Sweeping Communications Deregulation Legislation Introduced in Congress - Analysis of the "Ensign Bill'

The aggressive plans by ILECs to deploy fiber optic facilities for broadband video have precipitated a major debate over the future of local cable television franchising requirements. When Congress returns in September, it will have occasion to continue the debate that has percolated in Virginia, Texas, California, and New Jersey. The “Broadband Investment and Consumer Choice” Bill (S.1504) introduced by Sen. John Ensign (R-Nev.) may be one vehicle for focusing that debate.

The Ensign Bill would:

• Eliminate cable franchising for new video entrants and incumbent operators; 
  
  
• Give new video entrants greater rights to obtain “must have” regional and live sports programming; 
  
  
• Deregulate all but the most basic telecommunications services; 
  
  
• Restrict municipal provision of communications services; 
  
  
• Grant pole rental relief for providers of bundled services; 
  
  
• Revise the “Net Neutrality” principles recently adopted by the FCC; and 
  
  
• Require multiple federal rulemaking proceedings to effectuate deregulation.

The lobbying power of ILECs has been evident in the FCC’s recent UNE, DSL and E911 rulings—eliminating most of the unbundling and interconnection requirements imposed by the 1996 Act and imposing new burdens on CLECs. In many ways, the Ensign Bill reflects the desire of the ILECs to launch a “triple play” of lightly regulated video, voice and Internet access services in competition with cable, but without the expensive and time-consuming build-out, PEG and other franchise requirements that have governed cable operators to date. Also absent from the Bill are any provisions related to universal service.

As written, the Bill has little chance of passage. But it will help set the stage for the coming debate over reform of the nation’s communications laws. The following analysis distills the Bill to focus on the practical issues likely to be featured in the coming legislative debate.

I. Video service providers

No more cable franchising. The Bill would repeal most of the current cable television franchising provisions in Title VI for wireline “Video Service Providers” (defined as those using the public rights-of-way and expressly excluding satellite and broadcast). VSPs would no longer need any state or local franchise to construct facilities or provide service. Existing video franchises would be “preempted and superseded.” All VSPs would have the benefit of the compulsory cable copyright license for retransmitted broadcast programming, putting to rest a lingering ILEC concern over how they can be “cable” for copyright benefits but not for franchising burdens.

No build-out requirements. Offering video services only in the most desirable neighborhoods (“cream skimming” or “red-lining”) would be allowed.

Customer service / consumer protection. The FCC would issue new rules establishing the maximum permissible customer service and consumer protection standards that could be enforced by state commissions. The FCC would serve as the default regulator. Only individual civil actions (but not class actions) could be brought for violations.
Local rights of way management. State and local governments would “manage” public rights-of-way in a “competitively neutral” fashion and would be limited to controlling physical construction activities by way of free and expeditious permits only.

Franchise fees revised. State and local governments could collect “reasonable” fees from VSPs to recover the costs of managing the public rights-of-way and VSPs could itemize and pass-through those fees to subscribers, as they do currently. The familiar 5 percent of “gross receipts” cap on these fees would also be retained, but the Bill expressly excludes from the “gross receipts” calculation: revenues from telecommunications and information services (as they are currently) plus advertising, home shopping, marketing support and fee-on-fee. VSPs could petition the FCC for a reduction of the fees to achieve “fairness, equality of treatment, or simplification.”

Public, governmental and educational (“PEG”) channels. Local governments could still require carriage of up to four PEG channels, but there would be no mechanism for funding or establishing related facilities.

Navigation Devices. Although the provisions in Title VI addressing commercial availability of retail cable set-top boxes (which spawned CableCard requirements) remain applicable, the FCC would be tasked with commencing a new rulemaking by January 2008 to “determine the appropriateness” of maintaining the requirements in light of “changes and advancements in technology.”

New program access requirements. The Bill would extend the prohibitions on cable programming exclusivity to preclude: exclusivity for vertically-integrated DBS programming; exclusivity for terrestrially delivered programming in which any multichannel video programming distributor (cable operator, telco or DBS provider) has a financial interest (which would include most regional sports networks); and exclusivity for any live sports programming (DirecTV’s NFL Sunday Ticket) regardless of ownership. The Bill would also create a new grandfathering exception for exclusive agreements governing DBS programming and terrestrially delivered programming entered into on or before July 1, 2003, and would also exempt individual non-sports programs produced for local distribution. The provisions prohibiting exclusivity would sunset in ten years. Existing “price discrimination” and “fair competition” provisions would also be extended to the same non-exclusive DBS, telco, and terrestrially delivered programming and by rule could be further extended to “other programming,” which could sweep in IP-managed video services and VOD.

Parts of Title VI retained. Rate regulation and commercial leased access would be jettisoned, but under the Bill VSPs would still be subject to provisions governing must carry, retransmission consent, customer privacy, EEO, restrictions on obscene and indecent programming, and theft of service.

II. Telecommunications

No Common Carrier / Local Competition Regulation. The Bill would substantially revise the common carrier provisions of the Communications Act. First, carriers—a term essentially abolished by the Bill and replaced with new definitions, discussed below—would effectively be relieved from most Title II obligations including, regulation of retail and wholesale telecommunications of all types (including rate and service reasonableness and non-discrimination obligations). Many of the competitor access provisions of the 1996 Act would also be eliminated. Likewise, most state common carrier regulation would be preempted, leaving the state commissions with authority over only customer complaints and the enforcement of certain FCC rules.

New service definitions. Although the Bill does not affirmatively repeal the statutory distinctions between “information services,” “telecommunications services,” and “cable services,” it effectively renders them inoperable and replaces them with several new definitions, including “Basic Telephone Service,” “Communications Service,” “Broadband Communications Service,” “Narrowband Communications Service,” “2-Percent Carrier,” and “Facilities Based Provider.” Several of these definitions are discussed below.

The “narrowband” versus “broadband” worlds. The Bill effectively establishes parallel regulatory worlds in which broadband communications services are largely unregulated, while legacy narrowband communications services remain subject to certain obligations that resemble, but are different from, certain historical regulatory obligations.

Basic Telephone Service (“BTS”). Narrowband telephone service (64 Kbps or less) will be called “Basic Telephone Service” (“BTS”) and defined as a single-line, flat-rate voice communications service with traditional local calling area, 911, touch tone, and long distance access. Under the Bill, BTS could be provided only by ILECs or eligible telecommunications carriers (i.e., those companies adjudged by a state commission to offer service throughout the service area) and only BTS providers would qualify to draw from the federal Universal Service Fund. BTS providers would not be limited to current switched technologies and the FCC would have to take into account “technical limitations” of new technologies, such as VoIP, when analyzing BTS provider obligations.

BTS would be almost entirely deregulated at both the federal and state levels and would be subject to a price freeze through Jan. 1, 2010, (except that BTS providers could itemize and collect subscriber line charges, USF assessments and taxes). This would void all current federal- and state-level incentive plans, which typically include efficiency penalties and/or royalty plans to reflect the declining cost of telecommunications.

2-Percent Carriers. At the same time, so-called smaller “2 percent carriers”—defined as carriers with less than 2 percent total market share, i.e., carriers other than the RBOCs (SBC, Verizon, Qwest, and BellSouth) and Sprint—can opt to stay under present federal/state regulatory plans (traditional ROR/ROI or alternative rate or earnings plans) on a study area basis. Further, if a 2 percent carrier is also rural LEC in a particular state or study area, it can opt to stay under its present regulatory plan and keep its current 251(f) rural exemption (although the legislation is unclear whether this would be an absolute defense to an interconnection request).

Quality of service requirements. The Bill would direct the FCC to develop “quality of service” standards and establish performance levels for BTS that would replace state and federal standards but which would be enforceable by state commissions. Damages for quality of service violations would be capped at $50 per household for the first violation, and at $500 per household for the second violation, increased over time based on CPI. Class actions would be forbidden but damages would be paid to consumers, not to federal or state treasuries.

Certain legacy obligations retained. The FCC would have to adopt narrowband and broadband rules for all providers concerning auto dialers, solicitation, slamming, cramming, E911, obscene/harassing calls, billing disputes, CPNI and ADA access issues, consistent with any “technical limitations” of the technologies. These new standards would likely preempt existing state standards. State commissions could enforce rules and class actions would not be permitted, although a state commission could sue in federal court to enforce the standard on consumers’ behalf.

Carrier-to-carrier and local competition. At the carrier-to-carrier level, state commission-arbitrated interconnection agreements would be supplanted by “commercial agreements” that would not be subject to FCC or state commission oversight. The FCC is directed under the Bill to develop, within six months, a regulatory framework concerning uniform rate structures, but no particular ratemaking methodology (specifically, incremental or forward-looking costs) is required by the Bill, and no state commission involvement would be permitted. If adopted, this approach would virtually guarantee that ILECs will not have to extend the current level of wholesale discounts to would-be reseller competitors, and interconnection service prices would likely increase as well.

Interconnection. At the network level, the Bill appears to permit ILECs to require multiple points of interconnection by CLECs, directly contrary to the single point of interconnection per LATA opportunity CLECs currently enjoy. In addition, the FCC would be directed to eliminate “arbitrage” (meaning, perhaps, to eliminate or standardize reciprocal compensation), and disputes, and not unduly burden electronic commerce (i.e., clear away vestige regulation and assessments on telephone services). At the same time, “equal access obligations”—the requirement that led to long-distance competition beginning in the 1980s—would be abolished.

Unbundled Network Elements. The Bill would require that ILECs unbundle only copper local loops on “commercially reasonable” rates, terms and conditions, and leave unbundling disputes solely to the FCC. CLEC collocation obligations would be limited to the ILEC Central Office and only to access copper loops. An ILEC would be required to make BTS available for resale, but at retail “less the costs actually avoided.” This approach shifts the discount burden to the CLEC, which must prove savings to achieve any resale discount.

5-Day number portability requirement. Sen. Ensign has been quoted as saying that he views number portability as the key to inter-modal communications competition and his Bill proposes a maximum 5-day number porting requirement for all providers. However, wireless carriers have already agreed to porting in less than three hours and landline carriers generally need no more than a day or two for most lines. Although porting to VoIP has been a problem, it would be up to the FCC to set time limits that are realistic, or ILECs would have incentives to delay for retention marketing. The FCC would also be authorized to investigate whether early cancellation fees deter changing carriers.

III. “Net neutrality” provisions

“Network neutrality” is a vague term that means different things to different people. Its advocates generally say that consumers should have unfettered access to Internet content and applications, and generally mean that networks that make Internet connections available should function only as a “dumb pipe” over which others may run businesses. The FCC’s recent pronouncement on this concept is somewhat narrower but, as described below, Internet access under the Bill would still be subject to certain practical and business limitations.

Internet Access. The Bill provides that “consumer[s] may not be denied access to any content … and a broadband communications service provider [“BCSP”] shall not willfully and knowingly block access to such content …”. In addition, BCSPs could offer “customized content,” but would be prohibited from “adversely affect[ing] the performance of non-customized content.” In any event, these requirements would not apply if “such access is inconsistent with the terms of service plan of such consumer,” including applicable bandwidth capacity or quality of service constraints, and if necessary to prevent illegal usage. BCSPs could also block content or restrict access for network management purposes and when attempting to prevent “unlawful conduct.” The FCC could enforce these requirements.

Network attachments and VoIP access. The Bill provides that BCSPs “shall not prevent any person from utilizing equipment and devices in connection with lawful content or applications,” subject to bandwidth and network management constraints. Likewise, BCSPs would not be permitted to prevent customers from using VoIP services offered by competitors. These provisions appear to be a response to the intense lobbying efforts of Microsoft, equipment manufacturers, Vonage, and others seeking unfettered access to broadband networks.

IV. Mobile services

Forbearance. The Bill proposes no changes to the regulation of mobile (e.g., CMRS) services, but it would create a specific “forbearance” mechanism for mobile operators similar to the forbearance provisions that the 1996 Act created for telecommunications carriers. Under the forbearance provisions, mobile operators could petition the FCC to be freed from any regulatory obligation if they could show such regulation was unnecessary by virtue of increased competition or otherwise, and the FCC would have one year to grant or deny the petition, or it would be deemed granted by operation of law.

Seamless Mobility. The Bill makes “seamless mobility” a guiding principle, instructing the FCC to not take any action in any of its rulemakings that would impede the ability of consumers and their “connecting devices” to move “easily and smoothly between and among” IP-enabled “platforms, facilities and networks.” There is no further specification but for the most part the term has been used by wireless carriers and some equipment manufacturers promoting movement between cellular, WiFi, DSL, cable, residential WLANs, VoIP, and other platforms and networks using only one phone, one phone number and one voicemail box.

V. Pole attachments

The Bill would make major changes in the provisions governing pole attachments in Section 224 of the Communications Act. ILECs would gain mandatory access rights to poles, and the rates, terms and conditions for ILEC attachments would likewise have to be just and reasonable. Poles owned by other telecommunications carriers (AT&T, MCI, Sprint) would also be subject to Section 224. And, if an attacher provides both video and telecommunications services, the pole attachment rate would be the cable rate, leaving only pure telecom carriers subject to the telecom rate. This would provide a major savings for ILECs which, combined with mandatory access to electric poles, could allow them to abrogate joint ownership agreements with other utilities and demand regulated rates for access to other carriers’ poles as well.

The Bill also appears to radically change the pole attachment rights of wireless telecommunications providers. The Bill contains an ambiguously worded provision stating that nothing in Section 224 “applies to a wireless service facility, including to towers of a provider of mobile services.” The Bill does not define wireless service facility, and as written, the provision could mean that wireless antennas and equipment would lose pole attachment rights—an outcome consistent with the policy goals of many pole-owning utilities.

VI. Municipally owned networks

The Bill would substantially limit the ability state or local governments to provide communications service over municipally owned facilities. The governmental entity would have to give conspicuous advance notice of the type and cost of the services to be provided, along with a detailed accounting of any preferential access to rights-of-way or land, tax treatment, or funding unavailable to private entities. Private competitors could bid and exercise a “right of first refusal” to build and operate a system on the same terms and conditions as the governmental entity. Even if a governmental entity ultimately prevailed in the bidding process, private providers would have access to the same conduit, trenches and locations used by the governmental network for concurrent or future uses. The Bill would grandfather existing governmental networks, but only for existing lines of business and service areas.

These particular provisions have been characterized as a middle ground between two other recent legislative initiatives—H.R. 2726, introduced by Representative Pete Sessions, which would prohibit state or municipal networks from competing with private telecommunications companies providing substantially similar services, and S. 1294, the Community Broadband Act of 2005, introduced by Senators McCain and Lautenberg, which would permit municipal provision of advanced telecommunications services, but would create a level playing field for public and private providers.

If you have any questions or would like to further discuss the implications of Senator Ensign’s proposed legislation, please contact us.