United States: Communications Law Bulletin, September 2006

The Month in Brief

As September drew to a close, a number of sources reported that Federal Communications Commission ("FCC" or "Commission") Chairman Kevin Martin’s nomination for a second term was on hold over policy differences with one or more Senators. If the hold is not lifted before this Congress bows out on at the end of October, Martin still can serve until late 2007 without renomination. Persistent rumors also are circulating that the Commission will approve the proposed merger between AT&T and BellSouth without conditions on October 12. Finally, a Notice of Inquiry on broadband practices has been placed on the agenda of the Commission’s October 12, 2006 open meeting.

Our next issue likely will disclose further developments on all of these fronts. In the meantime, this issue includes discussions of a number of developments that are not rumors, and offers our usual list of deadlines for your calendar.

FCC Creates Public Safety and Homeland Security Bureau

On September 25, the FCC released an order establishing a Public Safety and Homeland Security ("PSHS") Bureau. The new Bureau will advise and make recommendations to the Commission regarding public safety, national security, emergency management and preparedness, and disaster management.

Citing the events of September 11, 2001 and Hurricane Katrina, the Commission expressed the urgent need for consolidating public safety, homeland and national security, and disaster management policymaking and coordination from the various different Bureaus into a single department. The PSHS Bureau will work to ensure nationwide reliability, interoperability, redundancy, and prompt restoration of critical communications infrastructure. The Bureau also will act as a clearinghouse for new ideas and best practices for public safety communications issues.

The Bureau’s immediate policy goals include continuing the FCC’s E911 initiatives, promoting nationwide compliance with Communications Assistance for Law Enforcement Act ("CALEA"), and addressing the increasing spectrum needs of the public safety community through the restructuring of the 800 MHz band. The Commission also has streamlined emergency requests for Special Temporary Authority by directing the new Bureau to handle such requests outside normal business hours.

Telecommunications providers, information service providers, facilities-based broadcast and cable companies, common and non-common carriers, wireless providers, and satellite providers should all anticipate new recommendations and policies in areas such as emergency preparedness, infrastructure protection, and the Emergency Alert System from the new Bureau.

With Congress set to recess at the end of October, many observers and analysts are predicting that Congress will not pass communications reform legislation before the November elections or even before the end of the year. Senate Commerce Committee Chairman Ted Stevens (R-Ak.) conceded that, as of September 21, he was unable to round up the necessary 60 votes to avoid a filibuster on the Senate bill (HR-5252). Even if the 60 votes could be obtained, another hurdle to passing the bill this year is clearing time on the Senate floor to allow 60 hours of debate, as required under Senate procedural rules. The Senate bill continues to face strong opposition from Democrats seeking Net neutrality provisions, although portions of the bill, such as video franchise reform, enjoy strong bipartisan support. Some have speculated that the bill could be passed this year if it is segmented into separate bills, but Sen. Stevens has insisted that he will not section off portions of the bill or attempt to attach it to an appropriations or other bill in order to increase its likelihood of passage. It is unclear how a possible change of control of one or both houses of Congress would affect the bill’s prospects when Congress returns after the November elections.

On a separate matter, the Senate on September 13 passed a voice-over-Internet protocol ("VoIP") E911 measure (S-1063) as part of a port security bill. The measure would require telecommunications carriers to offer VoIP providers access to 911 services. It also would direct the FCC to adopt VoIP E911 access rules within 90 days after enactment and would allow states to impose fees to support E911 services. It no longer contains waiver or grandfather provisions that would have exempted certain noncompliant providers from complying with E911 requirements. The measure is based on a House bill and therefore may be easily reconciled in conference. Some have speculated, however, that the measure may be dropped in conference in order to provide an incentive for the Senate to pass HR-5252, which contains similar VoIP E911 provisions.

California Legislature Passes Statewide Video Franchise Legislation
The California legislature has enacted a video franchising bill, which Governor Arnold Schwarzenegger is expected to sign. If the bill becomes law, California will be the eighth state to provide statewide video franchising and to ease entry into the video market by competitors. Other states that have approved statewide franchises include Indiana, Kansas, New Jersey, North Carolina, South Carolina, Texas, and Virginia. The addition of California to this list would mean that one third of the U.S. population lives in jurisdictions that provide statewide franchises.

Under the legislation, new entrants would be able to apply to the California Public Utilities Commission ("CPUC") to obtain state franchises after the CPUC drafts new application procedures. Incumbents also will be able to obtain statewide franchises at that time and can opt out of a local franchise agreement upon entry by a video competitor. State franchise holders will be required to pay franchise fees of up to 5 percent and to satisfy state antidiscrimination and staggered buildout requirements.

Many predict that the steady progression of states adopting statewide franchises decreases the odds of national franchise legislation, particularly because federal legislation appears bogged down in the Net neutrality debate.

Verizon Settles with Montgomery County, MD; Obtains Video Franchise
Verizon reportedly has entered a deal with Montgomery County, Maryland, to provide its FiOS video service in the county. Verizon reportedly has agreed to request dismissal of its suit against the County in federal court in Baltimore if the County Council approves a franchise agreement. Verizon apparently has agreed that FiOS customers will pay a 5 percent franchise fee on video service and another 3 percent public access channel fee. Verizon also will provide 100 public buildings with free video and pay $1 million in related fees over 5 years. A public hearing is set for September 28, 2006, in Rockville, Maryland.

Michigan Introduces Revised Statewide Franchise Bill
A new statewide video franchising bill has been introduced in the Michigan legislature as a similar bill has been languishing in committee for six months. The new video bill would transfer video franchising authority to the Public Service Commission from municipalities. Franchise fees would be allowed up to 5 percent of gross receipts and carriage fees, but could be passed through on customers’ bills. Fees from telecom or Internet services would be exempt from franchise fee requirements. The legislation also includes staggered buildout requirements, but would permit satisfaction of the buildout requirements through use of satellite or wireless technologies. New entrants would be required to provide one or more public access channels and to pay up to 1 percent of gross revenue as public, educational, and governmental support. The proposed legislation also would require new entrants to provide municipalities with 30 days’ notice of infrastructure upgrades for video services. The bill would permit incumbent cable providers to negotiate the terms of franchise buy-outs with municipalities. Also counted would be any payments for carriage from program providers.

The fourth quarter 2006 contribution factor for the universal service fund ("USF") has decreased to 9.1 percent. This is the first time in two years – since the fourth quarter of 2004 – that the contribution factor has been less than 10 %. The contribution factor started topping 10 percent in early 2005 after the FCC concluded that administration of the USF was subject to certain government accounting standards set forth in the Anti-Deficiency Act. Changing the USF’s accounting standards at that time resulted in the loss of millions of dollars and required an increase of the contribution factor to make up for lost monies.

Since then, Congress twice has passed legislation exempting the USF from the Anti-Deficiency Act for limited periods of time. Current legislation is pending that would further extend the exemption. The FCC also currently is working with the U.S. Office of Management and Budget ("OMB") to draft an interpretation of the government’s accounting rules that effectively would exempt the USF from the Anti-Deficiency Act. The interpretation would make unnecessary further Congressional action to adopt such an exemption through legislation. In response to a question from Senator Rockefeller (D. W.Va.), FCC Chairman Kevin Martin stated at his renomination hearing that the FCC’s negotiations with OMB were progressing and that further details regarding the negotiations would be provided "soon."

On September 18, the FCC concluded the Advanced Wireless Services ("AWS") spectrum auction. The auction, which began August 9, represents the largest amount of radio spectrum ever sold at one time. The newly acquired spectrum will enable carriers to offer higher quality and a greater variety of wireless broadband services and devices over Third Generation ("3G") mobile networks.

The 104 bidders participating in the auction won a total of 1,087 spectrum licenses for which they promised to pay over $13.9 billion. Winners are required to make a down payment on the licenses and file their long-form applications (FCC Form 601) with the FCC within 10 business days after the Wireless Telecommunications Bureau’s issuance of its Public Notice announcing the close of the auction. Winning bidders are granted the spectrum licenses only after timely submission of both the down payment and final payment and upon successful review of the long-form application.

T-Mobile emerged the high bidder for the largest amount of spectrum, pledging $4.2 billion for a total of 102 licenses. Other top bidders included Verizon Wireless bidding $2.8 billion, a consortium of cable companies teamed with Sprint Nextel bidding $2.4 billion, and Cingular Wireless increasing its spectrum holdings by a relatively smaller block of licenses for $1.3 billion. More than half of the winning bidders were small business entities (or designated entities), each of whom will enjoy the discounts of up to 25% promised by the FCC designed to encourage auction participation by smaller companies. The auction is in some legal doubt, however, due to a legal challenge pending in the Third Circuit Court of Appeals brought by three of the designated small business entities. In a brief filed with the court in early September, appellants argued that the FCC’s new designated entity rules are "flawed" and ultimately undermine the participation of small businesses in the auction. In spite of the fact that 100 of the 168 parties that qualified to bid in the auction were designated entities, small businesses generated just 4% of the overall bids.

This newly released "prime ‘spectrum real estate’," as Chairman Kevin Martin described it, will bring Internet and other video content offerings to mobile devices. So-called 3G technology includes, for example, video-calling on a wireless phone and "aircards" that enable Internet connectivity from a laptop computer without a landline or Wi-Fi connection. Carriers also are expected to use the new spectrum to upgrade their existing voice services. Chairman Martin also expressed hope that smaller companies who won new spectrum licenses will introduce advanced wireless services to previously "underserved and rural areas." Details about new service offerings are limited at the present time. To prevent collusion, auction winners may not discuss their specific plans for use of their newly acquired spectrum until after their initial down payment.

The next large spectrum auction will likely offer for sale the spectrum currently used for analog broadcasting. Broadcasters will be required to vacate this spectrum and move to a different frequency as part of the transition to digital broadcasting. The FCC has yet to set a date, but by law auctioning of broadcast spectrum must begin by January 28, 2008.

FCC Requests Rehearing of Appeals Court’s Truth-in-Billing Decision

The FCC has asked the 11th Circuit Court of Appeals to reconsider its recent decision overturning those portions of the FCC’s Truth-In-Billing decision preempting state regulation of line-item details on wireless bills to consumers (see the August Communications Law Bulletin for more details on the Appeals Court decision). The FCC has asked the full court to rehear the legal question whether regulation of line-item charges is an "other term or condition" that states may regulate, or a rate over which the FCC has jurisdiction. In its rehearing request, the FCC argues that the statutory language does not clearly authorize states to require or prohibit line items in wireless bills and this ambiguity implicitly delegates authority to the FCC.

On August 30, the Illinois Commerce Commission ("ICC") approved a joint proposal of AT&T Illinois and the Citizens Utility Board (a consumer watchdog group) to reclassify most of AT&T’s residential local services in Chicago as competitive, virtually eliminating price regulation for these services. With this decision, only three AT&T local exchange services in the Chicago local service area remain classified as non-competitive: the Flat Rate Package, the Enhanced Flat Rate Package, and the Residence Saver Pack Unlimited. Rates for these three "safe harbor" services will be reduced and frozen. The rates for all other local services, including network access lines, ISDN, local usage, vertical services, and directory assistance will be regulated according to the existing rules for competitive service, with the exception that prices for network access lines are capped at their current rates for two years, and increases after that shall not exceed $2 per year in years three and four.

The plan as approved by the ICC varies somewhat from AT&T’s original proposal by including additional consumer protections, but the ICC rejected the more stringent requirements set forth in the alternative proposal of the Administrative Law Judge assigned to review AT&T’s request. As adopted, AT&T is required to comply with a number of "voluntary commitments," including the preparation of billing messages to customers, filing reports of the number of customers subscribing to the safe-harbor services, and committing to expanding its digital subscriber line ("DSL") services to 99% of its wire centers in the Chicago area and ninety percent of the customer living units in its Chicago service territory. The ICC will commence a formal proceeding in the beginning of the fourth year to evaluate the status of competition. AARP and the Illinois state Attorney General have criticized the decision and are exploring appellate options.

California Wireless Developments

A CPUC Administrative Law Judge has tentatively approved a settlement between Cingular Wireless and the Utility Consumers’ Action Network ("UCAN") regarding a UCAN complaint over the authorization required to place charges for "wireless content services" on Cingular bills. Wireless content services include content such as ring-tones, graphics, and games, and digital applications such as weather tracker and email readers. Cingular had moved for dismissal of the complaint on a number of grounds including federal preemption of wireless rates. The CPUC granted the motion in part but reiterated that all billing telephone companies must comply with California law by including only authorized charges on customers’ invoices, and further determining that the charges in question were not wireless rates. The settlement is designed to ensure that customers understand what they are buying and how to cancel the services. Cingular will be required to send free confirmation messages for all wireless content service orders, implement a per line dollar limit for wireless content service purchases, create a blocking option, and institute a readily available means to address billing issues and to cancel wireless content services. The full Commission may approve the ALJ’s draft decision or its own alternate as early as its regularly scheduled agenda meeting on October 16.

Separately, Governor Schwarzenegger has signed SB 1613 outlawing the use of handheld mobile phones while driving, except to make emergency calls. The bill will take effect on July 1, 2008, and will impose a $20 fine on first offenders and a $50 fine on all repeat offenders. Push-to-talk phones may be used until July 1, 2011. Violations of the new law will not result in "points" being imposed on a violator’s driving record.

The FCC released a Notice of Proposed Rulemaking ("NPRM") seeking comment on possibly changing the rules governing the guard band portions of the 700 MHz spectrum band and related issues. The FCC is seeking new ways in which it can promote the more efficient and effective use of the 700 MHz guard band spectrum by providing greater flexibility to guard band operators while continuing to protect adjacent public safety operators.

The primary role of the 700 MHz guard bands is to protect adjacent public safety licensees from interference from 700 MHz operators. The FCC, however, also has made the guard bands available for certain limited operations that are governed by unique service rules and managed by specified entities. The guard band managers then may allow others to use the guard bands through spectrum user agreements. The managers retain ultimate control of the guard bands and are responsible for frequency coordination with each other, guard band operators, and adjacent public safety operators. Although the FCC previously held two auctions for the 700 MHz guard bands, few systems have been deployed, prompting in part the NPRM.

The NPRM specifically seeks comment on whether to:

• apply the FCC’s spectrum leasing rules to the 700 MHz guard bands;
• increase band manager flexibility by eliminating or revising existing restrictions on leasing to affiliates and using the spectrum for internal purposes;
• eliminate the prohibition on deploying cellular architectures in the guard bands; and
• change the power limits in the guard bands.

The NPRM also seeks comment on how to re-license guard band licenses that were returned to the FCC by Nextel as part of the 800 MHz band reconfiguration proceeding. In addition, the NPRM asks whether the FCC should modify the existing band plan for the upper 700 MHz band with respect to the guard bands.

Comments and reply comments in response to the NPRM are due October 23 and November 6, respectively.

Alcatel and Lucent Shareholders Approve Deal

On September 7, the shareholders of Alcatel SA ("Alcatel") and Lucent Technologies Inc. ("Lucent") approved Alcatel’s stock acquisition of Lucent. The deal, which we first reported in the April 2006 Communications Law Bulletin, is set to close by the end of 2006.

Since the transaction, styled as a "merger of equals," was announcement in April, the stock prices of both companies have declined. This has caused enthusiasm for the deal to wane. Nevertheless, many observers have endorsed the merger, seeing it as the only way for these companies to survive in the competitive, rapidly consolidating telecommunications equipment sector. The combined company will have a global reach, broad product offerings and one of the largest research and development capabilities in the industry.

On August 29, the U.S. Court of Appeals for the Ninth Circuit affirmed the FCC’s decision requiring competitive local exchange carriers ("CLECs") seeking the benefits of existing interconnection agreements to opt into such agreements in their entirety. Rejecting consolidated challenges by New Edge Networks, CompTel, Xspedius Communications, XO Communications, and other CLECs, the court held that the FCC’s interpretation of Section 252(i) of the Communications Act was reasonable and that the FCC did not abuse its discretion in adopting the challenged interpretation.

Section 252(i) requires any local exchange carrier ("LEC") to make available to "any other requesting telecommunications carrier" any interconnection, service, or network element provided under an approved interconnection agreement "upon the same terms and conditions." Previously, the FCC had permitted CLECs to exercise their Section 252(i) rights by selecting incumbent local exchange carrier ("ILEC") services or network elements pursuant to the most favorable provisions of an existing interconnection agreement, without having to meet any other conditions in the agreement. In 2004, however, the FCC determined that, in practice, its "pick-and-choose" approach had impeded negotiations because ILECs were reluctant to make concessions in negotiating interconnection agreements "‘for fear that third parties [would] obtain equivalent benefits without making any trade-off at all.’" Accordingly, the FCC imposed an "all-or-nothing" rule requiring CLECs to adopt an existing approved agreement in its entirety in order to obtain the benefits of the agreement from an ILEC.

The court, in an opinion by Judge Thomas Nelson, first found that Section 252(i) is ambiguous on this point, stating "Congress simply has not spoken to the precise question before us." The court then determined that the all-or-nothing rule "is a permissible interpretation of" Section 252(i) because the requirement that the requesting carrier take the ILEC interconnection, service or network element "under the same terms and conditions" as provided in the interconnection agreement "can reasonably be read to refer to the terms and conditions of the entire agreement." The court also held that the FCC’s approach is "a reasonable policy choice" because it found that the initial pick-and-choose rule "had impeded negotiations."

The court also held that the FCC’s policy reversal was not an abuse of discretion because it was based on record evidence – supported by state commissions and two CLECs – that the pick-and-choose rule impeded negotiations and that CLECs were willing to adopt entire agreements. The court also rejected CompTel’s argument that the reversal amounted to forbearance from enforcing the pick-and-choose rule without meeting the statutory criteria for forbearance under Section 10 of the Telecommunications Act of 1996. Rather than allowing a party to avoid a statute or regulation through forbearance, the FCC changed its interpretation of what the statute required and the implementing regulation.

FCC Application Fees Increasing

Effective October 17, 2006, the Commission will adjust its application processing fees to reflect the net change in the Consumer Price Index for all Urban Consumers (CPI-U) of 7.7 percent, calculated from October 2003 to October 2005. Please visit the Commission’s website for specific application fee information at www.fcc.gov/fees. The 2006 Fee Filing Guides will be placed on the website on October 13, 2006 (although we note that the 2006 Wireless Telecommunications Bureau Fee Filing Guide is already available).

Note: Although we try to ensure that the dates listed in the attached 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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