Dallas and USCM had argued that the OVS provisions added to the Communications Act by the Telecommunications Act of 1996 did not allow the FCC to preempt local franchising of OVS operators. The local franchise authorities pointed out that the language of the statute did not call for preemption, and actually left local franchise authorities free to franchise. Furthermore, if local franchising authority was preempted, the local franchise authorities argued that the rules would have effected a taking of property, or a commandeering of governmental processes, thus violating the Fifth and Tenth Amendments to the Constitution.

The court did not address the Fifth and Tenth Amendment arguments, but relied only on the plain meaning of the statute. The court accepted our argument that local franchising authority predated the Cable Act, and that the Cable Act did not establish a new entirely federal franchising scheme. The court rejected the FCC's view that it had to preempt local franchising to accomplish the deregulatory objectives of Congress. Basically, the court said that if Congress wanted to lift certain federal restrictions on franchising, it could do so. That is what the statute does -- but nothing in the statute states a Congressional intent to preempt local authority, or to give the FCC the authority to preempt.

This holding is critical—and beneficial to local governments. The Court’s decision leaves no doubt that OVS operators must get permission to use the rights-of-way (ROW) from the local franchising authority.

Dallas, USCM and NATOA argued that the "fee in lieu" provided by the OVS rules must include both the OVS operator's revenues and revenues of unaffiliated programmers because Congress meant to maintain parity between OVS and cable. The court read the statute narrowly, however, and said that the FCC's decision was consistent with the statute because the statute refers only to "fees on the gross revenues of the operator." The court also noted that nothing in the rule prohibited local governments from imposing a separate fee on unaffiliated programmers.

We argued that an OVS operator should be required to match any I-Net requirements imposed on the incumbent cable operator. We said there is no difference between the cable operator’s obligation to provide PEG capacity and support and the obligation to provide an institutional network under Section 611(b) of the Cable Act. Section 653(c)(2) states that OVS operators are subject to PEG obligations that are "no greater or lesser" than the cable operator. Therefore, OVS operators should be subject to I-net obligations as well as other forms of PEG.

The court rejected this approach because it said that Section 611 does not allow a franchising authority to require I-Net's of cable operators - Section 611 refers only to capacity on I-nets. And OVS operators’ PEG obligations were only those contained in Section 611.

We expect industry advocates to use this language in the opinion to argue that Cable Operators can no longer be obligated to provide I-nets. This is a misreading of the court’s opinion. The authority to require I-Net's of cable operators was not at issue in the case. It is found in an entirely unrelated section of the Cable which the court did not examine. The authority to require I-nets remains intact in Section 624-- the provisions of the Cable Act that give local franchise authorities the right to require facilities and equipment of cable operators. The legislative history explains that this includes the authority to require institutional networks.

This should not be a matter of debate. During the OVS rulemaking, the cable industry actually asked the FCC to declare that local franchise authorities lacked the authority to require I-nets. The FCC did not accept the operators' arguments, and concluded that there was authority to order cable operators to build I-NETS. But, it concluded that there was no authority to require OVS to build I-NETS, for the reasons laid out above. NO ONE argued to the court that local franchise authorities lacked authority to require cable operators to build I-NETS, and so the issue was not one the court addressed.

In front of the Court, the FCC argued that OVS operators are only subject to the PEG requirements contained in Section 611. Since 611 does not state that local franchise authorities may require construction of institutional networks, local franchise authorities could not require I-nets of OVS operators. Section 611 does allow local franchise authorities to require operators to set aside capacity on I-NETS for government and educational use. Hence, (the FCC concluded) in establishing equivalent requirements, local franchise authorities could not require OVS providers to build I-NETS, but could require OVS operators to set aside capacity on I-NETS for government and education use.

The Court accepted the FCC's argument, and footnote 10 of the opinion so states. The footnote goes on to reject a second argument that the FCC had raised that construction of I-nets was a product of Section 621(b)(3)(D). The Court notes the FCC’s argument was obviously wrong, because that section was added in 1996, and I-NETS were required before that time.

It is a disappointment that the Court did not treat I-nets as a requirement under Section 611. OVS operators are explicitly subject to this section of the Cable Act and are exempted from Section 624. The Court would have created more balance in a market with both a cable operator and an OVS operator if it had found both were subject to I-net build requirements. However, we do not project that the decision will have much practical effect. OVS operators seem willing to enter into contracts with local franchise authorities that obligate the OVS operator to build an I-net. A freely negotiated contract that is "not required" as a condition for the franchise should be fully enforceable against an OVS operator. Apparently, the OVS companies see advantages in non-video transmission systems that are not within Title II regulation.

The court rejected our argument that Congress only intended traditional telephone companies to be OVS operators. Actually, our argument must have been fairly persuasive, because the court upheld the FCC by relying on Section 4(i) of the Communications Act, which the FCC essentially argues allows it to do anything that is "in the public interest". The court engaged in no analysis of the scope of Section 4(i), but just accepted that the Commission has discretion to do pretty much what it wants. This ruling is of little consequence, however, since local governments can require non-LEC's to get franchises.

The court found that the statute is not ambiguous, as the FCC argued. Section 653(a)(1) says that a LEC may be an OVS, and that a cable operator may provide OVS service, subject to FCC rules and the public interest standard. Therefore, the Court concluded that a LEC can provide OVS service, regardless of whether it is a cable operator or not, and the FCC can't impose an extraneous standard such as effective competition on the LEC.

The court upheld this FCC requirement as reasonable under the public interest standard applicable to FCC regulation of cable.

The court upheld this FCC requirement that market power, not possession of a franchise, should determine when a cable operator can become OVS. The Court noted it wouldn't make sense to let a cable operator allow its franchise to expire and then get the regulatory relief available to OVS operators, who are expected to be new entrants.

The plain meaning of the statute prohibits an OVS operator from discriminating among video programming providers, so the FCC cannot allow an OVS provider to keep a competing, in-region cable operator off its system. We project this little noted portion of the decision will probably disable OVS as a viable market alternative to traditional cable television franchises. OVS operators are reluctant to build new systems that can then be captured in large part by the incumbent cable operator for the transmission of the cable operator’s programming.

The Court upheld Bell South’s argument that the FCC could not use its traditional authority to require LEC construction plans as a backdoor source of authority to require OVS operators to provide the same information.