plant's projected remaining life. In the case of telephone

plant, based on the most recent (1993) depreciation represcription

order, the average remaining life is 9 years and approximately 40

percent of the original cost of those facilities has already been taken

as depreciation expense. We believe that our existing practices are

adequate to respond to any acceleration in the rate of technological

change in the provision of loop facilities. We also note that to date

we have received more than thirty video dialtone applications proposing

use of advanced broadband networks. These applications provide evidence

that the measures we have taken in this proceeding to eliminate

artificial regulatory constraints will by themselves promote investment

in broadband networks and that special incentives are unnecessary.

M. Recommendation to Congress

90. Although petitions for reconsideration do not lie against

reports to Congress, we nevertheless take this opportunity to affirm

our recommendation that Congress amend the 1984 Cable Act to permit

LECs to provide video programming directly to subscribers in their

telephone service areas, subject to appropriate safeguards. As we noted

in the Second Report and Order, the 1984 Cable Act's ban on LEC

provision of video programming was originally enacted to prevent LECs

from establishing a monopoly position in the provision of video

services. Given the enormous growth of the cable industry during the

past decade, the risk of telephone companies preemptively eliminating

competition in the video marketplace has lessened significantly. While

there remains some risk of anticompetitive behavior by the LECs, we

affirm our finding that this risk can and should instead be addressed

through our video dialtone framework and other appropriate regulatory

safeguards.

Final Regulatory Flexibility Analysis Statement

91. Pursuant to the Regulatory Flexibility Act of 1980, 5 U.S.C.

601-612, the Commission considered whether this decision could

disadvantage small non-vertically integrated cable systems, wireless

cable systems, and broadcasters because it could supplant these video

distribution mechanisms. The Commission also considered whether this

decision could threaten small businesses involved in the video rental

market by eliminating the current video distribution chain. On the

basis of the record, however, the Commission determined that the public

interest in a competitive video marketplace, increased opportunities

for development of an advanced infrastructure and the promotion of a

diversity of video services, would be best served by permitting local

telephone companies to offer video dialtone.

92. Copies of the final regulatory flexibility analysis are

available for inspection and copying, Monday through Friday, 9 a.m.-

4:30 p.m., in the FCC Dockets Reference Room (Room 239), 1919 M Street

NW., Washington, DC 20554. The added final regulatory flexibility

analysis may also be purchased, as part of the Memorandum Opinion and

Order on Reconsideration, from the Commission's copy contractor, ITS,

Inc., room 246, 1919 M St. NW., Washington, DC 20037. See 5 U.S.C.

604(b).

Ordering Clauses

93. It is ordered that, pursuant to sections 1, 4, 201-205, 214,

and 220 of the Communications Act of 1934, as amended, and Section 613

of the Cable Communications Policy Act of 1984, 47 U.S.C. 151, 154,

201-205, 214, 220, 533, the Memorandum Opinion and Order on

Reconsideration, affirming in part, and modifying in part, the Second

Report and Order is adopted.

94. It is further ordered that, the Petition for Rulemaking filed

by CFA and NCTA is denied in part and granted in part to the extent

indicated in the Memorandum Opinion and Order on Reconsideration.

List of Subjects in 47 CFR Part 63

Cable television, Communications common carriers, Reporting and

recordkeeping requirements, Telephone, Video Dialtone.

Final Rule Changes

Part 63 of Title 47 of the Code of Federal Regulations is amended

as follows:

PART 63--[AMENDED]

1. The authority citation for Part 63 is revised to read as

follows:

Authority: Sections 1, 4(i), 4(j), 201-205, 218, and 403 of the

Communications Act of 1934, as amended, and Section 613 of the Cable

Communications Policy Act of 1984, 47 U.S.C. secs. 151, 154(i),

15(j), 201-205, 218, 403, and 533 unless otherwise noted.

2. Section 63.54 is amended by revising paragraph (d), and adding

paragraphs (e)(5), (e)(6), (f), and (g), to read as follows:

Sec. 63.54 Facilities for provision of video programming by a

telephone common carrier in its telephone service area.

* * * * *

(d)(1) Except as provided in paragraph (d)(5) of this section,

nothing in this section shall be construed to prohibit the provision of

video dialtone services.

(2) Nothing in this section prohibits a telephone company from

exceeding the carrier-user relationship with a video programmer or

video programmers by providing services, and engaging in activities,

not related to the provision of video programming directly to

subscribers in its local exchange area.

(3) A telephone company may exceed the carrier-user relationship in

its local exchange area with a video programmer by providing enhanced

or other nonregulated services related to the provision of video

programming to such video programmer, provided that a basic video

platform is available to 70% of the households for which the video

programmer seeks such enhanced or nonregulated services and provided

that the telephone company does not:

(i) Determine how video programming is presented for sale to

subscribers in its local exchange service area, including making

decisions concerning the bundling or ``tiering,'' or the price, terms,

or conditions on which video programming is offered to subscribers in

that area; or

(ii) Have a cognizable financial interest in, or exercise direct or

indirect control over, any entity that performs any of the activities

listed in paragraph (d)(3)(i) of this section within the telephone

company's local exchange service area.

(4) A telephone company may exceed the carrier-user relationship

with a video programmer or video programmers by providing services, and

engaging in activities, related to the provision of video programming

(other than enhanced or other nonregulated services), provided that the

telephone company does not:

(i) Determine how video programming is presented for sale to

subscribers in its local exchange service area, including making

decisions concerning the bundling or ``tiering,'' or the price, terms,

or conditions on which video programming is offered to subscribers in

that area;

(ii) Have a cognizable financial interest in, or exercise direct or

indirect control over, any entity that performs any of the activities

listed in paragraph (d)(4)(i) of this section within the telephone

company's local exchange service area;

(iii) Permit any video programmer to participate in the operation

or management of basic video dialtone service, except as may be

authorized by the Commission; or

(iv) Exceed the carrier-user relationship with any franchised cable

operator in the telephone company's local exchange service area, or

affiliate of such cable operator, except to: lease cable drop wires, in

accordance with paragraph (d)(5) of this section, or to provide

enhanced or other nonregulated services, in accordance with paragraph

(d)(3) of this section.

(5) A telephone company may not acquire cable facilities in its

local exchange service area for use in providing video dialtone

service, or services related to the provision of video programming

directly to subscribers. Notwithstanding the above, a telephone company

may acquire cable facilities in its local exchange service area for use

in providing common carrier channel service, subject to Section 214

certification and compliance with the Commission's rules. A telephone

company may also lease drop wires from a franchised cable operator in

its local exchange service area, provided that:

(i) Such lease is for a nonrenewable term of three years or less;

and

(ii) The telephone company does not obtain exclusive rights to use

such drop wires, or otherwise unreasonably restrict the access of any

video programmer to any of the cable operator's drop wires.

(e) * * *

(5) Interests with rights of conversion to equity, including debt

instruments, warrants, convertible debentures, and options, shall not

be included in the determination of cognizable ownership interests

unless and until conversion is affected.

(6) Attribution of ownership interests in a video programmer that

are held indirectly by any party, other than an investment company,

through one or more intervening entities, will be determined by

successive multiplication of the ownership percentages for each link in

the vertical ownership chain, and application of the relevant benchmark

to the resulting product, except that wherever the ownership percentage

for any link in the chain exceeds 50%, it shall not be included for

purposes of this multiplication. (For example, if A owns 10% of company

X, which owns 60% of company Y, which owns 25% of a video programmer,

then X's interest in the video programmer would be 25% (the same as Y's

interest since X's interest in Y exceeds 50%), and A's interest in the

video programmer would be 2.5% (0.1 x 0.25)). Under the 5%

attribution benchmark, X's interest in video programmer would be

cognizable, while A's interest would not be cognizable. Paragraph

(e)(2) of this section governs stock ownership interests held by an

investment company in a corporation.

(f) Nothing in this section prohibits a telephone company from

providing video programming directly to subscribers outside its

telephone service area or from owning video programming that an

unaffiliated video programmer directly provides to subscribers in the

telephone company's service area.

(g) As used in this section, the term ``video programmer'' shall

mean any entity that provides video programming either directly or

indirectly through an affiliate, directly to subscribers. Any entity

shall be deemed to ``provide'' video programming if it determines how

video programming is presented for sale to subscribers, including

making decisions concerning the bundling or ``tiering,'' or the price,

terms, or conditions on which video programming is offered to

subscribers.

Federal Communications Commission.

William F. Caton,

Acting Secretary.

[FR Doc. 94-30241 Filed 12-9-94; 8:45 am]

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