Originally published April 2006

The Month in Brief

March has been an eventful month for communications services and service providers. The consolidation of the former Bell companies continued with the announcement of a proposed merger between AT&T Inc. – itself the product of a recent merger with SBC Communications – and BellSouth Corp. The Federal Communications Commission ("FCC" or "Commission") proposed fines of unprecedented size for broadcast indecency violations, and the Senate considered extending indecency regulation to satellite and cable programming. Meanwhile, the states moved aggressively to dismantle their traditional regulatory regimes for telephone common carriers. We summarize these and other developments here, along with our usual list of deadlines for your calendar.

Hold Placed on Nomination of Telecom Lawyer Robert McDowell to the FCC Following Endorsement by the Senate Commerce Committee

On March 16, the Senate Commerce Committee unanimously endorsed the nomination of Robert McDowell, Senior Vice President and General Counsel of CompTel, to fill the last open seat on the FCC. If confirmed by the full Senate, McDowell will provide FCC Chairman Kevin Martin a working 3-2 Republican majority for the first time in about a year. McDowell would fill out the remainder of former FCC Chairman Michael Powell’s term, which expires on June 30, 2009. McDowell’s confirmation would allow Chairman Martin to initiate a review of FCC policies in a number of areas, including cable system ownership limits and the possible easing of media ownership restrictions, and resolve a number of pending issues, including the proposed sale of Adelphia Communications Corp. to Time Warner Inc. and Comcast Corp., "blind" advanced wireless services auction bidding, net neutrality, intercarrier compensation and E-911.

No date has been set for full Senate consideration of his unopposed nomination, but confirmation appears certain. It was reported on March 28, however, that a "hold" was placed on McDowell’s nomination on March 24. Senators can place anonymous holds on nominations, and there is no consensus as to who placed the hold or why. Such holds are typically used to gain leverage with the Administration, often on an entirely separate issue, by Senators who may have no objection to the nominee. A Senate Commerce Committee spokesperson stated that "Senator Stevens would like to see Mr. McDowell confirmed as quickly as possible."

It is widely agreed that McDowell is steeped in the competition issues that are pending before the FCC. CompTel represents long-distance carriers and competitive local exchange carriers ("CLECs") and lobbied against the SBC-AT&T and Verizon-MCI mergers. Prior to his position at CompTel, McDowell worked with Chairman Martin on the 2000 Bush/Cheney campaign and, before that, served as General Counsel for the America’s Carriers Telecommunications Association, a lobbying group that merged with CompTel in 1999. McDowell is credited with successfully lobbying, on behalf of the CLECs, against the FCC’s proposed "truth in billing" rules, which would have required local exchange carriers ("LECs") to detail the specifics of phone charges. Previously, he lobbied for more stringent limitations on access charges imposed by incumbent local exchange carriers ("ILECs").

McDowell told the Senate Commerce Committee at his confirmation hearing on March 9 that he intends to push competition and investment and eliminate unnecessary regulation. He said that he wants to encourage private sector solutions to telecom problems while removing barriers to entry. Critics of AT&T’s proposed acquisition of BellSouth, which will soon be reviewed by the FCC, are hoping that McDowell’s background will lead him to vote for strict conditions on the acquisition. When asked about possible conflicts of interest at his confirmation hearing, however, McDowell pledged to "wipe the slate clear," to start his tenure at the FCC "from scratch, and to judge new [cases] de novo," without bias against the Bell telephone companies and other ILECs. "I will prejudge nothing and I ask that my ability to be impartial not be prejudged." He pointed out that many of the major issues that he worked on have been resolved. He also said that he has not appeared before the FCC in several years and would work with the FCC’s general counsel on any issues possibly requiring recusal. Commerce Committee Chairman Stevens (R-AK) stated that he was "satisfied with [McDowell’s] statement" about recusal.

Chairman Stevens also questioned McDowell’s commitment to rural America. The nominee responded that "[k]eeping rural America connected is front and center for the McDowells," noting that his father grew up on a ranch on the Texas-Mexico border without a telephone. FCC Commissioner Jonathan Adelstein appeared at the hearing in support of McDowell. The hearing lasted only 20 minutes, and McDowell’s nomination has drawn little public opposition.

Congress Continues to Mull Data Broker Bills

Revelations concerning the deceptive practices of online data brokers, who use "pretexting" techniques to obtain telephone subscribers’ billing and call detail records, have resulted in the introduction of a number of bills intended to control those practices.

One such bill — the "Protecting Consumers Phone Records Act" (S.2389) — was approved on March 30 by the Senate Commerce, Science and Transportation Committee. The Senate bill, which makes pretexting a criminal offense, is aimed primarily at the bad actors in the pretexting drama. Although voice telephone service providers would be required to make an annual certification to the FCC and notify subscribers of any unauthorized acquisitions of the subscribers’ confidential information, the Senate bill would not impose new restrictions on the service providers’ data security, disclosure and use practices.

Another data broker bill, approved by the House Energy and Commerce Committee, would criminalize pretexting but also would impose new data security standards for telephone service providers. As a number of telephone carriers have pointed out, these new restrictions cannot logically be justified as a response to the recent pretexting incidents, which were caused by the fraudulent practices of the pretexters rather than carriers’ violations of the FCC rules concerning customer proprietary network information ("CPNI").

Another important difference between the House and Senate bills concerns preemption of more stringent or inconsistent state pretexting laws. The Senate bill, but not the House bill, would preempt inconsistent state laws except to the extent those laws are aimed at fraudulent conduct.

While Congress debated the federal response to pretexting, the wireless carriers continued their legal efforts to shut down the data brokers that have victimized the carriers and their customers. Most recently, on March 17, 2006, Sprint Nextel Corp. filed an action in Florida against San Marco & Associates, a private investigation firm that allegedly engaged in pretexting to obtain Sprint Nextel’s customer records. Sprint Nextel’s lawsuit follows similar legal actions brought against data brokers by T-Mobile USA Inc., Verizon Communications Inc.’s Verizon Wireless, and Cingular Wireless LLC.

AT&T-BellSouth Merger Announced

On March 6, 2006, AT&T Inc. ("AT&T") and BellSouth Corp. ("BellSouth") announced a $67 billion merger that the two companies hope to close within the next 9 to 12 months. The transaction must be approved by the FCC, the Department of Justice and at least five states.

If consummated, the AT&T-BellSouth merger will leave only 3 Bell Operating Companies (AT&T, Qwest and Verizon) remaining from the 7 regional Bell companies and 23 subsidiary companies that emerged from the divestiture of the Bell System in 1984. When that historic divestiture was negotiated, the Justice Department’s goal was to separate the Bells’ long-distance and equipment operations from the local exchange telephone business, by spinning off long-distance and equipment to AT&T and keeping the local exchange business with the divested Bells. Because local exchange service was generally believed to be a natural monopoly (that is, a market in which competition was not economically feasible), the Justice Department did not try to dictate the number of companies that would engage in local exchange service after divestiture. In 1984, as far as the Government was concerned, a single Bell operating company with a national footprint would have been acceptable, so long as that company did not offer interexchange long-distance and certain other prohibited services.

The Telecommunications Act of 1996 represented a profound change from the "natural monopoly" view of local exchange service. Under the 1996 Act, the Bells were given a way to reenter the long-distance market by opening their local exchanges to new entrants. There also was widespread hope that each of the Bells would use its considerable resources to compete for local service customers in the home regions of other Bells.

The ongoing consolidation of the Bells since 1996 would seem to be a profound defeat for those who expected robust Bell-to-Bell competition. Remarkably, however, each of the successive Bell mergers has been approved by the FCC, the Justice Department and the states, and the AT&T-BellSouth deal is expected to follow that pattern. Like other Bell mergers, this one likely will be approved conditionally, with the parties making concessions to blunt anti-competitive outcomes in specific markets; but outright disapproval is not expected.

Video Competition Developments

Bells Continue to Lobby State Legislatures for Statewide Video Franchises; Prospect for Federal Legislation Remains Uncertain

After a breakdown in bipartisan negotiations, the Republican-controlled House Commerce Committee pushed forward with national cable franchising, introducing a bill in late March. The legislation would create 10-year terms for federal video franchises and would establish franchise fees equal to five percent of gross revenue. State and local governments would retain jurisdiction over management of public rights-of-way under the legislation. Cities also would be authorized to impose charges for such management. Local franchising authorities and the FCC would have concurrent jurisdiction to hear complaints. The bill also would require Voice Over Internet Protocol ("VOIP") providers to ensure provision of Emergency 911 to customers. The legislation also includes a nondiscrimination provision stating that a public entity that is affiliated with a public provider of telecom service "shall not grant any preference or advantage to any such provider."

Markup of the bill is scheduled for next week. While House Commerce Committee Chairman Joe Barton "look[s] forward to . . . an expedited Subcommittee markup," reports indicate that Ranking Member Dingell and Telecom Subcommittee Ranking Member Markey resent being pushed out of the bipartisan process and strongly oppose the bill. Meanwhile, Senator Ted Stevens has predicted that the Senate Commerce Committee will agree on video franchising issues such as revenue percentages flowing to municipalities, the scope of local regulation of public rights-of-way, and standards for provision of public, educational and governmental ("PEG") channels. Stevens’ view is that video franchising and broadband deployment would be components of broader omnibus telecommunications reform legislation. Stating that "the largest barrier to broadband entry is the current franchising structure," Senator Stevens expects a final draft to be marked up after the Easter recess.

The Bells are not waiting for Congress. Rather, they are making progress rolling out fiber-based video networks through incremental, state-by-state legislative victories. While the legality of Texas’ statewide franchising statute continues to be tested in court, two states, Virginia and Indiana, have followed Texas’ lead by enacting statewide video franchising legislation in early March. Similar legislative initiatives are in play in Kansas, Louisiana, Missouri, New Jersey and South Carolina and may soon be on the table in California, Florida, Michigan and North Carolina. The following is a synopsis of legislative developments in selected states considering statewide franchising:

  • Kansas: A House committee is considering a Senate-passed bill that would strip municipalities’ video franchising authority and give it to the Secretary of State. The legislation does not include build-out requirements but would prohibit income-based redlining. The bill would enable incumbent cable providers to request renegotiation of an existing municipal franchise upon a state-franchised competitor’s entry into the market, with recourse to state court if a locality refuses to negotiate, demands unreasonable terms or fails to act within 120 days. Reports suggest that the legislation would impose a five-percent franchise fee on gross revenue that does not include penalty fees, non-cable services, and other revenue streams.
  • Louisiana: Parallel bills pending in each chamber’s Commerce Committee would remove local authority over franchising and give it to an agency created by the Secretary of State or the Governor. The bills would restrict franchise fees to five percent of revenue or the amount of franchise fees paid by incumbent cable providers, whichever is less. They also would require incumbent and new cable service providers to interconnect their public access channels, limiting the number of public access channels to three in large cities and two in small cities and towns. State or local build-out requirements and redlining would be prohibited.
  • Missouri: A bill is pending that would give power over video franchising only to the Public Service Commission. The legislation reportedly does not contain a buildout requirement.
  • New Jersey: Legislation that was temporarily dropped last year after the legislature’s lame-duck session expired has reappeared in the form of a cable bill proposed by Senator Joseph V. Doria, Jr. The bill, like its predecessor, likely will face vehement opposition from the cable industry because it would replace local authority over video franchising with a statewide regulatory regime. The bill would restructure the franchise process by modifying franchise fees and payments to localities, increasing cable taxes from approximately two percent on basic rates to about four percent on all cable services.
  • South Carolina: The House passed a bill that would authorize the Secretary of State to award statewide video franchises. Municipal franchises already in effect would remain in place until expiration, but otherwise would be preempted. Statewide video franchisees would be entitled to access public rights-of-way, subject to either the municipal franchise fee charged to incumbents or five percent of revenue in markets where no incumbent exists. The bill also would require statewide video franchisees to match the number of public access channels provided by incumbents or, where no incumbent exists, to provide two public access channels in rural markets and three in urban markets. Current municipal franchisees would be permitted to apply for a statewide franchise covering new markets. The bill would allow recovery of franchise fees from customers as a separate line item on bills and would prohibit build-out requirements. The Senate is now considering the House bill as well as its own similar legislation.

As Martin Advocates À La Carte Cable Pricing and Broadcasting "Family Hours," the FCC Seeks Comment on Its Annual Video Market Report Suggesting À La Carte Is a Low-Cost Option

Reports suggest that FCC Commissioner Kevin Martin believes that à la carte cable pricing will reduce customers’ bills and may rely on the upcoming annual cable-pricing report to bolster this view. In testimony in early March before a House Appropriations Subcommittee on Commerce, Chairman Martin testified that the cable industry’s adoption of family tiers was an "important step" but that "more needs to be done" to give parents control over the content their children view. He conceded, however, that for the FCC to impose an à la carte requirement, "Congress would have to require it." Martin also stated that the transition to Internet Protocol Television ("IPTV") will provide Americans with greater control over content while potentially lowering rates. Meanwhile, he said that broadcasters should voluntarily designate 8 to 9 p.m. as an hour of family-friendly programming, but noted that they would be "hesitant" to do so because of competition they face from cable and satellite.

On the heels of FCC Chairman Martin’s Hill testimony advocating à la carte cable pricing and a broadcasting "family hour," the FCC sought comment on its annual multichannel video competition report suggesting that à la carte is a viable low-cost option. The FCC specifically sought comment on data submitted in the record this year that raises questions about whether the so-called "70/70 test" has been satisfied. Section 612(g) of the Communications Act provides that when cable systems with 36 or more activated channels are available to 70 percent of households within the United States, and when 70 percent of those households subscribe to them, the Commission may promulgate any additional rules necessary to promote diversity of information sources. The FCC is seeking further public comment on the best methodologies and data for measuring the 70-percent thresholds and, if the thresholds have been met, what action might be warranted to achieve the statutory goals. If the FCC decides that the thresholds have been met, the agency will issue a notice to open a proceeding. Press reports suggest that Chairman Martin most likely wants expanded authority to require cable operators to offer more bundles of channels and à la carte pricing. Comments were to be filed Monday, April 3, and reply comments are due April 18.

Broadcast Developments

The Senate Considers Extending Indecency Regulation to Cable and Satellite Television

The Senate is considering legislation extending FCC indecency standards to cable and satellite providers. This action comes just as the FCC is encountering sharp criticism for unclear and confusing indecency standards after issuing enforcement decisions that it had touted as offering guidance to broadcasters about "the kinds of materials that are and are not prohibited under the FCC’s indecency and profanity standards." In addition to subjecting cable and satellite providers for the first time to indecency and profanity standards, a bill introduced by Senator Rockefeller this month would expand the FCC’s jurisdiction to encompass violent content delivered over those media, as well as broadcast. The legislation also would increase fines for violations from $32,500 to $500,000, with a total limit of $3 million. Additionally, the bill would double the amount of children’s programming broadcasters must offer. If enacted, the legislation would create freedom-of-speech issues of first impression for the judiciary. Senator Stevens reportedly has said that a House indecency bill that would raise maximum fines on broadcasters to $500,000 is a priority for the Senate Commerce Committee, but said that "there are still internal discussions" and there is "no consensus" about the final language. He also suggested that indecency issues might merit separate action.

Meanwhile, the FCC has proposed unprecedented indecency fines against television stations, amounting to a record $4 million, sparking sharp criticism from the broadcast industry and others that the FCC has failed to establish clear indecency and profanity standards with which broadcasters can comply. The Commission’s most recent actions also reflect inconsistency in the procedural approach to indecency adjudications. For example, the FCC upheld a fine imposed only on CBS-owned stations for the Janet Jackson Super Bowl breast-baring incident, while in an unrelated case, the agency fined the affiliated stations as well as the network-owned stations. In another case involving broadcast of an "explicit and graphic" rape scene, the FCC proposed a forfeiture only against the station that was the subject of the complaint, even though "other stations may have broadcast the material at issue here between 6 a.m. and 10 p.m." The Commission acknowledged that it was deviating from prior precedent: "[We] recognize that this approach differs from that taken in previous Commission decisions involving the broadcast of apparently indecent programming." Many observers also believe that the recent action confuses, rather than clarifies, the role of context in indecency assessments. The FCC has said that although the "f-word," and now the "s-word," may be "both indecent and profane," in certain cases "language that is presumptively profane will not be found to be profane where it is demonstrably essential to the nature of an artistic or educational work or essential to information [presented to] viewers on a matter of public importance." The example cited by the Commission for this exception is the prime-time broadcast of the film "Saving Private Ryan." Yet the Commission refused to apply this reasoning to a case involving the broadcast by noncommercial educational station KCSM-TV, licensed to San Mateo (San Francisco DMA), of a PBS documentary on the evolution of the blues as a musical genre, in which interviews of musicians and others in the music industry contained the words "fuck" and "shit." Commissioner Adelstein, who dissented from this portion of the order, stated that these words were clearly part of the "coarse" culture of the bluesmen depicted and that the context in which the words were spoken must be considered. Legal challenges to these rulings at the FCC and in the courts are expected.

Payola Becomes the Intense Focus of Regulators as NY Attorney General Spitzer Files a Suit in Manhattan and Accuses the FCC of Being "Asleep at the Switch"

Payola has grabbed headlines in a way not seen since the 1950s. This month, New York State Attorney General Eliot Spitzer sued the nation’s fifth-largest radio chain, Entercom Communication Corp., alleging that the company "traded airplay for revenue." The suit, filed in Manhattan state court, alleged that gifts, trips and cash were traded for airplay for certain songs at Entercom’s radio stations. "We have moved from the label side, those who put out the records and are forced to pay for air time," said Spitzer, "and switched to the radio conglomerates . . . that are extracting money." The complaint also alleges that the company "falsely promot[ed] records up the music charts" in reports it provided to trade publications about the airplay of songs. According to Spitzer, "The decisions are being made as to what to put on the airwaves based on bribes to be paid and extracted, rather than on judgments based on artistic merit." Two major recording companies agreed last year to settle with Spitzer to end payola investigations. Warner Music Group Corp. said it would pay $5 million, and Sony BMG Music Entertainment agreed to pay $10 million. Spitzer contends that the FCC has been "asleep at the switch" with regard to payola and should consider revoking licenses. The FCC sharply disputed this characterization.

The FCC Seeks Comment on a Children’s Television Educational Programming Compromise Proposed by Programmers and Media Activists

On March 24, the FCC released a Second Further Notice of Proposed Rulemaking in which it seeks comment on certain previously adopted children’s television requirements in light of a recent proposal filed jointly by several broadcast and programming entities and children’s television advocates seeking reconsideration of the previously adopted requirements. The FCC seeks comment on whether, and to what extent, it should adopt the joint recommendations for modification of the rules adopted in September 2004, or any alternative modifications. The FCC has said that the record upon which it will base its decision will consist of the comments filed in advance of the September 2004 order, the petitions for reconsideration of that order, the joint proposal, and comments filed in response to this solicitation. Comments are due April 24, 2006, and reply comments are due May 8, 2006.

The joint proposal recommends modifications or clarifications for the following five children’s television rules:

  • the website rule;
  • the host-selling rule;
  • the promotions rule;
  • the preemption rule;
  • the multicasting rule.

Under the joint proposal, the FCC would credit the display of web addresses appearing in children’s programming toward the children’s commercial limits (unless those websites meet a stringent four-pronged test) and restrict the use of characters appearing in children’s television shows in Internet content directed at children age 12 and younger. The group also requested that the FCC relax or vacate some limits it had adopted.

In addition to relaxing the host-selling rule, the parties propose that the Commission void its rule mandating that children’s television shows cannot be preempted by other programming more than 10 percent of the time. The joint proposal recommends instead that no numerical or percentage limits be placed on preemptions. The parties also propose that the Commission’s new multicasting rule should stand, but recommend two clarifications "to avoid confusion in its implementation." Finally, the parties also propose redefinition of what constitutes "commercial matter" so that it does not include promotions for children’s or other age-appropriate programming appearing on the same channel, or promotions for children’s educational and informational programming airing on any channel. The companies have voluntarily honored the terms of the joint proposal since March 1, 2006.

FCC Increases Homeland Security and Public Safety Efforts

The FCC’s March open meeting included two items focusing on homeland security and public safety. Specifically, the FCC voted unanimously to establish a Public Safety and Homeland Security ("PSHS") Bureau and adopted a Notice of Proposed Rulemaking ("NPRM") seeking comment on whether certain channels within the 700 MHz band allocated for public safety use should be modified to accommodate broadband communications.

FCC Chairman Kevin Martin had proposed the establishment of a new bureau devoted to homeland security initiatives last year. According to the FCC, the new bureau "is designed to provide a more efficient, effective, and responsive organizational structure to address public safety, homeland security, national security, emergency management and preparedness, disaster management, and other related issues." The PSHS Bureau will centralize certain functions that to date have been dispersed among seven other FCC bureaus and offices. The new bureau will focus on issues concerning public safety communications such as emergency 911 services; priority emergency communications; alert and warning systems; continuity of government operations; public safety outreach; disaster management coordination and outreach; infrastructure protection; CALEA; and network reliability, resiliency and security.

The PSHS Bureau initially will have three divisions – policy, public communications outreach and operations, and communications systems analysis. It also likely will have fewer than 150 full-time employees. Other areas of responsibility may be moved to the new bureau in the future. The new bureau is subject to Congressional notification and coordination with an employee union before it becomes effective. The last time the FCC underwent reorganization, it took approximately two months to complete.

Although the Commissioners all supported the establishment of the new bureau, Commissioner Copps stated that the FCC should have established it long ago, noting that it has been five years since the September 11 attacks. Commissioner Adelstein also voiced the concern that moving licensing responsibilities of public safety licenses from the Wireless Telecommunications Bureau may undercut the FCC’s ability to effectuate spectrum policy.

The FCC’s 700 MHz NPRM seeks comments on proposals by Motorola, Lucent and the National Public Safety Telecom Council to modify the existing public safety allocation to better accommodate wireless broadband services. Currently, 24 MHz in the 700 MHz band is reserved for public safety operations after the DTV transition. The public safety channels are to be no larger than 50 kHz, which are best suited for narrowband voice communications. The proposals set forth in the NPRM could result in combining the channels into 1.25 MHz bands. Under the proposals, the "general use," "interoperability" and "reserve" wideband channels in the upper portion of the 700 MHz band would be combined for broadband applications. Chairman Martin noted that the NPRM will "help us ensure that our rules keep pace with the communications requirements of public safety and give first responders the communications capabilities they need to protect safety of life and property of the American public."

Net Neutrality Issues Continue to Occupy Congress, with No Resolution in Sight

Net neutrality issues continue to percolate in Washington, although the strong feelings on both sides have created no clear path toward legislative (or industry) compromise.

The Bell companies continue to argue that Net neutrality is a solution in search of a problem, and some analysts testified to Congress that over-regulation with respect to this issue could discourage investment in the broadband industry. On the other side, a coalition of 70 high-tech companies, consumer groups and content providers are lobbying Congress in favor of a "meaningful" Net neutrality requirement to keep the Internet open to innovation. The announcement of the AT&T-BellSouth merger has also fueled the debate, as the two big mergers last year contained conditions requiring compliance with the FCC’s Net neutrality policy statement.

In the Senate, Senator Ron Wyden (D-OR) introduced Net neutrality legislation (the Internet Nondiscrimination Act of 2006, S-2360) that would (among other things) prevent the Bell companies and cable operators from blocking transmissions, discriminating in bandwidth allocations, charging application or service providers for the delivery of traffic to subscribers, and degrading or impairing content in any way. Senator Wyden told reporters, however, that his bill would still permit network operators to charge end users (but not content providers) different amounts for different tiers of service. Under the bill, Net neutrality complaints would be submitted to the FCC, which would have seven days to determine if the complaint presented prima facie evidence of a violation, in which case a cease-and-desist order would be issued pending a final ruling, which would have a 90-day deadline.

Senator Ted Stevens (R-AK), who is the chairman of the Senate Commerce Committee, is still neutral about whether Net neutrality principles will be included in the Senate telecom bill. Senator Stevens has stated publicly that Net neutrality is the most polarizing issue facing the committee, with "extreme views" on both sides of the issue. Senator Stevens has questioned how to define Net neutrality, and has suggested some mechanism for FCC action if needed in Net neutrality disputes.

In the House, draft telecom legislation still contains a Net neutrality provision, reportedly to gain enough Democratic support to get the bill out of committee. It remains unclear if Congress will enact any Net neutrality provisions this year given the magnitude of the disagreement and the intensity with which both sides hold their views.

Legislative Developments

The Senate Commerce Committee is expected to mark up a final draft of a comprehensive telecommunications bill after the Senate returns from its Easter recess. The bill will address universal service, Net neutrality, video franchising, and broadband deployment. Net neutrality is emerging as the most contentious issue, as some lawmakers advocate no regulation, while others seek to ensure nondiscriminatory access to the Internet. Senate Commerce Committee Chairman Stevens (R-AK) predicted that the committee would seek to expedite broadband deployment by revising the existing franchising structure to address the percentage of revenue available to localities, a uniform standard for the number of public access channels, and public rights-of-way. Additional provisions that could be incorporated into the bill include those addressing more efficient and transparent use of universal service funds, directing the FCC to clear "white space" in the TV band for unlicensed devices, and prohibiting the sale of mobile phone records.

The House Energy and Commerce Committee also has been drafting its version of a comprehensive telecommunications measure, but a draft is not expected to be released until after members return from recess at the end of March. The draft bill is expected to be narrower in scope than originally envisioned, and it is uncertain whether the bill will gain bipartisan support. The House Judiciary Committee also will commence hearings in April to consider telecommunications and antitrust issues, possibly setting up jurisdictional conflict with the House Energy and Commerce Committee and complicating House efforts to pass telecommunications reform.

Furthermore, this spring, the Senate Commerce Committee is expected to consider legislation addressing "indecent" television programming, although it is unclear whether the legislation will be limited to broadcasters or extended to cable and satellite operators. The House previously passed a bill that would increase fines for broadcast indecency from $32,500 to $500,000.

Additionally, the House Energy and Commerce Committee is expected to consider legislation that would relax local video franchising requirements for the Bell telephone companies and expedite their entry into the video market.

USF Reform Heats Up on the Hill While the USF Contribution Factor Increases

Proposed reform of the federal universal service fund ("USF") program was the focus of several Congressional hearings in March while the USF contribution factor increased to almost 11 percent. Specifically, carriers must contribute 10.9 percent of their interstate and international end user revenue to the USF in the second quarter of 2006, up from 10.2 percent.

At Senate hearings this month lawmakers generally expressed support for maintaining the universal service program, but suggested broadening the contribution base and other reform measures because the existing program is technologically outdated and financially unsustainable. For example, Senator Stevens stated that policy changes are necessary to ensure that the USF remains viable in the broadband age and supported a contribution system that levies charges on all communications methods. Stevens also noted that the law should be flexible so that Congress is not required to rewrite complex USF rules every several years to keep up with technical innovation. In addition, Stevens proposed implementing a random audit requirement to help ensure that USF recipients are using monies responsibly.

Other senators also expressed concern that the USF program, which heavily relies on interstate long-distance services that are becoming obsolete in light of wireless and voice-over-Internet-protocol services, be reformed before it falls further behind technological innovation. Further, the USF should be modified to encourage investment in broadband and other advanced services rather than supporting obsolete networks and services. Several lawmakers also noted that reform is necessary because the existing system reimburses carriers their costs of providing service, without actually measuring how the USF monies are being applied.

Members of a House appropriations subcommittee also asked FCC Chairman Martin questions regarding certain USF-related budget requests, including an additional $20.5 million in USF contributions that would help cover the costs of monitoring and auditing the USF program. The subcommittee members acknowledged that the FCC is trying to reduce fraud, waste and abuse within the program, but questioned whether additional funding was the appropriate way to address existing problems. One member suggested that the General Accountability Office could assist the FCC with its investigative efforts to help save costs. The appropriation also likely would require an increase in the USF contribution factor, which ultimately will be passed to consumers, but Martin stated that the funding would be only a one-time appropriation.

FCC Proposes to Allow States to Implement Mandatory Number Pooling

The FCC adopted an order and notice of proposed rulemaking regarding the power of state regulators at their discretion to implement mandatory thousands-block number pooling. Granting state regulators authority to implement pooling would permit states to optimize and conserve numbering resources without first seeking FCC permission to do so.

Under the current number pooling process, states must petition the FCC for authority to implement mandatory thousands-block number pooling. Pursuant to delegated authority, the FCC then grants each state’s request on a case-by-case basis. The order accompanying the NPRM provides such delegated authority to the West Virginia, Nebraska, Oklahoma, Michigan and Missouri regulators to implement number pooling in certain numbering plan areas ("NPAs") that are set to exhaust within three years.

The NPRM notes that mandatory number pooling can extend the life of an NPA and conserve numbering resources more effectively than optional pooling requirements. To increase the efficiency of mandatory number pooling, the FCC questions whether it should give the states delegated authority to implement mandatory pooling at their discretion. The FCC also asks for comment on the costs and benefits of providing states blanket authority in comparison to reviewing state petitions on a case-by-case basis. The FCC also seeks comment on whether it should phase in pooling to all rate centers – for example, pooling could be applied to all NPAs that are within three years of exhaust, then expanded to other NPAs as they reach a certain state of exhaust. Because the FCC already implemented mandatory number pooling in the largest 100 Metropolitan Statistical Areas ("MSAs"), the NPRM is limited to the issue of extending mandatory pooling to NPAs outside the top 100 MSAs.

Verizon Obtains Broadband Forbearance by Operation of Law

The FCC’s most recent era of collegiality was interrupted on March 19, 2006, when a significant Verizon petition for forbearance from regulation of its "broadband" services under Title II of the Communications Act (the "Act") was granted by operation of law. Under Section 10(c) of the Act, if the FCC does not deny a forbearance petition by the statutory deadline (which in this case was March 19), the petition "shall be deemed granted." The FCC commissioners split down party lines on the petition. The Republicans, Chairman Martin and Commissioner Tate, supported a grant, but Democratic Commissioners Copps and Adelstein supported a denial. With a 2-2 split on the Commission, the petition was deemed granted by operation of law. A variety of enterprise customers and competitors that purchase such services from Verizon had opposed the petition.

In the petition, Verizon asked for broad relief from Title II of the Act for its broadband services not already deregulated under the Wireline Broadband Order of August 2005. Title II includes the core regulatory obligations that the FCC imposes on telecommunications service providers. However, while the petition was pending, Verizon said that it does not seek forbearance of federal universal service obligations for the services at issue in this petition. After the forbearance grant, the Wall Street Journal reported that Verizon considers the universal service obligations and the conditions that the FCC placed on approval of the Verizon-MCI merger to continue to apply.

A major issue is the scope of the services for which forbearance applies, because the Verizon petition as initially filed was framed very broadly. In a letter to the FCC filed on February 7, 2006, Verizon described the services for which it requested relief — primarily optical and packet-switched services including non-time division multiplexing-based ("non-TDM-based") optical networking, optical hubbing, and optical transmission services, as well as packet-switched broadband services, such as Frame Relay and Asynchronous Transfer Mode Cell Relay ("ATM"). In a joint statement on March 20, Chairman Martin and Cmr. Tate said that the services exclude traditional special access services (DS1 and DS3 services) as well as TDM-based optical networking. According to Martin and Tate, Verizon also stated that it would continue to make these services available as wholesale common carrier services.

Ultra-Wideband Working Group Disbanded

Two organizations, the UWB Forum and the WiMedia Alliance, pushing incompatible technical approaches to the wireless technology known as ultra-wideband, or "UWB," have dissolved a working group that sought to create a common standard.

Ultra-wideband is a wireless communications technology that, instead of using a single frequency, sends short pulses across much of the radio spectrum. The concept is that because a UWB transmission lasts for short periods, it can share frequencies with other applications without causing interference (although interference concerns have been raised). UWB has been approved by the FCC for limited purposes, including communications devices designed for indoor use, automobile collision-detection systems, medical imaging, and through-wall imaging applications for law enforcement. One application being developed uses ultra-wideband to replace the myriad wires that connect televisions, stereos, computers, games and other consumer devices, promising to facilitate the convergence of computers and consumer electronics.

The UWB Forum and the WiMedia Alliance, each backed by different companies, had been battling over which technical approach would become industry standard. In 2003, the two consortiums formed a task group with the Institute of Electrical and Electronics Engineers with the mission to create a single ultra-wideband standard. After failing to achieve this goal, the task group disbanded. The problem with not having a uniform standard is that the UWB Forum’s Certified Wireless USB products and the WiMedia Alliance’s Cable-Free USB products will not be able to communicate and may interfere with each other.

State Activities

California

Telecommunications matters continue to keep the California legislature and the Public Utilities Commission ("CPUC") busy. On March 2, the CPUC issued the long-awaited decision in its six-year-old Consumer Protection Rulemaking proceeding. The 3-2 decision, which permanently rescinded the rules adopted in late 2004 and suspended in 2005, failed to end the controversy that has been associated with this proceeding since its inception. Republican commissioners John Bohn and Rachelle Chong joined CPUC President Michael Peevey to adopt a version of the decision preferred by the telecommunications providers. An alternative version favored by consumer advocates was supported by the Democratic commissioners Dian Grueneich and Geoffrey Brown. The adopted decision focuses on enforcing existing regulations and laws rather than creating new ones while Commissioner Grueneich’s alternative would have reinstated what she characterized as the essential elements of the earlier, rescinded rules.

The CPUC’s decision creates a consumer education program and strengthens the CPUC’s enforcement powers by creating a Consumer Fraud Unit to investigate allegations of consumer fraud. It requires the CPUC’s enforcement division to develop streamlined procedures for resolving informal complaints and to explore alternative enforcement mechanisms that will allow the CPUC to intervene earlier in cases. It also orders the CPUC’s staff to practice "collaborative law enforcement" – a process that will require staff to consider whether a matter would be better addressed by the state Attorney General or some other agency before beginning an enforcement action.

Although praised by the telecommunications carriers, the CPUC’s decision is being heavily criticized by consumer groups and other government entities. The state Attorney General’s office has called the collaborative enforcement program "abysmally deficient." Several members of the state legislature are considering introducing legislation to codify specific consumer rights, in particular those contained in the alternative version sponsored by Commissioner Grueneich. Commissioner Brown called the adopted rules "unenforceable slogans." The CPUC’s decision was effective immediately but remains subject to appeal. The first "Telecommunications Consumer and Fraud Prevention Education" workshop was held on March 30 in San Francisco.

Beyond the consumer protection issues, the California legislature is active on a number of other telecommunications fronts. A Joint Resolution introduced by Senator Murray on February 23 would urge Congress and the President to adopt a series of principles intended to achieve "Net neutrality." The resolution is pending before the Energy, Utilities, and Commerce Committee. In the Assembly, representative Saldana has introduced a bill, AB 2202, that would require all manufacturers of electronic devices to eliminate hazardous materials from all devices sold in California after January 1, 2008. Existing California law prohibits an electronic device from being sold or offered for sale in the state if it is prohibited from being sold in the European Union due to the presence of certain heavy metals. Regulations propounded under the existing California law are scheduled to take effect January 1, 2007 or the date the Directive 2002/95/EC, as adopted by the European Parliament and the Council of the European Union on January 27, 2003, takes effect, whichever date is later. AB 2202 would revise the definition of "electronic device" in the current law to be consistent with the definition of that term as used by the European Union. Current California law defines an "electronic device" as a video display that is deemed hazardous by the Department of Toxic Substances Control regulations as presumed hazardous waste when discarded. If enacted, the regulations to implement the revised law would be effective January 1, 2008, a year later than the current regulations. A committee hearing on AB 2202 was held on March 27.

State Deregulation Efforts Continue

Indiana and Mississippi are the two latest states to enact sweeping deregulation legislation. In Mississippi, HB 1252, signed by Gov. Haley Barbour, eliminates much of the Public Service Commission’s ("PSC’s") jurisdiction over telecommunications companies, leaving it with authority only over the retail rates for single line, flat rate local exchange service and wholesale intrastate switched access charges and complaints related to those services. In addition, the PSC may only interpret and enforce terms and conditions in service agreements; it may not amend or invalidate such agreements, and third-party intervention in complaint cases is prohibited.

In Indiana, Gov. Mitch Daniels signed the Senate version of the sweeping telecommunications reform legislation discussed in earlier Bulletins. The law immediately divests the state of jurisdiction over broadband and VOIP services and shifts jurisdiction over video franchising from local governments to the Utility Regulatory Commission ("URC") in 2007. The URC must act on franchise applications within fifteen days of receipt. In addition, the new law deregulates retail rates for phone services by mid-2009, provided that the incumbent carriers are able to provide broadband services to 50 percent of the households in their serving territories by that date.

Deregulatory bills continue to advance in other states’ legislatures. The Kansas Senate has passed a bill that would immediately deregulate rates for all bundled telecommunications services, provided that the bundled rate cannot exceed the sum of the rates for the individual services included in the bundle. The bill also would deregulate the retail rates for all services other than basic exchange and lifeline services provided to customers with fewer than five lines in markets with more that 75,000 customers. The amended version of the bill passed by the Kansas House includes a requirement that there be at least one facilities-based competitor and one other type of competitor before a market can be deregulated. Pure resellers and prepaid service providers will not count as competitors. The Senate version also had tied deregulation in smaller markets to broadband deployment but the House deleted that language. The House bill also includes a clause to allow retail rate regulation to be reinstated if fewer than two companies compete against the incumbent in any market.

In Washington State, the legislature is considering relaxing the regulations applicable to CLECs, in particular eliminating the requirement that CLECs file price lists with the Washington Utility and Transportation Commission ("WUTC"). As drafted, the bill would require CLECs to file periodic reports, comply with accounting rules, and be subject to the WUTC’s complaint jurisdiction.

Finally, more states are jumping on the video-franchising reform bandwagon. In addition to the Indiana statute described above, legislation is progressing in Missouri, Michigan, and New Jersey to move franchising authority from local governments to the state. The pending bills differ in imposing build-out requirements on new carriers and the obligation to pay franchise fees, but they all reflect the current national move to reduce local government authority over video franchising.

Finally, despite the strong push towards market control rather than regulation of telecommunications services, state regulatory commissions continue to take slamming and cramming complaints very seriously. The Indiana URC recently imposed fines in excess of $1 million on two companies for cramming, or adding unauthorized charges to customers’ bills. Micronet and the company handling billing for its prepaid directory assistance services, HT Teleservices, were fined $1.1 million for including unauthorized charges on more than 200 customers’ bills. Cramming and slamming continue to be the basis for a significant number of consumer complaints in most states and we expect that regulators and legislators will continue to respond quickly against companies that engage in these practices.

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 below 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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