FCC CHAIRMAN KENNARD HINTS AT FCC APPEAL IN PORTLAND CASE, DECRYING "CHAOS" FROM "30,000 LOCAL FRANCHISING AUTHORITIES" IMPOSING OWN BROADBAND RULES
Subject: Telecommunications Regulation TELECM, BROCTV: SLYNN, T, UMG, TWX, ATHM, AOLAnalyst: Susan Lynner (703) 276-0055 Katherine Styponias (212) 778-8647 Guy W. Woodlief (212) 778-8411--------------------------------------------------------------------------------Chairman Kennard Hints At FCC Appeal In Portland Case. Speaking June 15 before the National Cable TV Association convention, FCC Chairman William Kennard said that the FCC is weighing its options with respect to Judge Owen Panner's decision upholding demands by local franchising authorities in Portland, Oregon, who want to impose a cable open-access obligation as a condition of transferring their franchise from TCI to AT&T (T, 52 7/8, rated Strong Buy by Guy Woodlief). Kennard told a questioner that the FCC would be indicating its planned course soon. After talking with lawyers associated with the case, reading Kennard's speech, and weighing his remarks as reported in a related June 15 Washington Post article, we believe that the FCC intends to file an "amicus" brief with the 9th Circuit in support of AT&T's planned appeal, and that such a brief would have considerable influence with the appellate court. (Kennard's speech is available in the Headline section of the fcc.gov web site.) The high points of the speech include these excerpts: "Here is my vision for broadband in America. Multiple pipes serving America's homes. At least four or five facilities-based competitors. DSL, cable modem, terrestrial wireless, and satellite ... We have to get these pipes built. But how do we do it? We leave it to the marketplace. "In a market developing at these speeds, the FCC must follow a piece of advice as old as Western Civilization itself: first, do no harm ... the FCC has taken a hands-off, deregulatory approach to the broadband market. We approved the AT&T-TCI deal without imposing conditions that they open their networks. Now, the Baby Bells say that it's unfair - that they have to open their networks, but cable doesn't; that there's a lack of parity. But let's look at the facts, we put a proposal on the table for the Baby Bells to operate advanced services in a de-regulated environment. The Bells have been given the roadmap to their liberation. All they need is the courage to compete. "There are 30,000 local franchising authorities in the United States. If each and everyone of them decided on their own technical standards for two-way communications on the cable infrastructure, there would be chaos ... The market would be rocked with uncertainty; investment would be stymied .. That is why I have asked my general counsel for options in light of the Portland decision ... See, it is in the national interest that we have a national broadband policy. The FCC-as I have said before-has the authority to set one, and we have. We have taken a deregulatory approach, an approach that will let this nascent industry flourish." We Expect To See AT&T Outline Appellate Case Over Next Week Or So. The next step in the appellate process would be for AT&T to file a brief notice with the district court (Judge Panner) alerting the court of AT&T's decision to appeal. Attorneys close to the Portland case think that AT&T may then file a document of about 20 pages with the 9th Circuit outlining their arguments against Judge Panner's decision and seeking an expedited hearing from the 9th Circuit (which the court may or may not grant; the final schedule for the case, including filing of briefs and oral arguments, is up to the court). This document could include arguments based on the cable statutes that limit the powers of local franchising authorities and language in the 1996 telecom act stating that in most cases, "a franchising authority may not require a cable operator to provide any telecommunications service or facilities ... as a condition of the initial grant of a franchise, a franchise renewal, or a transfer of a franchise." That provision could be construed as barring the open-access mandate, since requiring AT&T to unbundle its network to allow unlimited access by unaffiliated Internet service providers (ISPs) is arguably requiring them to provide a common carrier platform for those ISPs. For The FCC, The Issue Would Be The Challenge To Its Authority To Set National Policy. We think that Chairman Kennard's remarks indicate that the FCC sees the Portland case, and the potential for copy-cat mandates around the nation in the transfers of the MediaOne franchises (UMG, 72 1/8, not rated), as a threat on two fronts: 1) the FCC's vision for healthy competition in broadband deployment--Kennard noted that where cable-modem service has been deployed, "DSL [from the BOCs] is following"; and 2) its authority to set national policy for cable broadband deployment. Assuming that the FCC does file an amicus brief, we think that the 9th Circuit would give heavy weight to the FCC's views, since the FCC is the federal agency vested with primary jurisdiction over these matters. We think that the FCC's participation in the Portland case would likely discourage other copy-cat franchising efforts, although some authorities may make the attempt anyway. The End Result Is Likely No Action Towards Cable Open Access For The Investable Future. If the FCC is able to claim jurisdication on cable open access initiatives, the Commission has clearly indicated its hands off approach to the deployment of advanced data services over the cable infrastructure. With that in mind, it is unlikely that the FCC will revisit the issue for at least the next 18-24 months. Even if it revisits the issue at that point (not a certainty) and rules to open the cable network, there will surely be legal challenges to that decision which could tie the issue up in the courts for another two years. Thus, it is likely that we will have the current regime (no cable open access requirements) in place for the foreseeable future. Thus, this issue should have no impact on the AT&T-UMG deal closing. That said, we believe the rollout of high speed cable modems and DSL lines from the local exchange carriers will proceed apace. Cable Subscriber Cap/Attribution Rules Still On Table. The other regulatory cloud hanging over the AT&T/UMG deal is the still-unresolved debate over whether the FCC may impose a cap on the number of cable subscribers that any one cable MSO (multi-system operator) may reach and the "attribution" rules that would govern whether a franchise's subs are deemed controlled by an MSO. This debate has been hanging fire since September 1993, when a federal district court judge ruled that the underlying cable-cap language in the 1992 cable act was unconstitutional, and the FCC immediately froze its rules limiting a cable MSO to 30% of homes passed. The D.C. Circuit Court of Appeals is set to hear oral arguments on the 1992 act's constitutionality and the FCC's 1993 rules in early December. In the meantime, the FCC could issue a revamped cable sub and attribution order over the next several months, which would make any arguments over the 1993 order before the appellate court virtually moot. We think that the FCC is aiming for a new rule based on subscribers actually served, with the comparison based not just on homes served by cable, but all video providers, including direct broadcast satellite (DBS). Attorneys familiar with the case say that AT&T could argue that AT&T should not have attributed to it any subs which it reaches via minority interests in cable franchises over which it has no video programming control. However the final rules on cable subscriber caps and attribution work out, we think that the FCC is committed to seeing a name-brand national roll-out of local voice and data competition for the BOCs, and will likely not follow a policy that would undercut that goal.
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