No. 96-60844

(consolidated)

In the

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

NATIONAL CABLE TELEVISION ASSOCIATION,

et al.,

Petitioners,

v.

FEDERAL COMMUNICATIONS COMMISSION

and UNITED STATES OF AMERICA,

Respondents,

SOUTHWESTERN BELL TELEPHONE COMPANY, et al.,

Intervenors.

Petition for Review of an Order of the

Federal Communications Commission

Joseph Van Eaton

William Malone

Matthew C. Ames

MILLER & VAN EATON, p.l.l.c.

1225 Nineteenth Street, N.W.

Washington, D.C. 20036

(202) 785-0600

Attorneys for Petitioner

National Association of

Telecommunications Officers

and Advisors

February 26, 1997

In the

UNITED STATES COURT OF APPEALS

for the Fifth Circuit

NATIONAL CABLE TELEVISION

ASSOCIATION, et al.,

Petitioners, No. 96-60844

(consolidated)

v.

FEDERAL COMMUNICATIONS COMMISSION

and UNITED STATES OF AMERICA,

Respondents,

SOUTHWESTERN BELL

TELEPHONE COMPANY, et al.,

Intervenors.

The undersigned counsel of record certifies that the following listed persons may have an interest in the outcome of this case. These representations are made in order that the Judges of this Court may evaluate possible disqualifications or refusal.

___________________________

William Malone

Attorney of record for

Petitioner

February 26, 1997

Petitioners respectfully request that the Court hear full oral argument. This case presents questions of first impression on the legality of the initial rules adopted by the Federal Communications Commission ("FCC") to implement certain 1996 amendments to the Communications Act of 1934. This case is one with significant implications for local governments across the nation. If allowed stand, the order of the FCC under review could deprive local governments collectively across the nation of millions of dollars annually in franchise fee revenues and in-kind benefits from operators of cable systems and open video systems. This is a case where oral argument will materially assist the Court in understanding the implications of the FCC's rules.

 TABLE OF AUTHORITIES

H.Conf. Rpt. No. 104-458, 104th Cong., 2d Sess (1996) passim

Implementation of Section 302 of the

Telecommunications Act of 1996, Third Report

and Order and Second Order on Reconsideration,

4 Comm. Reg. 380 (P&F) (1996) 7, 9, 13

No. 96-60844

(consolidated)

In the UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

NATIONAL CABLE TELEVISION ASSOCIATION,

et al.,

Petitioners,

v.

FEDERAL COMMUNICATIONS COMMISSION

and UNITED STATES OF AMERICA,

Respondents,

SOUTHWESTERN BELL TELEPHONE COMPANY, et al,

Intervenors.

Petition for Review of an Order of the

Federal Communications Commission

NATOA's petition brings before the Court for review the rules of the Federal Communications Commission ("FCC" or "Commission") adopted in a notice-and-comment rulemaking proceeding. This Court has jurisdiction of NATOA's petition under the Hobbs Act, now 28 U.S.C. ' 2344; Section 402(a) of the Communications Act, 47 U.S.C. ' 402(a); and Section 10 of the Administrative Procedure Act, now 5 U.S.C., ch. 7. NATOA was a party in the rulemaking before the FCC. The FCC's order on reconsideration was published in the Federal Register on August 21, 1996, and NATOA's petition for review was filed in the D.C. Circuit on October 21, 1996.

In addition to the issues that have been identified in the brief for Petitioners, the City of Dallas and the U.S. Conference of Mayors, the following questions are presented in the petitions that are before this Court:

Petitioners hereby adopt the Statement of the Case contained in the Brief of Petitioners City of Dallas and U.S. Conference of Mayors.

Chevron USA v. National Resources Defense Council, 467 U.S. 837 (1984), prescribes a two-prong process for determining the correctness of the FCC's construction of Section 653 of the Communications Act of 1934, as added by the Tele-communications Act of 1996 and codified as 47 U.S.C. ' 573 (hereinafter referred to as "Section 653"). Under the first Chevron prong, the Court must determine whether the plain meaning of the provisions of the statute can be ascertained by using standard canons of statutory construction. If so, the FCC's construction is entitled to "little deference," and the meaning of the statute is a question of law for the Court. Petrou Fisheries v. ICC, 727 F.2d 542, 545 (5th Cir. 1984). See Chevron, 467 U.S. at 843; White v. INS, 75 F.3d 213, 215 (5th Cir. 1996).

The second Chevron prong only applies if the statute has no plain meaning. In that case, an agency's construction is entitled to deference, in most instances.

As we will show, the FCC's resolution of three critical issues in the OVS rules is not entitled to deference under the first prong of Chevron. "Under Chevron's first step, the plain language of the statute is the more reliable indicator of congressional intent." The FCC has ignored the plain meaning of Section 653 and replaced it with its own regulatory concepts, completely disregarding congressional intent.

Congress created OVS as a means of encouraging local telephone companies to enter the video programming market and begin competing with cable operators as quickly as possible. The purpose of OVS was to allow existing telephone companies to provide service over their own networks, not to create a new scheme under which any person could provide cable service.

To this end, the Telecommunications Act of 1996 establishes a carefully crafted statutory scheme under which a local exchange carrier ("LEC") is permitted to deliver video programming in one of four different ways: (1) as a cable operator; (2) over Multichannel Multipoint Distribution Service, which is the wireless equivalent of a traditional cable system; (3) on a common carrier basis; and (4) as an OVS operator or quasi-common carrier.

Congress believed that it could encourage new entrants into the video marketplace by giving LEC's four ways to enter the market. At the same time, however, Congress did not want to unduly disadvantage cable operators. Therefore, it provided that OVS operators should pay local franchising authorities for the right to use the public rights-of-way at levels that preserve parity between OVS operators and cable operators. Congress also provided that OVS operators would be subject to requirements "no greater or lesser" than those required of cable operators under Section 611 of the Communications Act. That section authorizes local governments to enforce requirements for facilities, equipment and other support for public, educational, and governmental ("PEG") use, including institutional networks ("I-Nets").

The FCC, however, has ignored this meticulously devised regulatory scheme and replaced it with its own vision.

1. Contrary to the plain language of the statute, the FCC's rules allow "any person" to become an OVS operator, including an incumbent cable operator. Such an interpretation is not consistent with the statute's stated intent of using OVS to encourage "new entrants" into the marketplace.

2. Also contrary to the plain language of the statute, the FCC's rules do not allow local governments to require the OVS operators to provide institutional networks. The FCC properly interprets Section 653 as requiring OVS operators to provide channels, facilities and equipment for public, educational and governmental use that are equivalent to those required of cable operators pursuant to Section 611. Inexplicably, however, the FCC's rules exclude institutional networks from that requirement even though Section 611 on its face permits enforcement of requirements for I-Net construction. The statute does not distinguish between institutional networks and other facilities that may be required under Section 611; it merely requires that OVS operators be subject to the same requirements as incumbent cable operators.

3. Finally, the FCC's rules fail to establish the parity Congress intended in the fees that OVS providers and cable operators pay for use of the public rights-of-way. Congress directed the FCC to require OVS operators to pay a fee in lieu of the cable franchise fee. The FCC has gone further, however, and purported to preempt local and state authority to impose other fees for occupancy of the right-of-way. As a result, and because the FCC has read the statute to exclude the revenues of unaffiliated programmers from the in lieu fee calculation, OVS providers pay far less than do similarly situated cable operator. The FCC's action cannot be squared with the statute.

In adopting the specific OVS rules congressionally mandated in Section 302(b) of the Telecommunications Act of 1996, the FCC adopted a series of rules purporting to govern, inter alia, who may be an OVS operator; OVS operators' obligations under Section 611 of the Cable Act; and the "in lieu" fee that is to be imposed on OVS operators. For the reasons discussed below, the rules adopted do not conform to the plain language of the statute.

Contrary to the statute's plain language, the FCC's rules would allow cable operators and any other person to become an OVS operator.

Section 653(a)(1), 47 U.S.C. ' 573(a)(1), appears in a new Part V of Title VI titled "Video Programming Services for Provided by Telephone Companies." It provides in relevant part that:

Section 653 on its face thus distinguishes between LECs, who are authorized to provide cable service through an open video system, and others, who are limited to providing video programming. The distinction is significant because an entity authorized to provide cable service can provide variety of transmission services in addition to providing video programming; a person that can provide video programming is only entitled to provide programming comparable to programming provided by television broadcast stations.

The obvious reason for the distinction is that the LEC is authorized to be the operator of the system, while others may be authorized to use capacity on the system, in accordance with FCC rules. In fact, the FCC has clearly recognized that the language that refers to cable systems and others is intended to allow the FCC to adopt rules governing those entities' use of an OVS system. The FCC adopted rules restricting cable system operators' use of LEC OVS systems pursuant to that interpretation. Nonetheless, the FCC also adopted rules to allow anyone to operate an OVS system to provide cable service, even though the statute itself does not allow the FCC to do so.

The legislative history makes it clear that OVS was intended to be a means for local telephone companies to provide competition to existing cable systems as new entrants into the market. The FCC spent many years working on its video dialtone rules, which would have allowed local telephone companies to deliver video programming on a common carrier basis. The 1996 Act superseded those rules, but did so with the clear intention of substituting OVS as a means for these same carriers to provide cable service. For example, the Conference Report on S. 652, the Telecommunications Act of 1996, states that "[t]he conferees recognize that telephone companies need to be able to choose from among multiple video entry options to encourage entry . . . . New Section 653(a) focuses on the establishment of open video systems by local exchange carriers and provides for reduced regulatory burdens. . . ." Conference Report at 177. Later on, the same report emphasizes this point:

Id. at 178.

In other words, Congress established OVS as a means for local exchange carriers to enter the video programming market, as new entrants in established markets.

Indeed, OVS is only one part of a precise, four-part Congressional approach to allowing local telephone companies to provide video services, clearly delineated by the terms of Section 651. First, local exchange carriers may become cable operators and serve subscribers by delivering programming selected by the operator over wireline networks owned and controlled by the operator. Second, they may obtain licenses to provide Multichannel Multipoint Distribution Service, also known as wireless cable, which is the wireless equivalent of a traditional cable system. Third, they may transmit video programming selected by and at the request of others, on a common carrier basis. And fourth, they may become OVS operators, or quasi-common carriers, delivering to subscribers programming that they select and also making capacity available on their networks for unaffiliated programmers to deliver programming of their own. These four options represent a comprehensive attempt to encourage telephone companies to provide video services in whatever fashion best advances their business strategies. There is no equivalent to Section 651 that permits cable operators to become OVS providers.

The FCC's rules, however, do something entirely different. They allow any prospective provider of video programming to operate an OVS system and provide cable service, including a cable operator. The rules allow "any person" to be certified as an OVS operator, "except that an operator of a cable system . . . may not obtain such a certification within its cable service area unless it is subject to 'effective competition' . . . ." 47 C.F.R. ' 76.1501. Cable operators that are not subject to effective competition may file a petition with the FCC to convert their systems to OVS. Id.

By allowing cable operators to become OVS providers, FCC rewrites both Section 653 and the provisions of Title VI of the Communications Act that govern cable operators and ignores the legislative history. Congress expressly established OVS as an alternative to traditional cable systems, not as a replacement for them. In fact, if a telephone company wishes to provide cable service as a cable operator, it may do so. But this does not mean that Congress intended cable operators to become OVS operators. Allowing cable operators to establish OVS systems hardly encourages "new entrants" into the marketplace -- the incumbent is by definition not a new entrant. And, given that the reason why regulation was streamlined was to promote new entrants, it makes no sense, under the statutory scheme, to permit incumbents to obtain those benefits.

In the Third Report and Order, the FCC insists that it is complying with Congress's desire to promote competition, but this argument requires ignoring the plain language of the statute. Section 653 does not say that "any person may provide service to its cable service subscribers through an open video system." It says only that a local exchange carrier may do so, and the legislative history reinforces this conclusion.

The 1996 Act changed the Communications Act in fundamental ways. In drafting the 1996 Act, Congress considered numerous proposals; if Congress had intended to allow cable operators to avoid their obligations under Title VI, it could have done so. But it did not. This is not a case of an expert agency filling in the interstices left by Congress. It is an abrogation of a fundamental decision of the legislature that flies in the face of the text of the statute.

The FCC's rules do not require OVS operators to provide institutional networks at the request of local governments, even though the statute expressly applies Section 611 of the Communications Act to OVS operators. Under that provision, franchising authorities may require cable operators to build institutional networks for the uses defined by the local government. Section 611(b), 47 U.S.C. ' 531(b). Section 653(c)(1)(B) expressly provides that Section 611 shall apply to OVS operators, subject to rules issued by the FCC, and Section 653(c)(2)(A) directs the FCC to establish obligations that are "no greater or lesser" than those contained in Section 611.

In issuing its rules, however, the FCC chose to ignore the plain language of both Section 653 and Section 611. An OVS operator is only required to provide capacity on an institutional network if it has voluntarily elected to build an institutional network. 47 C.F.R. ' 76.1505(e). If, on the other hand, the OVS operator has elected not to build any institutional network at all, the local government has no authority to require construction of the network. This conflicts directly with Section 611, and means not only that OVS operators are relieved of obligations that can be imposed on cable operators, which can still be required to provide institutional networks. Because provision of in-kind facilities constitutes part of the compensation a local government receives from a cable operator, this reading permits OVS operators to use rights-of-way while paying less compensation than cable operators.

The FCC's error seems to stem from its assumption that institutional network requirements are only imposed under provisions of the Cable Act that do not apply to OVS operators by the statute's terms. In fact, all obligations of Section 611 may be applied to an OVS operator. Section 611 on its face states that a local franchising authority may "enforce any requirement in any franchise" that relates to the designation of channel capacity for I-Net use, including "any provisions" for I-Net "services, facilities or equipment." The FCC acknowledges that OVS operators have PEG obligations that parallel those of cable operators, but misunderstands the relationship between institutional networks and other PEG facilities.

For these reasons, 47 C.F.R. ' 76.1505(e) does not conform with the plain language of the statute, and is inconsistent with the Congress's stated goal of providing for PEG parity between cable operators and OVS operators.

The statute and the legislative history make it plain that Congress intended OVS systems to pay fees to local governments equivalent to those paid by cable operators. Section 653 itself defines that authority in one regard when it states that an OVS operator:

Section 653(c)(2)(B), 47 U.S.C. ' 573(c)(2)(B).

However, by the plain terms of Section 601 of the 1996 Act, local authority to impose fees on OVS operators or on those using OVS systems are not otherwise affected. Nonetheless, the FCC apparently views Section 653 as the only source of compensation for use of the rights-of-way by open video systems. That result is not consistent with the language of the statute, nor is it consistent with its purpose. The FCC's rules permit OVS operators to pay local governments less for the right to use the public rights-of-way than cable operators do, even though the OVS provisions are intended to result in OVS operators paying compensation at least equivalent to compensation paid by cable operators.

The legislative history reinforces this conclusion. The Conference Report describes the fee-in-lieu provision as "another effort to ensure parity among video providers . . . ." Conference Report at 178.

The FCC's rules, however, do not ensure parity among video providers. The FCC's rules exclude revenues "collected by unaffiliated video programming providers, such as subscriber or advertising revenues . . . . [and a]ny gross revenues fee that the open video system operator or its affiliate collects from subscribers or video programming providers . . . ." 47 C.F.R. ' 76.1511.

These exclusions have two effects. First, they discriminate in favor of OVS operators as compared to cable operators because they reduce the amount of the fees that OVS operators have to pay to levels below those paid by cable operators. Second, they reduce the revenues that local governments receive for use of their rights-of-way.

Because cable operators do not have extensive obligations to make their channels available to unaffiliated programmers, essentially all of the revenue earned by their systems is subject to franchise fees, unless otherwise provided in a franchise agreement. Revenues paid by subscribers or others directly to unaffiliated programmers are very small as a proportion of total revenues earned by a cable system. In fact, in most -- if not all -- cases, cable operators that carry leased access programming receive carriage fees from the leased access programmer and both subscription fees and installation fees from subscribers. If the intent of Congress is achieved, however, OVS operators will presumably lease much of their capacity to unaffiliated programmers. In that case, OVS providers may receive hook-up fees from all subscribers, carriage fees from unaffiliated programmers, and monthly subscription fees from delivery of their own video programming to subscribers, but no revenue from the subscribers of unaffiliated programmers. It seems unlikely that OVS operators would be able to charge hook-up fees comparable to basic cable subscription fees, because there would be no programming component associated with those charges. Thus, the OVS rules effect a transfer in the flow of revenues from the system operator to the unaffiliated programmer. Those fees for the provision of programming will not be included in the OVS operator's revenues. If the unaffiliated programming revenues cannot be reached, that reduction in revenue could be significant, and would increase as the number of unaffiliated programmers increases.

To the extent the FCC is reading the statute to restrict states and localities so that their sole compensation for use of rights-of-way is a fee based upon the past revenues of the OVS operator and its affiliates, the FCC's rules reduce the OVS system's obligations to the state and local governments. This reading directly contradicts the statute's requirement of parity among video providers.

The FCC's new OVS rules do not conform to the plain meaning of Section 653. Congress directed the FCC to develop a means by which local exchange carriers could compete with cable operators, in a manner different from traditional cable franchising. Congress also directed the FCC to ensure parity with respect to public, educational and governmental access requirements, institutional networks, and franchise fees. Congress did not authorize the FCC to establish a mechanism by which cable operators could escape the obligations of their franchises and the requirements of the Cable Act, or in which OVS operators would enjoy lesser obligations to local franchising authorities than cable operators. The FCC's rules, therefore, ignore the plain meaning of Section 653.

Accordingly, Petitioner respectfully prays that the Court remand the order and direct the FCC to amend its OVS rules to conform to the intent of Congress.

February 26, 1997

Matthew C. Ames

Washington, D.C.

February 26, 1997