The Month in Brief

In Washington, the dawning year wears a gray and dispirited aspect. The Federal Communications Commission ("FCC" or "Commission") faces 2006 with two new commissioners, but no relief from its Republican-Democratic split in sight. The telecommunications industry, after a frantic round of consolidations, opens its first year in decades without the old MCI and AT&T astride the vanished "interexchange telephone service" marketplace. In the meantime, technology and the smart money continue to move in the direction of broadband and wireless services, and all segments of the industry wait for Congress to return and address possible amendments to the Communications Act.

For all that, we anticipate an interesting year. The following tones down the rhetoric, tells you what’s happening, and provides the usual list of deadlines for your calendar.

Happy New Year to all of our loyal readers.

Senate Approves Tate and Copps Nominations to FCC

Late on December 21, 2005, the U.S. Senate confirmed Republican Tennessee regulator Deborah Tate to fill a Republican seat on the FCC and Commissioner Michael Copps, a Democrat, to serve another term at the agency.

A day earlier, press reports had indicated that the Senate had placed a hold on the nominations. These reports indicated that Senate Minority Leader Reid (D-NV) had stated that he would subject all nominations to cloture votes, a procedure that would make it virtually impossible for the Senate to process the nominations this year. Senator Reid reportedly made this statement because he was angry with Republican tactics regarding the budget reconciliation and defense bills.

The nominations came to the Senate floor after the Senate Commerce Committee, on December 13, unanimously agreed to move the nominations onto the Senate calendar without the scheduled markup session.

President Bush has not submitted a nomination for the fifth FCC position, so the Commission will retain a 2-2 Republican-Democrat split for the foreseeable future.

Ms. Tate, an attorney, will be leaving a six-year term at the Tennessee Regulatory Authority ("TRA"). She was appointed to the TRA by Republican Governor Don Sundquist, whom she had previously served as an assistant. She served a one-year term as Chair of the TRA from July 1, 2003-2004. She also was assistant legal counsel to Tennessee Senator Lamar Alexander while he was Governor of the state, and reportedly was backed by Tennessee’s senior Senator and Majority Leader, Bill Frist. In June of 2003, Ms. Tate was appointed Vice-Chair of the Washington Action Committee by the President of the National Association of Regulatory Utility Commissioners ("NARUC") and in February 2005 became chair. In December of 2003, FCC Chairman Michael Powell appointed Ms. Tate to the FCC’s Federal-State Joint Conference on Advanced Telecommunications Services. Ms. Tate also was founder and president of Renewal House, a recovery residence for women with crack cocaine addictions and their children.

Commissioner Copps joined the FCC as a Commissioner in 2001. He previously was Assistant Secretary of Commerce for Trade Development and, before that, was Deputy Assistant Secretary of Commerce for Basic Industries. For the twelve years prior, Dr. Copps served as Chief of Staff to former South Carolina Senator Ernest Hollings. Commissioner Copps also was a history professor at Loyola University of the South from 1967-1970. Dr. Copps receive his Bachelor of Arts degree from Wofford College and his Ph.D. in U.S. History from the University of North Carolina at Chapel Hill.

Ms. Tate’s FCC term will run until June 30, 2007, and Dr. Copps’ additional full term will expire on June 30, 2010.

FCC Moves to Loosen Junk Fax Restrictions

At its December open meeting, the FCC opened a proceeding to implement the Junk Fax Prevention Act that was signed into law over the summer. The Junk Fax Prevention Act (enacted at the behest of business community concerns) directed the FCC to loosen its regulations to permit an established business relationship ("EBR") exception to the ban on unsolicited fax advertisements. The FCC previously had required written permission for such faxes, even from individuals with an EBR with the business.

In the Notice of Proposed Rulemaking ("NPRM"), the FCC proposes: (1) to remove the prior written permission limitation in the existing rules; and (2) to adopt a definition of an EBR that would apply to both business and residential subscribers.

The NPRM also seeks comment on: (1) whether there should be specific limits on the duration of an EBR; (2) what types of notice would be considered "clear and conspicuous"; (3) whether 30 days is the "shortest reasonable time" for fax senders to comply with any requests not to receive future fax advertisements; (4) whether certain classes of small business senders should be exempted from the requirement to provide a cost-free opt-out mechanism; (5) what forms of "cost-free" opt-out mechanisms are acceptable; (6) whether an opt-out request should terminate the EBR exemption even if the recipient continues to do business with the sender; (7) whether opt-out requests to a third-party agent/sender should apply to the underlying business on whose behalf the fax was sent; and (8) whether the FCC should allow tax-exempt nonprofits to send faxes to their members that do not contain the otherwise required opt-out notice.

As the FCC’s previous written permission requirement was scheduled to become effective on January 9, 2006, the FCC also further delayed the effective date of these previous rules until the conclusion of the new rulemaking proceeding.

Comments in this proceeding are due January 18, 2006, and reply comments are due February 2, 2006.

Draft House Broadband Bill Markup Postponed at the Last Minute Until 2006

House Energy and Commerce Committee Chairman Barton (R-TX) had previously announced his intent to schedule a markup by the Telecommunications and the Internet Subcommittee of his draft broadband bill (discussed in the last three Bulletins) before Congress adjourned for the holidays. The public policy debate raised by the revised draft of the bill circulated on

November 2 focused on a number of issues, including the "net neutrality" provision guaranteeing subscriber access to Internet services and applications.

Among the interests weighing in on the bill was a coalition of municipal groups, including the U.S. Conference of Mayors, the National League of Cities and the National Association of Counties, which stated in a November 30 letter to the Committee and Subcommittee leadership that the draft language "does not protect local governments’ core police powers." The groups said that the bill should clearly protect localities’ authority over public rights-of-way. Industry representatives sparred over the implications of the net neutrality provision. Incumbent local telephone companies warned that a more explicit nondiscrimination safeguard would undermine carriers’ ability to manage the network and ensure service quality. Competitors objected that incumbents will discriminate in the provision of access to third-party content, application and other service providers without more explicit protections. Competitive service providers argued that the draft language would allow incumbents to prioritize their own traffic over competitors’ "best efforts" traffic. Industry observers and experts have expressed concern that, under the revised draft, application and content providers would have to reach separate deals with broadband access providers to reach customers who have already purchased access service sufficient to support the application or content delivery, thereby imposing additional costs on competitive application or content providers.

In light of the furious debate over net neutrality and other issues, CompTel President Earl Comstock stated in a December 6 letter to the House Committee leadership that markup of the bill should be postponed until next year to allow time to address the "substantive and complex" issues that have arisen. The letter stated that the draft bill "could substantially change the Internet by severely restricting competition and creating network gatekeepers who would decide what content and services Americans receive." Comstock also charged that the draft contains "major structural flaws," including the conflicting, overlapping regimes applied to circuit-switching and packet-switching technologies, and that the draft gives only broadband Internet transmission service providers interconnection rights. Without more regulatory oversight, "network owners could price competitors off the network."

Another provision in the draft bill eliciting industry comment is Section 410(e), which would subject all voice-over-Internet Protocol ("VoIP"), wireless and broadband Internet service providers covered by the bill to the foreign ownership restrictions in Section 310 of the Communications Act. According to Committee staff, this provision was intended to provide regulatory parity between wireless license holders already subject to Section 310 and all other service providers. According to industry sources, it is not clear how this provision would affect companies like T-Mobile USA, Inc., which is owned by Deutsche Telekom. They speculated that, although T-Mobile has satisfied the requirements of Section 310, it might face additional regulation as to its foreign ownership under the draft bill. The Committee staff has indicated, however, that it was not the intention of the drafters to require companies that already had approval for foreign ownership to be subject to further regulation, but rather to subject new providers to the same requirements.

On December 8, the Subcommittee decided to postpone any markup of the draft broadband bill until 2006, after the members realized that they could not resolve their differences before the holidays. Industry observers pointed out that a markup early next year would still allow the full Committee to act within the March timeframe previously announced by Chairman Barton. On December 15, the "Group of Five" – Chairman Barton, Ranking Member Dingell (D-MI), Rep. Pickering (R-MS), Subcommittee Chairman Upton (R-MI) and Ranking Member Markey (D-MA) – met to work out their disagreements over the draft. Bryce Dustman, an aide to Rep. Wilson (R-NM), indicated that the current draft is "an irrelevant document at this time" and that the issue now is "how closely we get back towards" the original draft. The staff appears to be aiming at a Subcommittee markup in February.

Amy Levine, staff aide to Rep. Boucher (D-VA), said that Chairman Barton likely will address universal service next spring in a separate measure. She said that a universal service reform discussion draft circulated by Rep. Boucher and Rep. Terry (R-NE) (discussed in the November Bulletin) could become a vehicle for universal service reform as the debate moves forward.

Assuming that disagreements over the Barton draft bill can be worked out in the House Committee, any resulting action must still be coordinated with the Senate. According to Senate Commerce Committee Staff Director Lisa Sutherland, speaking at a CompTel conference on December 15, the Committee will hold 15 hearings on telecom-related matters in the first quarter of 2006, ranging from indecency to FCC oversight. She said that the Senate Commerce Committee "may take a broader approach" than the Barton draft and will include universal service reform in any broad-based bill, although she indicated that more narrowly focused bills could be broken off and moved ahead if necessary.

On December 15, Sen. DeMint (R-SC) introduced the Digital Age Communications Act (S. 2113), a deregulatory telecom bill that would preempt nearly all state regulation, authorize all communications service providers to use public rights-of-way, eliminate existing franchises and franchise fee obligations in four years, establish a telephone number-based universal service contribution mechanism and cap the universal service fund at $3.65 billion, to be distributed as block grants to the states. The bill would also replace the public interest standard in the Communications Act with an "unfair competition standard," thereby regulating the telecom industry more "like other businesses," according to a press release accompanying the bill. All FCC rules would sunset in five years unless the FCC could show they were still necessary to protect consumers. S. 2113 was referred to the Commerce Committee. Rural exchange carriers expressed concerns about the cap on the universal service fund and the state block grant distribution mechanism. The Bell companies, however, praised the bill as facilitating investment and competition.

FCC Takes Additional Steps to Improve Air-to-Ground Services

The FCC has established competitive bidding rules for the auction of air-to-ground ("ATG") services and resolved certain petitions seeking reconsideration of a December 2004 decision opening the ATG services market to multiple competitors. The FCC’s action demonstrates that it continues to promote flexible, market-based solutions and the use of new and innovative technologies.

Specifically, the FCC concluded that it would apply the competitive bidding rules already set forth in Part 1 of its rules to the auction of commercial 800 MHz ATG and 400 MHz General Aviation spectrum. The FCC also decided that its existing bidding credits and small business definitions apply to the auction of the commercial ATG spectrum. A "small business" has average annual gross revenues for the three preceding years of less than $40 million and will qualify for a 15 percent bidding credit. A "very small business" has average annual gross revenues for the three preceding years of less than $15 million and will qualify for a 25 percent bidding credit.

Acting on several petitions for reconsideration, the FCC clarified that licensees can use high-altitude stratospheric platforms, such as Space Data Corporation’s unique and innovative wireless system that utilizes weather balloons to provide ATG services. According to the FCC, its rules provide "licensees flexibility to deploy any type of transmission technology, provided that the radio emissions produced fit within a licensee’s assigned spectrum."

Furthermore, the FCC concluded that it would not revisit certain conclusions set forth in its prior ATG decision. Specifically, the FCC upheld its prior determinations to renew Verizon Airfone’s existing ATG license for a non-renewable period of five years and to provide Verizon Airfone with two years to transition its incumbent ATG operations to 1 MHz of the ATG band so that new ATG services can be deployed. The FCC, however, adopted certain reporting requirements to monitor Verizon Airfone’s migration of its incumbent operations. The FCC also affirmed its decision to prohibit the provision of ancillary land mobile and fixed services using ATG spectrum.

Google to Buy 5% Stake in AOL

America Online, Inc. ("AOL") and Google, Inc. ("Google") have struck a deal to strengthen their strategic alliance. Under the agreement, Google will buy a 5% stake in AOL for $1 billion. Google will continue to provide its search engine to AOL and to share revenue generated by ads appearing next to search results, but under the new deal AOL will sell those ads directly to advertisers instead of referring advertisers to Google. Google also will promote AOL content in its sponsored link search results and provide AOL with a $300 million credit to advertise on Google. In addition, the companies will make their instant-messaging services compatible and look for ways to digitize some of Time Warner’s library of movies, television and other content for the Internet.

The deal also gives Google the right to demand an initial public offering ("IPO") beginning in July 2008. If Time Warner, AOL’s parent, does not want to proceed with an IPO, Time Warner could buy back Google’s stake based on a fair market appraisal.

Time Warner hopes that Wall Street will value AOL more highly because of the deal, which sets AOL’s worth at $20 billion. Time Warner has been under pressure to boost its stock price by financier Carl Icahn, who is launching a proxy fight to unseat a majority of Time Warner’s directors.

Broadcast Developments

House and Senate Pass Compromise DTV Legislation. House and Senate conferees reached compromises on several key portions of their respective digital TV ("DTV") bills, with the House passing legislation as part of the budget reconciliation package on December 19 and the Senate passing the conference report on December 21. The report will return to the House for approval because of Medicaid-related provisions of the legislation. The DTV provisions set February 17, 2009 as the deadline for the end of the digital TV transition, provide up to $1.5 billion to subsidize consumers’ purchases of converter boxes that will allow analog TV sets to continue operating after the digital transition is completed, and earmark $1 billion for a state and local public safety interoperability grant program. Initially, Congress will allocate $990 million (of which $100 million may be used for administrative expenses) to the subsidy program, which will be run by the National Telecommunications and Information Administration ("NTIA"). If NTIA needs more money for the program, an additional $510 million could be allocated. Households that request a subsidy could receive up to two $40 coupons to purchase converter boxes. Final approval of the legislation is expected in mid-January.

Warner Settles Payola Probe in New York. New York Attorney General Eliot Spitzer recently announced that Warner Music Group has agreed to pay $5 million to settle an investigation into payoffs it made to radio stations and employees to get airplay for certain artists, in violation of state and federal law. Warner, the second major recording company to settle with Spitzer over payola violations (Sony BMG was the first), also agreed to internal reforms and to disclose any items of value it has already given to get its artists on the air. FCC Commissioner Jonathan Adelstein issued a statement applauding the settlement and AG Spitzer’s effort to combat payola. The FCC launched its own investigation into payola practices in the music industry in August, 2005.

Senators Push for Expansion of Indecency Rules and Fines. The Senate Commerce Committee has been circulating the draft Family TV Act Bill, which would increase broadcaster penalties for airing obscene material to $500,000 per occurrence, more than 15 times greater than the current fine. Senator Stevens has called for applying indecency standards to cable TV. Other proposals include providing the FCC with greater authority to address graphic violence on TV, increasing the required hours of children’s educational programming and measures to give local broadcasters and parents more flexibility to reject offensive programming. A Kaiser Family Foundation report released on November 9 stated that 70% (up from 56% in 1998) of all TV shows include "some sexual content." During the past seven years, the average number of sexually-related scenes rose 56% to five scenes per hour. A hearing on indecency issues is scheduled for November 29.

Kids’ TV Accord Reached. Child-advocacy groups and media companies (including Viacom, Disney, Fox, NBC Universal and Time Warner) presented to FCC officials an agreement they reached regarding new digital television rules. Their dispute stemmed from the FCC’s new rules expanding educational programming requirements to cover digital television channels and setting new limits on related Internet sites for kids. Under the agreement, the cable industry would get relief from a current FCC rule that counts promotions for other children’s shows as commercials during educational broadcasts. Broadcasters would have more latitude to preempt some children’s programming for sporting events. Programmers, however, would be barred from directly linking Internet sites for children to sites that sell related merchandise. The deal, if approved by the FCC, could resolve pending litigation challenges to the rules brought by several of the media companies. The FCC has stated that it will give serious consideration to the joint proposal and delay the effective date of the children’s TV rules (previously January 1, 2006) for 60 days after it resolves pending petitions to reconsider the rules.

FCC Reports to Congress on Public Safety Spectrum Needs

In a report to Congress released in late December, the FCC reported that emergency response providers would benefit from the development of an integrated, interoperable nationwide network capable of delivering broadband services throughout the country. "A network that delivers real-time, high speed, highly secure broadband data to emergency response providers in the field[,]" the Commission stated, "would improve their ability to respond to emergencies." The FCC stated that the "underlying infrastructure of a nationwide interoperable broadband mobile communications network should include a mobility and satellite component to enable emergency response providers the capability of ‘rolling in’ a mobile infrastructure that would quickly re-establish communications when permanent networks are temporarily incapacitated." The Commission envisions that mobile antennas, including inflatable antennas, cell towers on wheels, high-altitude balloons, or other mobile facilities, would operate independent of the damaged local infrastructure and would facilitate communications as quickly as possible. The FCC also envisions that a nationwide interoperable broadband mobile communications network could potentially include the use of smart radios, "which are capable of operating on multiple frequencies in multiple formats, so that different systems can connect with each other." A robust interoperable network (whether commercial or private), the FCC found, "should be able to function in all areas served by emergency response providers and . . could be incorporated into traditional, private public safety networks or into a nationwide network." Similarly, "IP-based technologies also may enhance the resiliency of either traditional, private public safety networks or a nationwide network by providing the dynamic capability to change and reroute telecommunications voice and data traffic within the network." Recognizing that such a nationwide interoperable broadband mobile communications network would be costly, the FCC called for adequate funding to develop and implement the system.

Addressing the potential use of commercial wireless technologies, the FCC stated that while commercial wireless technologies are not appropriate for every type of public safety communication, "there may now be a place for commercial providers to assist public safety in securing and protecting the homeland." The Commission reported that "[t]echnological solutions are emerging that show significant promise for addressing interoperability." The Commission stressed the importance, however, of recognizing the "distinction between suggesting that public safety consider the use of commercial services and exploring the utility of deploying commercial technologies in public safety spectrum." Having said that, the FCC listed smart radios, Wi-Fi, Wi-Max, Wireless Priority Service, Push-to-Talk technologies, and satellite and terrestrial wireless systems as technologies that could help to ensure that emergency response providers have access to effective communication services. Recognizing the communications challenges posed by Hurricane Katrina, the FCC recommended that "[g]oing forward, we need to establish a process to work with states and municipalities to improve the redundancy of critical communications links that serve [Public Safety Answering Points]."

The FCC also addressed the short-term and long-term needs of emergency response providers for allocations of additional portions of the electromagnetic spectrum, specifically whether or not to grant an additional allocation of spectrum in the 700 MHz band. The FCC began by observing that "a broad array of entities urge Congress to establish a firm date for broadcasters to clear Channels 60-69 in order to make available for public safety the spectrum associated with these channels." The Commission also stated that public safety commenters at all levels – federal, state, local and regional – contend that, even considering the actions the Commission has taken to date, there remains a need for allocations of additional public safety spectrum in the 700 MHz bands. Likewise, the FCC noted, critical infrastructure and other entities also indicated a need for allocations of additional public safety spectrum in the 700 MHz band.

The Commission observed, however, that although public safety commenters generally agree that emergency response providers need access to additional spectrum, "there is a lack of unanimity within the public safety community regarding how much spectrum will be needed." While the FCC agreed to "expeditiously examine" ways to adjust the public safety allocation of 24 MHz of 700 MHz spectrum to allow more ambitious broadband uses, the Commission did not agree to demands that public safety receive an additional 6 MHz of spectrum. The Commission expects that "public safety’s long-term needs will become clearer as exiting public safety spectrum allocations in the 700 MHz, 800 MHz, and 4.9 GHz bands are fully developed and initiatives to make more efficient use of existing spectrum are completed."

FCC Grants Qwest Forbearance in Omaha MSA, Relying on Intermodal Competition, but Not Wireless Competition

On December 3, the FCC released the text of an order adopted on September 16 granting in part a petition for forbearance filed by Qwest Corporation seeking relief from unbundling obligations in the Omaha, Nebraska Metropolitan Statistical Area ("MSA"). The FCC determined that Qwest faces "substantial infrastructure competition" from other providers such as Cox Communications "in targeted areas where intermodal deployment is extensive." Specifically, the FCC relieved Qwest of the obligation to provide unbundled network elements ("UNEs") to competitors in nine of twenty-four of its wire centers in the Omaha MSA. The FCC left undisturbed other requirements such as interconnection and interconnection-related collocation obligations, as well as section 271 obligations to provide wholesale access to local loops, local transport, and local switching at just and reasonable rates. The Commission stated that it reached its decision to grant forbearance without considering intermodal competition from wireless and interconnected VoIP services. Many view this decision as a victory for the wireless industry because it reduces the likelihood that the FCC could decide to consider their service a substitute for wireline service, thereby potentially subjecting the wireless industry to more regulation.

FCC Grants Additional Spectrum to the Two Remaining 2 GHz MSS Operators

In a victory for 2 GHz mobile satellite service ("MSS") operators, the FCC on December 9 issued a decision redistributing all unassigned 2 GHz MSS spectrum to the two remaining 2 GHz MSS operators, ICO Satellite Services ("ICO") and TMI Communications ("TMI"). In doing so, the FCC rejected requests by terrestrial wireless carriers and others to reallocate the unassigned spectrum for other services or to redistribute the spectrum to new MSS applicants. The FCC found that granting additional spectrum to ICO and TMI will facilitate their provision of public safety and broadband services, particularly to rural and underserved areas. As a result of the FCC’s action, ICO and TMI each will have access to a total of 20 MHz of spectrum. In a separate but related decision, the International Bureau dismissed Inmarsat’s petition for declaratory ruling seeking access to the unassigned 2 GHz MSS spectrum.

FCC Initiates Rulemaking to Ensure Access to Emergency Services for Internet-based Telecommunications Relay Service

On November 30, the FCC issued a notice of proposed rulemaking to address access to emergency services for Internet-based forms of telecommunications relay service ("TRS") for individuals with hearing or speech disabilities. Currently, emergency calls made through TRS are connected by a communications assistant ("CA"), who initiates a voice telephone call to the appropriate public safety answering point ("PSAP"). With traditional TRS calls that are placed through the public switched network, the location and callback information is transmitted with the call, and the CA therefore is able to provide that information to the PSAP. Internet-based calls, however, do not originate on the public switched network, and CAs therefore must use other methods to obtain location and callback information. The FCC rulemaking proceeding is intended to examine methods for ensuring that persons using Internet-based TRS will have access to emergency services.

Cable Developments

Cable Operators Volunteer Family Programming Tier. Cable operators Comcast, Time Warner, Advance Newhouse, MidContinent and Bresnan are working on a family choice tier of programming to offer subscribers in the first quarter of 2006, according to National Cable Television Association President Kyle McSlarrow’s testimony during a December 12 Senate forum on decency. These companies – which collectively have most of the nation’s cable subscribers – are the first to make commitments to a family tier, while others are still considering the issue. Details on the family packages were not yet available, but McSlarrow stated that the family tier would be a digital alternative to the expanded basic package and would be the most "affordable you can get." Given these voluntary commitments to a family tier, McSlarrow asked Senate Commerce Committee Ted Stevens (R-AK) to "take mandates off the table." Stevens has repeatedly opined that cable must do more than educate parents about using parental controls to block unwanted programming. FCC Chairman Kevin Martin issued a statement saying he is pleased that some cable companies will voluntarily offer family tiers and that he will look forward to hearing more about the details.

Senator Stevens also pushed for satellite TV providers Echostar and DirecTV to "get the message" on the family tier. Echostar announced that it is "actively working to create a family tier of programming," while rival DirecTV committed only to exploring options in addition to its current "Locks and Limits" service.

Martin Pushes for A La Carte Cable Pricing. At a November 29 Senate forum, Chairman Martin announced that the FCC is preparing a report demonstrating that a la carte pricing of cable channels could provide substantial benefits to consumers. Updating a study prepared under former FCC Chairman Michael Powell which Martin called "flawed" and erroneously based, the new study recalculates industry data from the Powell study under a different methodology. The new study is not yet available publicly. National Cable Telecommunications Association ("NCTA") President McSlarrow called mandatory a la carte "a dangerous idea," but noted that Chairman Martin commented on voluntary a la carte pricing.

Stevens Seeks Voluntary Cable Decency Controls. Senator Stevens wants the cable industry to voluntarily commit to indecency rules, rather than submit to legislative controls, according to a Senate aide. Cable industry executives and Senator Stevens have been in talks over the issue, which have stalled likely due to concerns about the constitutionality of legislative measures. The Senate Commerce Committee has circulated a draft bill that would boost penalties against broadcasters more than 15-fold for each violation of indecency rules. These rules do not apply to cable television, although Senator Stevens has called for extension of the decency rules in some form to both cable and satellite TV.

New Jersey Is the Latest Battleground over Statewide Video Franchises

In early December, a bill allowing New Jersey to allow statewide video franchises was introduced into the New Jersey legislature. The bill would provide Verizon Communications Inc. ("Verizon") and other companies the opportunity to compete directly with incumbent cable television companies by obtaining statewide video franchises that do not have a statewide buildout requirement. The measure would require video franchisees to provide service to the sixty most populous municipalities in the state within three years. Additional build-out is left entirely to the discretion of the franchisee. The proposed legislation also would double the cable franchise fee to four percent of the franchise holder’s gross revenues.

Although an earlier statewide video franchising bill – which would have required that Verizon offer its video services within five years in all 526 communities where it provides phone service – stalled in the New Jersey Assembly (reportedly because Verizon had objected), Verizon appears to support the current legislation. The New Jersey Cable Telecom Association, however, says that the bill would allow Verizon to disregard the majority of customers in its telephone-service region, and argues that the higher franchise fee will lead to higher cable rates in general. Verizon counters that it plans to build its network in 102 municipalities in 10 counties around the state and that increased competition will lead to lower rates and better service that will offset higher franchise fees.

These developments follow closely on statewide grants of video franchises in Texas. Last November, the Texas Public Utility Commission ("Texas PUC") had approved SBC Communications Inc.’s ("SBC") application for a statewide video franchise under a state law enacted just last September. This approval follows the Texas PUC’s approval of Verizon’s similar application in October. SBC and Verizon now have authority to offer television programming in 21 communities in the San Antonio and Dallas/Ft. Worth metro areas, respectively.

Texas approval of the SBC and Verizon applications occurred even as the FCC initiated a broad inquiry into its authority over the local video franchise approval process. The FCC is still considering comments filed in response to its Notice of Proposed Rulemaking (NPRM), in which FCC staff tentatively concluded that the Communications Act confers upon the FCC broad authority to oversee local franchising. This NPRM was described in greater detail in the November 2005 issue of the Communications Law Bulletin.

Meanwhile, Texas cable companies continue to press their lawsuit challenging the Texas law on constitutional grounds. This lawsuit was described in the September 2005 issue of the Communications Law Bulletin.

Indiana Adopts New Rules for Local Competition

As part of its ongoing investigation addressing competitive telecommunications issues (Cause No. 42530), the Indiana Utility Regulatory Commission has adopted guidelines applicable to all local exchange providers’ customer-specific offers, promotions, winbacks, service bundles and packages. In its December 9, 2005 Order, the Commission concluded that, at the present time, there is insufficient intermodal competition for telecommunications services in Indiana, and therefore some regulatory oversight is necessary to ensure the continued health and growth of competition, while restricting the ability of the incumbent local exchange carriers ("ILECs") and competitive local exchange carriers ("CLECs") to engage in strategies that could reduce competition. The Commission also acknowledged that the mergers of SBC with AT&T Corporation ("AT&T") and Verizon with MCI, Inc. ("MCI") may have an important impact on the level of competition and regulation of all telecommunications carriers. At the same time, however, the Commission stated that in order for competition to grow, all carriers must be treated equally. The new rules, therefore, apply to both CLECs and ILECs and address a number of competitive practices relied on by these companies to obtain and retain customers. In particular, the new rules define "customer specific offerings" as written contractual arrangements for local exchange service at rates, terms and conditions that reflect the specific customer requirements and differ from those set forth in the generally available tariff. Summaries of all customer-specific contracts must be filed with the Commission quarterly. In addition, the aggregate revenues for all customer-specific contracts during a twelve-month period must exceed long-run incremental cost plus 5%. The Commission also adopted rules governing the bundling of services, both regulated and unregulated, by ILECs and CLECs. Services may be bundled and sold as a single package subject to price floors based on long-run incremental cost and certification by the offering company that the package price complies. CLECs and ILECs also may offer promotions and engage in win-back activities, but again subject to public notice obligations, cost review, and other requirements.

Finally, the Commission acknowledged that the testimony it had received in this proceeding suggested that there was growing competition in certain markets for telecommunications services, but concluded that the information was anecdotal and not comprehensive. Accordingly, the Commission initiated a new proceeding to examine the level of competition in all areas of Indiana and to adopt new regulations consistent with that information.

Illinois Deregulatory Statute Reinstated

The Illinois Supreme Court has overturned a lower court ruling that legislation which classified certain SBC services as competitive, and granted other relief to SBC, was unconstitutional. In 1998, SBC had filed a tariff reclassifying a number of its business services as competitive and soon thereafter raised the rates for many of those services. Under the rules in place at that time, the Illinois Commerce Commission initiated an investigation into the rate increases and ultimately issued a proposed order concluding that SBC had improperly attempted to reclassify the services and that the price increases should be refunded to the affected customers.

In 2001, while the Commission’s proposed order was pending, the Illinois General Assembly enacted legislation that abated the Commission investigation and rendered all SBC business services "competitive." It also required SBC to issue refunds to those customers who would have received refunds under the abated Commission proceeding, although the amount refunded by the statute was less than might have been refunded had the Commission’s proposed order become final.

The statute was challenged by a number of customers who alleged that it was impermissible special-interest legislation and that the amount refunded by the statute was less than what might have occurred had the Commission’s proposed order become final, thereby unjustly enriching SBC. While the statute did not specifically mention SBC as a beneficiary, as a practical matter, it only applied to SBC, and the plaintiffs argued that because of this, it violated Illinois’ constitutional prohibition against legislation conferring a special benefit or privilege on one person or group. The lower court concurred with plaintiffs, but the Supreme Court disagreed, finding that even if SBC’s position had improved as a result of the legislation, the advantages it received were not denied to other similarly situated carriers (although the court did acknowledge that were no other similarly situated carriers that could have benefited from the legislation). Even if the statute did benefit only one entity, the Supreme Court held, it did not affect a fundamental right or involve a suspect classification and, therefore, was constitutional because it was rationally related to a legitimate state interest.

The Court’s order has no immediate consumer impact, as the Illinois Commission had implemented the statute when it took effect.

Proposed Legislation in Georgia Would Limit PSC Jurisdiction

A Joint House and Senate Emerging Communications Technologies Study Committee, created by resolution of the Georgia state legislature in May, 2005, has issued its report regarding the competitiveness of broadband, VoIP, and wireless services. Its report and findings include a draft bill that would limit the Georgia Public Service Commission’s ("PSC") jurisdiction over wireless, broadband, and VOIP services, finding that competition for these services is sufficient to replace PSC oversight. The draft bill, which will be introduced in the 2006 legislative session, would restrict PSC jurisdiction over these services to hearing consumer complaints and policing anticompetitive practices. The draft bill also recommended that future regulation of these services maintain a distinction between content and transmission and encourage investment in these technologies.

California Court Finds Common Contract Term Unlawful

A California appellate court has held that contract provisions that require consumers to arbitrate minor monetary claims in Georgia and forbid consumer class actions are unenforceable under well-settled California law. The case involved individuals who had purchased Digital Subscriber Line ("DSL") service from Earthlink and brought suit to recovered alleged overcharges. Earthlink’s form agreement was presented to consumers on a "take it or leave it basis" with no opportunity for the consumer to opt out of the offending provisions – a practice the court described as "quintessential procedural unconscionability." Under these circumstances, the class action waiver is unconscionable under California law. Furthermore, any forum selection clause that requires consumers to travel a significant distance to obtain redress on a case-by-case basis, is unreasonable as a matter of law. Providing consumers with the option of recovery in a local small claims court does not, the court held, cure this problem, as a small claims court does not provide the relief available in an arbitration or a court.

It is worth noting that the court did not "make new law" in its decision. Rather, its decision is based on established California law and United States Supreme Court decisions. Because many telecommunications agreements include language similar to the Earthlink language found unreasonable by the California court, those companies offering service in California should review their service agreements carefully and make revisions consistent with the court’s decision.

Recent Universal Service Developments

There have been multiple regulatory developments regarding the universal service mechanism and support from the universal service fund ("USF"), all of which are described below. Universal service also is getting significant attention on the Hill, which is discussed in our article "Draft House Broadband Bill Markup Postponed at the Last Minute Until 2006," above.

USF Contribution Methodology Order May Be Circulating by End of January. It appears that the FCC finally may be acting on a pending rulemaking proceeding that proposes to revise the methodology by which telecommunications carriers contribute to the USF. Carriers, consumer groups and other interested parties have increased lobbying efforts accordingly. Chairman Martin has indicated that he supports a numbers-based approach in which contributions are based on the quantity of active telephone numbers. This approach, however, has been criticized for potentially raising USF fees that carriers pass through to customers and negatively affecting low-volume telephone users. Chairman Martin noted that a numbers-based approach is technologically and competitively neutral and well within the FCC’s authority.

FCC Revising USF Support Rules for Non-Rural Carriers. . . Again. At the December open meeting, the FCC adopted an NPRM seeking comment on new rules for distributing high cost USF support to non-rural carriers. The NPRM responds to the latest remand of a Tenth Circuit decision that invalidated a prior FCC decision that had revised the high-cost support mechanism for non-rural carriers.

In 1999 the FCC adopted a support mechanism based upon forward-looking economic costs of non-rural carriers. The Tenth Circuit remanded significant portions of that decision in 2003 ("Qwest I"). On remand, the FCC modified the mechanism to respond to the court’s concerns, largely relying on recommendations from the Federal-State Joint Board. However, the order on remand was rejected by the Tenth Circuit in 2005 ("Qwest II"). The court in Qwest II concluded that the FCC failed to reasonably define the terms "sufficient" and "reasonably comparable," which are important in deciding a carrier’s eligibility for high-cost support. Because the non-rural high-cost support mechanism rests on the application of the definition of "reasonably comparable" rates, the court also held that the support mechanism was invalid.

The NPRM seeks comment on how to define the terms "sufficient" and "reasonably comparable" under Section 254 of the Communications Act. Specifically, it seeks comment on how the statutory term "sufficient" can be defined to take into account seven universal service principles set forth in Section 254(b). The NPRM also asks how the term "reasonably comparable" should be used to describe rates that preserve and advance universal service. In addition, the NPRM seeks further comment on how the non-rural high-cost support mechanism should be designed to achieve the Act’s goals and statutory principles, questioning whether the FCC should use a rate-based mechanism rather than the cost-based mechanism that the FCC previously adopted.

Comments and replies on the NPRM are due 30 and 60 days, respectively, after Federal Register publication.

FCC Lacks Adequate Resources for USF Audits. A report to Congress by the FCC’s Office of Inspector General ("OIG") states that its efforts to audit the federal universal service programs have been stymied by a shortage of auditors. Although there were plans to hire additional staff and contract with an accounting firm to undertake a comprehensive audit, neither has come to fruition. The OIG report states that "personnel actions were frozen shortly after Chairman Martin assumed his position and no action has been taken to complete this transfer" of additional audit staff. A three-way agreement between the government, the administrator of the universal service program, and an accounting firm that had been in the works since the summer of 2004 seemed to be approved, but in mid-August the FCC’s General Counsel’s Office raised concerns about the vendor selection process. As a result of the delays, the OIG has "struggled to provide adequate investigative support to federal law enforcement."

Universal Service Contribution Factor Remains the Same. The FCC has announced that the universal service contribution factor for the first quarter of 2006 will remain at 10.2 percent. This will be the third quarter in a row that the contribution factor has not changed, and it is a decrease from the 11.1 percent contribution factor assessed in the second quarter of 2005.

Recent VoIP Developments

VoIP Providers Have Varying Success Meeting FCC’s E911 Deadline. A couple of hundred providers of VoIP services filed reports by the November 28 deadline regarding their compliance with the FCC’s E911 rules. Although a majority reported that they are providing E911 service to all or most consumers, several also requested waivers of the deadline. Those VoIP providers stated that they have been unable to achieve full E911 coverage because they have been unable to access selective E911 routers controlled by incumbent wireline carriers, they have to rely on third-party vendors for E911 service, and they have been unable to overcome various other technical difficulties.

VoIP providers were supposed to stop marketing their services to new customers in any areas in which they could not offer E911 services. Vonage, however, which filed for a short waiver of the deadline, stated it would continue its marketing efforts during the pendency of its waiver request. By mid-December Vonage reported that all of its customers have E911 access. The FCC’s marketing ban also continues to raise concerns and questions because many Internet advertisements for VoIP services are not geographically targeted. Chairman Martin recently stated that the FCC is still studying VoIP providers’ compliance reports, but indicated that a waiver request does not absolve a provider’s obligation to adhere to the marketing ban while its request is pending.

Injunction Against State Regulation of VoIP Services Upheld. The United States District Court for the Southern District of New York upheld a preliminary injunction against the New York Public Service Commission ("NY PSC") prohibiting it from requiring Vonage to obtain operating authority from the NY PSC. Although the court stated that the injunction will remain in place until the FCC acts on its pending comprehensive rulemaking regarding regulation of VoIP services, the court refused to make the injunction permanent. Also still in place is the court’s requirement that Vonage "make reasonable good-faith efforts" to participate in industry-wide E911 workshops to establish core principles and policies for the advancement of E911 offerings by IP-based service providers.

In May 2004, the NY PSC decided that Vonage was a "telephone corporation" and thus regulated under state law. The district court issued a preliminary injunction the following month prohibiting the NY PSC from enforcing the decision. Vonage subsequently asked the court to make the injunction permanent after the FCC’s November 2004 decision preempting state regulation of VoIP services.

Frontier Seeks Declaratory Ruling Regarding Access Charges for IP-Based Traffic. The FCC is seeking comment on a recent petition for declaratory ruling filed by Frontier Telephone regarding the applicability of access charges to IP-based traffic. Specifically, the petition requests that the FCC conclude that USA Datanet and any similarly situated carriers must pay tariffed originating interstate access charges for Feature Group A calls from Frontier’s end users. Frontier filed the petition after the United States District Court for the Western District of New York stayed Frontier’s case against USA Datanet regarding the collection of access charges. The FCC consolidated Frontier’s petition with those of SBC and VarTec, which raise similar issues. Comments and replies on Frontier’s petition are due January 9, 2006 and January 24, 2006, respectively.

ACLU Appeals CALEA VoIP Decision. The American Civil Liberties Union appealed the FCC’s decision subjecting wireline broadband and interconnected VoIP providers to the requirements of the Communications Assistance for Law Enforcement Act ("CALEA"). According to the ACLU, the FCC does not have the authority to extend CALEA’s wiretapping laws to wireline broadband and VoIP providers and must seek such authority from Congress before expanding the government’s surveillance powers.

Verizon-MCI Merger Completes State Approval Process

With a conditional approval adopted by the Washington Utilities & Transportation Commission ("UTC") in late December, 2005, the state approval process for the Verizon-MCI merger is effectively complete. The UTC attached conditions to its approval, including establishment of a $1.25 million "Public Service Fund" that the UTC will use, at its later discretion, to benefit ratepayers. The UTC also will impose a rate-increase moratorium on the merged entity, and will require the new company to: (1) advise customers that they can switch to a non‑Verizon local service provider at no charge within 60 days; and (2) offer standalone DSL throughout its service territory for a minimum of two years.

Also in December, the Verizon-MCI merger obtained approvals in New Jersey, Alaska, West Virginia, Pennsylvania, and Arizona.

Alltel Divests Its Wireline Business

Alltel Corp. ("Alltel"), historically a provider of both wireline and wireless services, has agreed to spin off all of its wireline holdings to Valor Communications Group Inc. ("Valor"), a company based in Irvine, Texas. The deal, worth a total of $9.1 billion, will result in Alltel shareholders owning 85 percent of the new Valor.

Alltel is the nation’s fifth-largest commercial mobile radio service ("CMRS") provider, serving 11 million customers in 34 states. In January 2005, Alltel acquired Western Wireless Corp. for $4.3 billion.

Upcoming Deadlines for Your Calendar

Note: Although we try to ensure that the dates listed in the PDF document are accurate as of the day this edition goes to press, please be aware that these deadlines are subject to frequent change. If there is a proceeding in which you are particularly interested, we suggest that you confirm the applicable deadline. In addition, although we try to list deadlines and proceedings of general interest, the list in the PDF document does not contain all proceedings in which you may be interested.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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