OMB Rejects FCC Commercial Leased Access Rules

On July 10, 2008, the Federal Communications Commission (FCC) was dealt another significant setback in its controversial effort to overhaul its commercial leased access (CLA) rules. In a rare rebuff of one federal agency by another, the Office of Management and Budget (OMB) rejected key aspects of the FCC's amended rules—those governing the time and procedures for cable operators' response to CLA requests—as violations of the 1980 Paperwork Reduction Act.

The OMB’s rejection comes after the U.S. Court of Appeals for the Sixth Circuit granted a stay of the effectiveness of the FCC’s pending new CLA rules in a case brought by the cable industry. None of the FCC’s amended CLA rules will go into effect until the outcome of the appeal of the rules, even if the FCC votes to ignore the OMB. Either way, it appears increasingly likely that the FCC will have to amend its proposed changes to the CLA rules in order for the rules to take effect.

The FCC's new rules, which were publicly released on Feb. 1, 2008, drastically reduce the rates cable operators may charge for the lease of CLA channels. The rules establish a 10-cent-per-subscriber-per-month cap on CLA rates, but also create a complicated formula likely to produce actual CLA rates well below that amount (and a rate of zero in many cases), which is expected to create a surge in demand for access to CLA channels. The rule amendments are intended to spur expanded lease by CLA programmers of channel capacity that federal law requires cable operators to make available to the public for commercial use.

The new rules also tightly prescribe the process by which the terms and conditions of leased carriage are established; impose an onerous three-business-day deadline for cable operators to respond to requests for information; require cable operators to disclose confidential business information to prospective CLA channel lessees; and impose substantial new annual reporting requirements on cable operators.

The 1980 Paperwork Reduction Act generally requires federal agencies to minimize paperwork burdens on parties affected by new regulations; to justify imposing any new paperwork burdens; and to submit new regulations to OMB for review. The July 10 OMB action specifically addresses only the information-collection and paperwork aspects of the new rules, but it may have broader implications because the increased paperwork and reporting burden on cable operators is directly tied to the dramatic reduction in CLA rates. In its ruling, OMB concluded that the FCC's CLA order was defective in several material respects, finding that the FCC had not:

• demonstrated the need for reducing the timeframe cable operators have to provide information to potential programmers from 15 days to three business days;
  
  
• demonstrated that it had taken reasonable steps to minimize the burden on cable operators who will be required to hire new staff in order to comply with the shorter response deadline and increased volume of CLA inquiries;
  
  
• demonstrated that there are reasonable mechanisms in place to protect proprietary and confidential information cable operators will be required to provide potential programmers; and
  
  
• demonstrated the need for an increased paperwork burden due to an increase in the number of non-bona fide CLA inquiries to cable operators.

The OMB action is the second major loss for the FCC against challenges of the new CLA rules brought by the cable industry. On May 22, the U.S. Court of Appeals for the Sixth Circuit granted a request by the National Cable & Telecommunications Association (NCTA) to stay the effectiveness of the pending rules. In issuing the stay order, the court found that NCTA had demonstrated a likelihood of irreparable harm to cable operators and a potential of success on the merits of its judicial challenge.

Although the OMB decision does not reject the substantive elements of the FCC's new leased access rules (e.g., it does not per se reject the new, lower maximum leased access rate that cable operators may charge for their leased access channels), and FCC representatives have stated that they are considering their options, the bottom line is that none of the new rules can go into effect given the stay issued by the Sixth Circuit Court of Appeals. Thus, even if the FCC does attempt to cure the defects noted by OMB, or to bypass the OMB ruling (which it can do by majority vote), the court's stay order will prevent the FCC from putting its new rules into effect on a piecemeal basis pending the outcome of the judicial appeal.