[Federal Register Volume 59, Number 237 (Monday, December 12, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30241]


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[Federal Register: December 12, 1994]


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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]
BILLING CODE 6712-01-M