Implementation of Section 621(a)(1) of the Cable Communications Policy Act of 1984 as Amended by the Cable Television Consumer Protection and Competition Act of 1992, 65670-65677 [07-5802]

Agencies

• FEDERAL COMMUNICATIONS COMMISSION

[Federal Register Volume 72, Number 225 (Friday, November 23, 2007)]
[Rules and Regulations]
[Pages 65670-65677]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 07-5802]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 76

[MB Docket No. 05-311; FCC 07-190]


Implementation of Section 621(a)(1) of the Cable Communications 
Policy Act of 1984 as Amended by the Cable Television Consumer 
Protection and Competition Act of 1992

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: In this document, the Commission adopts rules and provides 
guidance to implement section 621(a)(1) of the Communications Act. The 
Commission solicited and reviewed comments on this section and found 
that to promote the federal goals of enhanced cable competition and 
accelerated broadband development, the Commission's rules regarding the 
local franchising process should be extended to incumbent cable 
operators. The Commission adopts measures to address a variety of means 
by which local franchising authorities are unreasonably refusing to 
award competitive franchises. The rules and guidance will facilitate 
enhanced cable competition and accelerated broadband development.

DATES: The rules contained in this Second Report and Order (Second 
Report and Order) will become effective December 24, 2007.

FOR FURTHER INFORMATION CONTACT: For additional information on this 
proceeding, contact Holly Saurer, Holly.Saurer@fcc.gov or Brendan 
Murray, Brendan.Murray@fcc.gov of the Media Bureau, Policy Division, 
(202) 418-2120.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Second 
Report and Order, FCC 07-190, adopted on October 31, 2007, and released 
on November 6, 2007. The full text of this document is available for 
public inspection and copying during regular business hours in the FCC 
Reference Center, Federal Communications Commission, 445 12th Street, 
SW., CY-A257, Washington, DC 20554. These documents will also be 
available via ECFS (https://www.fcc.gov/cgb/ecfs/). (Documents will be 
available electronically in ASCII, Word 97, and/or Adobe Acrobat.) The 
complete text may be purchased from the Commission's copy contractor, 
445 12th Street, SW., Room CY-B402, Washington, DC 20554. To request 
this document in accessible formats (computer diskettes, large print, 
audio recording, and Braille), send an e-mail to fcc504@fcc.gov or call 
the Commission's Consumer and Governmental Affairs Bureau at (202) 418-
0530 (voice), (202) 418-0432 (TTY).

Summary of the Report and Order

I. Introduction

    1. In this Second Report and Order, we provide further guidance on 
the operation of the local franchising process. To promote the federal 
goals of enhanced cable competition and accelerated broadband 
development, we extend a number of the rules promulgated in this 
docket's preceding First Report and Order (First Report and Order), 72 
FR 13189, March 21, 2007, to incumbents as well as new entrants. We 
also decline to preempt state or local customer service laws that 
exceed the Commission's standards.

II. Background

    2. New competitors are entering markets for the delivery of 
services historically offered by monopolists: traditional phone 
companies are entering the multichannel video market, while traditional 
cable companies are competing in the telephone market. Ultimately, both 
types of companies are projected to offer customers a ``triple play'' 
of voice, high-speed Internet access, and video services over their 
respective networks. These entities also face competition from other 
new providers of bundled services, including overbuilders and utility 
companies. We believe this competition for the delivery of bundled 
services will benefit consumers by reducing prices and improving the 
quality of service offerings. In the First Report and Order, we stated 
our concerns that competitive applicants seeking to enter the video 
market faced unreasonable regulatory obstacles, to the detriment of 
competition generally and cable subscribers in particular.
    3. Specifically, in the First Report and Order, we adopted rules 
and provided guidance to implement section 621(a)(1) of the 
Communications Act of 1934, as amended (the Act), which prohibits 
franchising authorities from unreasonably refusing to award competitive 
franchises for the provision of cable services. The record in the First 
Report and Order showed that new entrants eager to provide video 
service are often delayed, and in some cases derailed, by the 
unreasonable demands made by local franchising authorities (LFAs) 
during the franchising process. The First Report and Order found that 
these delays contravened the dual congressional goals of enhancing 
cable competition and accelerating broadband deployment. As such, the 
Commission found that the operation of the local franchising process in 
many jurisdictions constituted an unreasonable barrier to entry.
    4. To eliminate unreasonable barriers to entry into the cable 
market, and to encourage investment in broadband facilities, we found 
in the First Report and Order that: (1) An LFA's failure to issue a 
decision on a competitive application within the timeframes specified 
in the order constitutes an unreasonable refusal to award a competitive 
franchise within the meaning of section 621(a)(1); (2) an LFA's refusal 
to grant a competitive franchise because of an applicant's 
unwillingness to agree to unreasonable build-out mandates constitutes 
an unreasonable refusal to award a competitive franchise within the 
meaning of section 621(a)(1); (3) an LFA's refusal to grant a 
competitive franchise because of an applicant's unwillingness to agree 
to a variety of franchise fee requirements that are impermissible under 
section 622 of the Act constitutes an unreasonable refusal to award a 
competitive franchise within the meaning of section 621(a)(1); (4) it 
would be an unreasonable refusal to award a competitive franchise if 
the LFA denied an application based upon a new entrant's refusal to 
undertake certain obligations relating to public, educational, and 
government channels (PEG) and institutional networks (I-Nets); and (5) 
it is unreasonable under section 621(a)(1) for an LFA to refuse to 
grant a franchise based on issues related to non-cable services or 
facilities.
    5. Some of the Commission's findings in the First Report and Order 
relied, in part, on statutory provisions that do not distinguish 
between incumbent providers and new entrants; however, in light of the 
fact that the NPRM in this proceeding focused on competitive entrants, 
the findings were made applicable only to new entrants. At the same 
time that we adopted the First Report and Order, we therefore issued a 
Further Notice of Proposed Rulemaking (FNPRM), 72 FR 13230, March 21, 
2007, to provide interested parties with the opportunity to provide 
comment on

[[Page 65671]]

which of those findings should be made applicable to incumbent 
providers and how that should be done.
    6. This FNPRM tentatively concluded that the findings in the First 
Report and Order should apply to incumbent cable operators as they 
negotiate renewal of their existing agreements with LFAs. We noted that 
two of the statutory provisions that we discussed in the First Report 
and Order, sections 611(a) and 622(a), do not distinguish between 
incumbents and new entrants or franchises issued to incumbents versus 
franchises issued to new entrants. We sought comment on that tentative 
conclusion, and also on the Commission's authority to implement this 
finding. We also sought comment on what effect, if any, the findings in 
the First Report and Order have on most favored nation (MFN) clauses 
that may be included in existing franchises. Finally, we asked about 
the Commission's authority to preempt state or local customer service 
laws that exceed the Commission's standards. We examined the statutory 
language of section 632(d)(2) and tentatively concluded that we can 
neither preempt state or local customer service laws that exceed the 
Commission's standards, nor prevent LFAs and cable operators from 
agreeing to more stringent standards.

III. Discussion

A. Incumbent Treatment

    7. Based on the comments filed in response to this Second Report 
and Order, we agree, as detailed below, that many of the findings in 
the sections of the First Report and Order addressing franchise fees, 
PEG and I-Net obligations, and non-cable related services and 
facilities should be applicable to incumbent operators. We also 
conclude, however, that the findings in the First Report and Order 
involving timing and build-out should not be applicable to incumbent 
operators. Accordingly, we extend the applicable findings from the 
First Report and Order to incumbents as discussed below.
    8. Time Limits. The ``Time Limit for Franchise Negotiations'' 
section of the First Report and Order is not applicable to incumbents. 
Many commenters argue that this section of the First Report and Order 
should not be applicable to incumbents. They point out that section 626 
of the Act, which concerns renewals, clearly delineates the process and 
timeline for renewal negotiations. We agree. The time limits 
established in the First Report and Order for negotiating initial 
agreements cannot apply to incumbent renewals because those limits are 
not consistent with the 36-month renewal procedure set forth in section 
626 of the Act. Moreover, the underlying rationale for the time 
limits--that is, preventing unreasonable entry delays--is inapplicable 
to incumbents. Although new entrants are barred from providing service 
until they obtain a franchise, incumbents are able to continue 
providing service during renewal negotiations. Accordingly, the 
rationale for the time limits set forth in the First Report and Order 
does not apply to the renewal context.
    9. Build-Out. The ``Build-Out'' section of the First Report and 
Order is also not applicable to incumbents. Again, many commenters 
argue that the findings in this section of the First Report and Order 
should not be applicable to incumbents. In particular, they contend 
that eliminating build-out requirements has no relevance for incumbents 
(and might prompt efforts to shrink existing service areas). We agree 
that the findings in the First Report and Order concerning build-out 
should not apply to incumbents. Our findings regarding build-out 
requirements were squarely based on section 621(a)(1) of the Act, a 
provision that plainly does not apply to incumbent providers. While we 
did indicate in the First Report and Order that section 621(a)(4)(A) of 
the Act did not limit our authority to restrict unreasonable build-out 
demands made on competitive applicants pursuant to section 621(a)(1), 
our findings clearly were not based on that provision. As we stated at 
the time, ``[s]ection 621(a)(4)(A) does not address the central 
question here.'' We also find there is no basis for applying the build-
out rationale in the First Report and Order to incumbents, because the 
underlying rationale--that build-out requirements can serve as a 
barrier to new entrants--is inapplicable to incumbents. Incumbents by 
definition are not barred from entry, and allowing incumbents to 
retract the boundaries of their own franchise areas may create 
disruptions that would hinder the statutory goal of broadband 
deployment. Moreover, the First Report and Order discussed the 
differential impact of build-out requirements on incumbents and new 
entrants.
    10. Franchise Fees. The ``Franchise Fees'' section of the First 
Report and Order applies equally to incumbents and new entrants. Most 
commenters agree that our findings regarding franchise fees from the 
First Report and Order should apply to incumbents. In that section of 
the First Report and Order, we determined that an LFA's refusal to 
grant a competitive franchise because of an applicant's unwillingness 
to agree to a variety of franchise fee requirements that are 
impermissible under section 622 of the Act constitutes an unreasonable 
refusal to award a competitive franchise within the meaning of section 
621(a)(1). Commenters argue that section 622 of the Act does not 
differentiate between new entrants and incumbents, and that when 
Congress intended to treat various providers differently, it was 
explicit when doing so. NCTA argues that absent a Congressional mandate 
otherwise, the Commission has defined its role as establishing a 
uniform franchising regime, and uniformity requires equal treatment. 
Some LFAs argue that the Commission was incorrect in its interpretation 
of section 622, and it should not extend its interpretation. NATOA 
states that incumbents have been renewing franchises for years with 
full knowledge of the Cable Act, and the FNRPM's proposal to extend the 
franchise fee aspects of the First Report and Order to incumbents is a 
solution in search of a problem.
    11. We agree that our findings interpreting section 622 should 
apply equally to incumbent operators and new entrants. Section 622 does 
not distinguish between incumbent providers and new entrants. As a 
result, to the extent that a franchise-fee requirement is found to be 
impermissible under section 622, that statutory interpretation applies 
to both incumbent operators and new entrants. The relevant findings 
from the First Report and Order that apply to incumbent providers 
include the following: (1) Our clarification that a cable operator is 
not required to pay cable franchise fees on revenues from non-cable 
services; (2) our finding that the term ``incidental'' in section 
622(g)(2)(D) should be limited to the list of incidentals in the 
statutory provision, as well as other minor expenses, and that certain 
fees are not to be regarded as ``incidental'' and therefore must count 
toward the 5 percent franchise fee cap; (3) our clarification that any 
municipal projects requested by LFAs unrelated to the provision of 
cable services that do not fall within the exempted categories in 
section 622(g)(2) are subject to the statutory 5 percent franchise fee 
cap; and (4) our finding that payments made to support the operation of 
PEG access facilities are considered franchise fees and are subject to 
the 5 percent cap, unless they are capital costs, which are excluded 
from franchise fees under section 622(g)(2)(C).
    12. PEG/I-Nets. Much of the ``PEG/I-Nets'' section of the First 
Report and Order applies equally to incumbents

[[Page 65672]]

and new entrants. Many commenters argue that our findings regarding PEG 
and I-Net issues from the First Report and Order should apply equally 
to incumbents because the statutory provisions discussed do not 
distinguish among differing providers. LFAs, on the other hand, argue 
that the findings regarding PEG and I-Nets should not be extended to 
incumbents. They contend that doing so would freeze PEG support at 
current contribution levels without the possibility for future 
modification, which would result in either substantially reduced PEG 
access facility support or decreased general fund monies. They also 
contend that they would lose the ability to benefit from an affordable 
I-Net, which cable operators can offer for no net costs. LFAs also 
assert that I-Nets provide numerous benefits to the community and are 
vital to government functions, and the Commission may not take any 
action that would inhibit an LFA's ability to require a cable operator 
to build an I-Net. LFAs further argue that some PEG and I-Net 
obligations are undertaken as part of a settlement agreement against an 
operator, and these contracts cannot be invalidated.
    13. We determine that some of the findings related to PEG and I-
Nets should apply to incumbent providers while others should not. 
Specifically, the finding, discussed above, that the non-capital costs 
of PEG requirements must be offset from the cable operator's franchise 
fee payments is applicable to incumbents because it was based upon our 
statutory interpretation of section 622 of the Act. Again, nothing in 
the language or structure of that provision distinguishes between 
different classes of providers, and thus our interpretation applies to 
all providers. Similarly, both our refusal to adopt standard terms for 
PEG channels for new entrants as well as our refusal to hold that it is 
per se unreasonable for LFAs to require the payment of ongoing costs to 
support PEG by new entrants (so long as such support costs as 
applicable are subject to the franchise fee cap) apply to incumbents as 
well.
    14. We conclude, however, that other findings pertaining to PEG and 
I-Nets should not apply to incumbents. In particular, our findings that 
it would be unreasonable for an LFA to impose on a new entrant more 
burdensome PEG carriage obligations than it has imposed upon the 
incumbent cable operator and that it would be unreasonable for an LFA 
to require a new entrant to provide PEG support that is in excess of 
the incumbent cable operator's obligations, by their terms, do not 
provide relief for incumbents. Neither do we believe that we can 
similarly conclude that it would be per se unreasonable for an LFA to 
impose less burdensome PEG carriage obligations on a new entrant than 
it has imposed on an incumbent cable operator or per se unreasonable 
for an LFA to require a new entrant to provide less PEG support than 
the incumbent cable provider. Requiring an established incumbent 
operator to have a greater PEG carriage obligation or provide greater 
PEG support than a fledgling new entrant may very well be reasonable 
under the circumstances, and we see no statutory provision that 
categorically precludes such an approach. We note that in the First 
Report and Order we found that a pro rata cost sharing approach between 
incumbents and new entrants is per se reasonable. In doing so, we also 
cited Sec.  76.1505 of the Commission's rules, which requires an open 
video system operator to match an incumbent cable operator's PEG 
obligations. Under a matching approach, the open video system operator 
and incumbent cable operator make equal contributions. In a pro rata 
cost sharing approach, the new entrant would make PEG contributions 
based on the ratio of its subscribership as compared to the incumbent 
operator's subscribership. While we did not find a matching arrangement 
per se reasonable, we did not find it per se unreasonable either. 
Section 653(c)(2)(A) of the Act requires that open video system PEG 
obligations be ``no greater or lesser'' than obligations imposed on 
incumbent operators, but the Act makes no such requirement with respect 
to new cable operator entrants. Finally, in the First Report and Order, 
we found that ``completely duplicative PEG and I-Net requirements 
imposed by LFAs would be unreasonable,'' and that it was unreasonable 
for an LFA to refuse to award a competitive franchise unless the 
applicant agrees to pay the face value of an I-Net that will not be 
constructed. The problems that these two determinations were designed 
to address--the required construction of duplicative networks and 
required payments in lieu of the construction of a duplicative 
network--are issues that face competitive entrants, and it is not clear 
to us how these findings would be of practical relevance to incumbents. 
We therefore do not apply them to incumbents at this time. However, 
incumbent providers are free in the future to present the Commission 
with evidence that these findings are of practical relevance to 
incumbents and therefore should be applied to them in an appropriate 
form. When doing so, incumbent providers should identify the particular 
problems that applying some variation of these findings to them would 
address.
    15. We disagree with comments arguing that any changes to the PEG 
structure means that PEG support would be frozen at current 
contribution levels without the possibility for future modification to 
reflect the community's needs at that time. Sections 611 and 626 
provide a process for requiring PEG carriage and determining a 
community's future cable-related needs and interests. Section 626 
requires that an LFA identify ``future cable-related community needs 
and interests'' prior to the consideration of a franchise renewal 
proposal. Therefore, LFAs are to evaluate their current and future PEG 
needs at the time of an incumbent provider's renewal, and are allowed 
to request such PEG support from their providers, within the limits of 
the Act and the Commission's statutory interpretation. Our findings 
here and in the First Report and Order have no bearing on these renewal 
requirements.
    16. Mixed-Use Networks. The ``Mixed-Use Networks'' section of the 
First Report and Order also applies equally to incumbents and new 
entrants. Consistent with their position on other provisions, a number 
of commenters argue that the Commission's mixed-use network findings in 
the First Report and Order are based upon a statutory interpretation of 
section 602(7)(C), and the statute's failure to distinguish among 
differing providers requires that it applies uniformly to all. LFAs 
argue that the mixed-use findings presume the competitor is a 
telecommunications provider, and that the findings do not speak to an 
incumbent cable provider that already is using its network to provide 
cable services.
    17. Because our findings on mixed-use networks in the First Report 
and Order depended upon our statutory interpretation of section 602, 
which does not distinguish between incumbent providers and new 
entrants, we agree that the findings in this section should be 
applicable to incumbent providers. Specifically, we clarify that LFAs' 
jurisdiction under Title VI over incumbents applies only to the 
provision of cable services over cable systems and that an LFA may not 
use its franchising authority to attempt to regulate non-cable services 
offered by incumbent video providers. For example, the provision of 
video services pursuant to a cable franchise agreement does not provide 
a basis for customer service regulation by local law or franchise 
agreement of a cable operator's entire network, or any services beyond 
cable services.

[[Page 65673]]

    18. Timing. The Commission tentatively concluded that the findings 
in the First Report and Order should apply to cable operators at the 
time of renewal:

[t]he findings in [the First Report and Order] should apply to cable 
operators that have existing franchise agreements as they negotiate 
renewal of those agreements with LFAs. We note that section 611(a) 
states ``A franchising authority may establish requirements in a 
franchise with respect to the designation or use of channel capacity 
for public, educational, or governmental use'' and section 622(a) 
provides ``any cable operator may be required under the terms of any 
franchise to pay a franchise fee.'' These statutory provisions do 
not distinguish between incumbents and new entrants or franchises 
issued to incumbents versus franchises issued to new entrants.

Many commenters agreed with our tentative conclusion. However, some 
incumbent providers argue that regulatory parity requires that the 
Commission extend the First Report and Order immediately to incumbent 
providers, and not wait until renewal. Specifically, incumbent 
providers argue that some of the findings in the First Report and 
Order, including franchise fees, PEG/I-Nets, and mixed use networks, 
were not made solely pursuant to section 621, but also other sections 
of the Act that are applicable to all operators, not just new entrants, 
and that those provisions should be immediately applicable to all 
providers. Further, a small number of incumbent competitive providers 
argue that to avoid penalizing them for being the first to risk 
competitive entry, the Second Report and Order should be applicable to 
such ``legacy'' competitive providers immediately or upon entrance of a 
new competitive provider. They argue that if the Commission adopts the 
tentative conclusion to apply the decisions in the First Report and 
Order at renewal, it is conceivable, where an incumbent's franchise is 
up for renewal before a competitive entrant's franchise, that a new 
competitive entrant and an incumbent would receive the regulatory 
relief of the First Report and Order before the incumbent competitive 
provider. LFAs, by contrast, argue that if findings from the First 
Report and Order are found to be applicable to incumbents, they should 
be effective only at the time of renewal. These commenters argue that 
the Commission does not have the authority to void existing agreements, 
and that to do so would violate LFAs' contractual rights.
    19. We believe that neither of the principal views expressed by 
commenters is entirely correct. The statutory interpretations set forth 
above represent the Commission's view as to the meaning of various 
statutory provisions, such as section 622, and these interpretations 
are valid immediately. We do not see, for example, how section 622 
could mean different things in different sections of the country 
depending on when various incumbents' franchise agreements come up for 
renewal. We recognize, however, that franchise agreements involve 
contractual obligations and also note that some terms may have been 
implemented as part of a settlement agreement regarding rate disputes 
or past performance by the franchisee. As a result, we believe that the 
facts and circumstances of each situation must be assessed on a case-
by-case basis under applicable law to determine whether our statutory 
interpretation should alter the incumbent's existing franchise 
agreement. This Second Report and Order should in no way be interpreted 
as giving incumbents a unilateral right to breach their existing 
contractual obligations. Instead, if an incumbent asserts that the 
terms of its franchise should be amended as a result of this Second 
Report and Order, we encourage LFAs and incumbents to work 
cooperatively to address those issues. Should such efforts fail, we 
recognize that particular disputes eventually may make their way to 
court but note that there are other means of addressing existing 
contract provisions. As further described below, incumbent providers 
may pursue avenues for pre-renewal modifications, including contractual 
most favored nation clauses, which may allow franchisees to take 
advantage of the franchise provisions of new competitive entrants. 
Parties may also make adjustments to franchise terms pursuant to 
compliance with law provisions within the franchise or contract. 
Statutory relief is also available in the form of the franchise 
modification provision in section 625 of the Act.
    20. Most Favored Nations (MFN) Clauses. The First Report and Order 
does not have any effect on existing MFN clauses. In the FNPRM, we 
sought comment on ``what effect, if any, the findings in this Second 
Report and Order have on MFN clauses that may be included in existing 
franchises.'' While provisions differ, MFN clauses generally allow 
franchisees to adjust their obligations if and when an LFA grants a 
competing provider any franchise provisions that are more favorable 
than the provisions in the incumbent's franchise agreement. Some 
providers state that an incumbent with existing MFN provisions should 
be able to amend its franchise to reflect the requirements applicable 
to the new entrant, in order to encourage regulatory parity. Others 
state that the proceeding should have no effect on MFN clauses, as they 
do not impose any barriers to entry. They also argue that MFN clauses 
are negotiated in order to adjust obligations when a new competitor 
enters the market, and the Commission has no basis to interfere with 
these contractual provisions. To the extent that the First Report and 
Order allows competitive providers to enter markets with franchise 
provisions more favorable than those of the incumbent provider, we 
expect that MFN clauses, pursuant to the operation of their own design, 
will provide some franchisees the option and ability to change 
provisions of their existing agreements. Otherwise, we do not believe 
that our First Report and Order has any effect on MFN clauses.

B. Other Issues

    21. Franchise Modification. We agree with commenters that the 
modification provision of the Cable Act will provide some franchisees 
the option and ability to change their existing agreements. Section 625 
of the Act provides that a cable operator may obtain a franchise 
modification from an LFA: (1) In the case of any requirements for 
facilities or equipment (including PEG access) where the provider can 
show that it is ``commercially impracticable'' to comply with a 
requirement; or (2) in the case of any requirements for services, if 
the cable operator demonstrates that the mix, quality, and level of 
services required by the franchise at the time it was granted will be 
maintained after any proposed modification.
    22. Commenters argue that incumbents without an MFN provision 
should be allowed to seek modification through section 625 when a 
competitor enters the franchise area. They assert that the Commission 
should find an incumbent's compliance with more burdensome franchise 
provisions than a new competitor ``commercially impracticable'' because 
of the possibility of higher costs. Some LFAs and Verizon agree that 
section 625 may be applicable in some circumstances, provided that the 
incumbent can meet the commercially impracticable test, but contend 
that there should not be an assumption that all providers can meet this 
test. NATOA argues that the Commission does not have jurisdiction to 
construe or enforce this provision under section 625(b)(1), which 
provides for review of modification decisions in state or federal 
district court under section 635, and that the Commission

[[Page 65674]]

cannot issue any blanket statements about modifications, as any 
determinations are fact specific, and cannot be shown merely by the 
presence of a new competitor. We agree that the First Report and Order 
and this Second Report and Order, to the extent applicable, can be 
taken into consideration if an incumbent seeks modification of a 
franchise when a competitor enters the franchise area, within the 
processes set forth under section 625. However, it is up to the 
incumbent to make to the relevant franchising authority the requisite 
showing of ``commercial impracticability.''
    23. Generally Accepted Accounting Principles. We decline to adopt a 
requirement that an operator's gross income be determined under 
Generally Accepted Accounting Principles (GAAP). Time Warner asks the 
Commission to mandate that the calculation of an operator's gross 
income under section 622 be determined in accordance with GAAP. Time 
Warner argues that the Commission has authority from Congress to 
mandate that uniform federal standards be used to govern franchise fee 
calculations. Some franchising authorities reject this assertion and 
argue that GAAP will not produce the clarity and uniformity Time Warner 
is seeking, because GAAP does not create rules but rather functions as 
a set of guidelines interpreted by professionals. They also state that 
GAAP was established by the financial community to govern disclosures 
to investors and stockholders, not to determine franchise fee payments, 
and these differing purposes may result in characterization of revenues 
that are not applicable to cable operations. Finally, they argue this 
has nothing to do with competitive entry, and a separate NPRM must be 
issued to consider it. Given the paucity of comments on the matter, and 
conflicting information of the applicability of GAAP to the franchising 
process, we do not believe that there is a sufficient record supporting 
the requested regulation. We therefore decline to adopt such a 
requirement here.
    24. Fresh Look. We reject RCN's request that we invoke the fresh 
look doctrine. The fresh look doctrine is used to re-open contracts. 
The Commission utilizes it sparingly, when it is ``necessary to promote 
consumer choice and eliminate barriers to competition.'' RCN urges the 
Commission to invoke its ``fresh look'' doctrine to require that LFAs 
reconsider existing franchises when a new entrant enters the franchise 
area and, in markets where there is more than one franchised operator, 
when the first existing franchise comes up for renewal. RCN suggests 
that when a new provider files an application to provide service, the 
LFA should provide notice to existing franchisees and allow them to 
terminate their franchise and negotiate a new one reflecting the rules 
in the First Report and Order. Similarly, the Broadband Service 
Providers Association asks that if one cable operator in a competitive 
market is able to eliminate franchise requirements deemed unlawful by 
the First Report and Order, other operators in that LFA should be able 
to submit a renewal proposal at any time that would allow that operator 
to conform its franchise to the rules in the First Report and Order. 
RCN argues that this proceeding is consistent with other contexts where 
the Commission adopted the fresh look doctrine, because the entity 
holding the long-term contracts has market power, that entity has 
exercised that power to create long-term contracts to ``lock up'' the 
market in a way that creates unreasonable barriers to competition, and 
the contractual obligations can be nullified without harm to the public 
interest.
    25. We do not believe that it is necessary to invoke the fresh look 
doctrine here. As indicated above, we believe that any contractual 
issues arising from today's Second Report and Order should be decided 
on a case-by-case basis. The fresh look doctrine was developed to allow 
customers to take advantage of competition, not to protect incumbent 
service providers when competitors enter the market. The case precedent 
is thus distinguishable from the circumstances addressed here.

C. Customer Service

    26. We find that the explicit statutory language of section 632 of 
the Act prohibits the Commission's preemption of state or local cable 
customer service laws that exceed the Commission's standards. The 
Commission previously sought comment on whether customer service 
requirements should be allowed to vary greatly between jurisdictions. 
Commenters urged the Commission to adopt a number of rules limiting LFA 
authority to adopt local customer service regulations. After reviewing 
those comments, we sought additional comment on our tentative 
conclusion that section 632(d)(2) of the Act prevents us from 
preempting state or local customer service laws exceeding Commission 
standards, and allows LFAs and cable operators to agree to more 
extensive customer service requirements.
    27. Section 632 of the Communications Act sets out the regulatory 
framework for cable customer service. It authorizes LFAs to establish 
and enforce customer service requirements and directs the Commission to 
establish standards by which cable operators may fulfill these 
requirements. Specifically, section 632(d)(1) provides that ``[n]othing 
in this title shall be construed to prohibit any State or any 
franchising authority from enacting or enforcing any consumer 
protection law, to the extent not specifically preempted by this 
title.'' Further, section 632(d)(2) states that:

[n]othing in this title shall be construed to prevent the 
establishment or enforcement of any municipal law or regulation, or 
any State law, concerning customer service that imposes customer 
service requirements that exceed the standards set by the Commission 
under the section, or addresses matters not addressed by the 
standards set by the Commission under this section.

The statute's explicit language makes clear that Commission standards 
are a floor for customer service requirements, rather than a ceiling, 
and thus do not preclude LFAs from adopting stricter customer service 
requirements.
    28. In response to the FNPRM, some commenters ask that we clarify 
certain issues surrounding customer service. Verizon recognizes that 
while LFAs have some discretion in the crafting of customer service 
regulations, they argue that this discretion is limited by the language 
of section 632(d)(2) to cable customer service issues. They urge the 
Commission to plainly state that LFAs only have authority to regulate 
cable customer service standards and that the Commission has the 
authority to preempt regulations that do not concern customer service 
for cable service. They argue that onerous regulations, as well as 
those unrelated to the provision of cable services couched as customer 
service rules, should be preempted because they amount to an 
unreasonable burden under section 621(a)(1). They suggest that customer 
service requirements be limited to those general types of issues 
recognized in section 632(b). That provision authorizes the Commission 
to ``establish standards by which cable operators can fulfill their 
customer service requirements'' including ``(1) cable system office 
hours and telephone availability; (2) installations, outages, and 
service calls; and (3) communications between the cable operator and 
subscriber.'' They assert that requirements beyond these limited 
categories impose unreasonable burdens on new entrants.
    29. Supporters of the Commission's tentative conclusion regarding 
section

[[Page 65675]]

632(d)(2) argue that the statute expressly authorizes the establishment 
and enforcement of local customer service standards that go beyond 
those delineated by the Commission. They assert that the unreasonable 
refusal language of section 621(a)(1) has no application to customer 
service standards under section 632. In fact, they argue that the only 
way to read these sections together is to conclude that Congress 
intended that local customer service standards exceeding Commission 
standards do not amount to an unreasonable refusal.
    30. New entrants also take issue with the local character of 
customer service requirements. AT&T cites difficulties created by 
disparate local standards and local data reporting requirements and 
suggested the Commission adopt uniform customer service standards 
because of the inefficiency inherent in varying standards. They argue 
that requiring new entrants to comply with these differing standards 
can be a potential barrier to entry. They further argue that the 
imposition of local data collection requirements also poses a barrier 
to entry. AT&T states that under their regional systems it is not 
currently possible to compile their data on a franchise area basis. At 
minimum, they ask the Commission to allow regional providers to 
demonstrate compliance with local standards through aggregate regional 
data.
    31. Given the explicit language of section 632, we conclude that 
the Commission cannot preempt local or state cable customer service 
requirements, nor can it prevent LFAs and cable operators from agreeing 
to more stringent standards. However, an LFA's authority to implement 
customer service rules under section 632 is limited to the adoption of 
regulations that, in fact, involve customer service matters and impose 
customer service requirements on the provision of cable services. For 
instance, LFAs cannot implement a ``customer service'' rule requiring a 
six percent franchise fee payment. Furthermore, it would constitute an 
unreasonable refusal under section 621(a)(1) for an LFA to make the 
grant of a competitive franchise contingent upon a cable customer 
service requirement that does not, in fact, involve cable customer 
service. While localities may have independent authority to impose 
customer service requirements on a cable operator's non-cable 
activities, franchising authorities may not condition the exercise of 
their video franchising authority on an operator's agreement to such 
non-cable requirements because we interpret section 632 to apply only 
to customer service requirements related to cable service.
    32. Local franchise authorities maintain that Congress made a 
policy judgment when it permitted individual franchising authorities to 
adopt local customer service standards, despite the inconvenience it 
may pose to new entrant compliance. They note that incumbents operating 
regional networks have complied with local data reporting requirements 
and other differing local standards. They state that local data 
collection requirements also are consistent with section 626 of the 
Act, which allows LFAs to take the quality of an operator's service 
into account during the franchise renewal process. They argue that 
limiting local data collection, as AT&T suggests, would make it 
impossible for LFAs to assess an operator's performance within their 
respective communities.
    33. The language of section 632(d)(2) provides that, while the 
Commission may adopt standards applicable to all cable operators, it 
may not prohibit LFAs from imposing requirements that exceed those 
standards. We conclude, therefore, that we do not have authority to 
grant AT&T's request for uniform local customer service standards or 
data collection requirements. In sum, we find that the explicit 
statutory language of section 632 prohibits the Commission's preemption 
of state or local cable customer service laws that exceed the 
Commission's standards.

IV. Procedural Matters

    34. Paperwork Reduction Act Analysis. This document does not 
contain new or modified information collection requirements subject to 
the Paperwork Reduction Act of 1995 (PRA), Public Law 104-13. In 
addition, we note that there is no new or modified ``information burden 
for small business concerns with fewer than 25 employees,'' pursuant to 
the Small Business Paperwork Relief Act of 2002, Public Law 107-198, 
see U.S.C. 3506(c)(4).
    35. Final Regulatory Flexibility Analysis. As required by the 
Regulatory Flexibility Act of 1980, as amended (RFA) an Initial 
Regulatory Flexibility Analysis (IRFA) was incorporated in the FNPRM to 
this proceeding. The Commission sought written public comment on the 
proposals in the FNPRM, including comment on the IRFA. The Commission 
received one comment on the IRFA. This Final Regulatory Flexibility 
Analysis (FRFA) conforms to the RFA.

A. Need for, and Objectives of, the Second Report and Order

    36. This Second Report and Order adopts rules and provides guidance 
to implement the findings in the First Report and Order dealing with 
section 611 and section 622 of the Communications Act of 1934, as 
amended (the Communications Act). The First Report and Order adopted 
rules in accordance with section 621(a) of the Communications Act to 
prevent Local Franchising Authorities (LFAs) from creating unreasonable 
barriers to competitive entry. It also provided clarifications of 
section 611, restricting LFAs' authority to establish capacity and 
support requirements for PEG channels, and section 622, setting limits 
on the franchise fees LFAs may charge cable operators. Neither of these 
sections distinguishes between the treatment of new entrants and 
incumbent cable operators. The Commission extends these findings to 
incumbent cable operators to further the interrelated goals of enhanced 
cable competition and accelerated broadband deployment. The Commission 
also finds that it cannot preempt state or local customer service rules 
exceeding Commission standards.

B. Summary of Significant Issues Raised by Public Comments in Response 
to the IRFA

    37. Only one commenter, the Local Government Lawyer's Roundtable, 
submitted a comment that specifically responded to the IRFA. The Local 
Government Lawyer's Roundtable contends that the Commission should 
issue a revised IRFA because of the erroneous determination that the 
proposed rules would have a de minimis effect on small governments. 
They argue that the Commission has not given weight to the economic 
impact the rules will have on small governments, including training and 
hiring concerns.
    38. We disagree with the Local Government Lawyer's Roundtable's 
assertion that our rules will have any more than a de minimis effect on 
small governments. LFAs today must review and decide upon competitive 
and renewal cable franchise applications, and will continue to perform 
that role. While the Local Government Lawyer's Roundtable expresses 
concern about additional training that may be necessary to understand 
these actions, and potential hiring of additional personnel to 
accommodate the Second Report and Order's requirements, we disagree 
that those steps will be necessary. This Second Report and Order simply 
extends existing

[[Page 65676]]

requirements to apply to incumbent cable providers. LFAs should be 
familiar with those existing requirements, and therefore should not 
need additional training or personnel to implement the Second Report 
and Order's requirements. Moreover, modifications made to the 
franchising process that result from this proceeding further streamline 
the franchising process, lessening the economic burdens placed upon 
LFAs.

C. Description and Estimate of the Number of Small Entities to Which 
the Rules Will Apply

    39. The RFA directs the Commission to provide a description of and, 
where feasible, an estimate of the number of small entities that will 
be affected by the rules adopted herein. The RFA generally defines the 
term ``small entity'' as having the same meaning as the terms ``small 
business,'' ``small organization,'' and ``small government 
jurisdiction.'' In addition, the term ``small business'' has the same 
meaning as the term ``small business concern'' under the Small Business 
Act. A small business concern is one which: (1) Is independently owned 
and operated; (2) is not dominant in its field of operation; and (3) 
satisfies any additional criteria established by the Small Business 
Administration (SBA).
    40. The rules adopted by this Second Report and Order will 
streamline the local franchising process by adopting rules that provide 
guidance as to the applicability of prior findings in this proceeding 
to incumbents and the limitations on the Commission's authority 
regarding customer service regulations. The Commission has determined 
that the group of small entities directly affected by the rules adopted 
herein consists of small governmental entities (which, in some cases, 
may be represented in the local franchising process by not-for-profit 
enterprises). Therefore, in this FRFA, we consider the impact of the 
rules on small governmental entities. A description of such small 
entities, as well as an estimate of the number of such small entities, 
is provided below.
    41. Small Governmental Jurisdictions. The term ``small governmental 
jurisdiction'' is defined generally as ``governments of cities, towns, 
townships, villages, school districts, or special districts, with a 
population of less than fifty thousand.'' Census Bureau data for 2002 
indicate that there were 87,525 local governmental jurisdictions in the 
United States. We estimate that, of this total, 84,377 entities were 
``small governmental jurisdictions.'' Thus, we estimate that most 
governmental jurisdictions are small.
    42. Cable and Other Program Distribution. The Census Bureau defines 
this category as follows: ``This industry comprises establishments 
primarily engaged as third-party distribution systems for broadcast 
programming. The establishments of this industry deliver visual, aural, 
or textual programming received from cable networks, local television 
stations, or radio networks to consumers via cable or direct-to-home 
satellite systems on a subscription or fee basis. These establishments 
do not generally originate programming material.'' The SBA has 
developed a small business size standard for Cable and Other Program 
Distribution, which is: All such firms having $13.5 million or less in 
annual receipts. According to Census Bureau data for 2002, there were a 
total of 1,191 firms in this category that operated for the entire 
year. Of this total, 1,087 firms had annual receipts of under $10 
million, and 43 firms had receipts of $10 million or more but less than 
$25 million. Thus, under this size standard, the majority of firms can 
be considered small.
    43. Cable Companies and Systems. The Commission has also developed 
its own small business size standards, for the purpose of cable rate 
regulation. Under the Commission's rules, a ``small cable company'' is 
one serving 400,000 or fewer subscribers, nationwide. Industry data 
indicate that, of 1,076 cable operators nationwide, all but eleven are 
small under this size standard. In addition, under the Commission's 
rules, a ``small system'' is a cable system serving 15,000 or fewer 
subscribers. Industry data indicate that, of 7,208 systems nationwide, 
6,139 systems have under 10,000 subscribers, and an additional 379 
systems have 10,000-19,999 subscribers. Thus, under this second size 
standard, most cable systems are small.
    44. Cable System Operators. The Communications Act of 1934, as 
amended, also contains a size standard for small cable system 
operators, which is ``a cable operator that, directly or through an 
affiliate, serves in the aggregate fewer than 1 percent of all 
subscribers in the United States and is not affiliated with any entity 
or entities whose gross annual revenues in the aggregate exceed 
$250,000,000.'' The Commission has determined that an operator serving 
fewer than 677,000 subscribers shall be deemed a small operator, if its 
annual revenues, when combined with the total annual revenues of all 
its affiliates, do not exceed $250 million in the aggregate. Industry 
data indicate that, of 1,076 cable operators nationwide, all but ten 
are small under this size standard. We note that the Commission neither 
requests nor collects information on whether cable system operators are 
affiliated with entities whose gross annual revenues exceed $250 
million, and therefore we are unable to estimate more accurately the 
number of cable system operators that would qualify as small under this 
size standard.
    45. Open Video Systems (OVS). In 1996, Congress established the 
open video system framework, one of four statutorily recognized options 
for the provision of video programming services by local exchange 
carriers (LECs). The OVS framework provides opportunities for the 
distribution of video programming other than through cable systems. 
Because OVS operators provide subscription services, OVS falls within 
the SBA small business size standard of Cable and Other Program 
Distribution Services, which consists of such entities having $13.5 
million or less in annual receipts. The Commission has certified 25 OVS 
operators, with some now providing service. Broadband service providers 
(BSPs) are currently the only significant holders of OVS certifications 
or local OVS franchises. As of June, 2005, BSPs served approximately 
1.4 million subscribers, representing 1.5 percent of all MVPD 
households. Affiliates of Residential Communications Network, Inc. 
(RCN), which serves about 371,000 subscribers as of June, 2005, is 
currently the largest BSP and 14th largest MVPD. RCN received approval 
to operate OVS systems in New York City, Boston, Washington, DC and 
other areas. The Commission does not have financial information 
regarding the entities authorized to provide OVS, some of which may not 
yet be operational. We thus believe that at least some of the OVS 
operators may qualify as small entities.

D. Description of Projected Reporting, Recordkeeping and Other 
Compliance Requirements

    46. The rule and guidance adopted in the Second Report and Order 
will require a de minimus additional reporting, record keeping, and 
other compliance requirements. LFAs will continue to perform its role 
of reviewing and deciding upon competitive cable franchise 
applications; the rules adopted in this Second Report and Order will 
decrease the procedural burdens faced by LFAs. Since the adopted rules 
do not apply until franchise renewal, there is no additional burden 
beyond what has been required during past renewals. Therefore, the

[[Page 65677]]

rules adopted will not require any additional special skills beyond any 
already needed in the cable franchising context.

E. Steps Taken To Minimize Significant Impact on Small Entities, and 
Significant Alternative Considered

    47. The RFA requires an agency to describe any significant 
alternatives that it has considered in reaching its proposed approach, 
why may include the following four alternatives (among others): (1) The 
establishment of differing compliance or reporting requirements or 
timetables that take into account the resources available to small 
entities; (2) the clarification, consolidation, or simplification of 
compliance or reporting requirements under the rule for small entities; 
(3) the use of performance, rather than design, standards; and (4) an 
exemption from coverage of the rule, or any part thereof, for small 
entities.
    48. In the FNPRM, the Commission sought comment on the extension of 
its findings that do not distinguish between new entrants and 
incumbents in the First Report and Order to incumbents and its 
authority to do so. The Commission also invited comment on the effect, 
if any, the findings in the First Report and Order had on most favored 
nation clauses in existing franchises. Additionally, the Commission 
also sought comment on its tentative conclusion that it cannot preempt 
state or local customer service laws exceeding Commission standards, 
nor can it prevent LFAs and cable operators from agreeing to more 
stringent standards. The Commission tentatively concluded that any 
rules likely would have at most a de minimis impact on small 
governmental jurisdictions, and that the interrelated, high-priority 
federal communications policy goals of enhanced cable competition and 
accelerated broadband deployment necessitated the extension of its 
rules to incumbent cable providers. We agree with those tentative 
conclusions, and we believe that the rules adopted in the Second Report 
and Order will not impose a significant impact on any small entity.
    49. In the Second Report and Order, we provide that the First 
Report and Order's findings resting upon statutory provisions that do 
not distinguish between new entrants and incumbents should be extended 
to incumbent cable operators at the time of franchise renewal. This 
will result in decreasing the regulatory burdens on incumbent cable 
operators. We declined to impose the findings of the First Report and 
Order immediately so that we do not unduly disrupt existing contracts. 
As an alternative, we considered not extending the First Report and 
Order's rules to incumbent cable operators at all. We conclude that the 
guidance we provide minimizes any adverse impact on small entities 
because it clarifies the terms within which parties must negotiate, and 
should prevent small entities from facing costly litigation over those 
terms.
    50. Report to Congress: The Commission will send a copy of the 
Second Report and Order, including this FRFA, in a report to be sent to 
Congress pursuant to the Congressional Review Act. In addition, the 
Commission will send a copy of the Second Report and Order, including 
the FRFA, to the Chief Counsel for Advocacy of the Small Business 
Administration.
    51. Congressional Review Act. The Commission will send a copy of 
this Second Report and Order in a report to be send to Congress and the 
Government Accountability Office pursuant to the Congressional Review 
Act, see 5 U.S.C. 801(a)(1)(A).
    52. Additional Information. For additional information on this 
proceeding, please contact Holly Saurer, Policy Division, Media Bureau 
at (202) 418-2120, or Brendan Murray, Policy Division, Media Bureau at 
(202) 418-2120.

V. Ordering Clauses

    53. It is ordered that, pursuant to the authority contained in 
sections 1, 2, 4(i), 303, 303r, 403, 405, 602, 611, 621, 622, 625, 626, 
and 632 of the Communications Act of 1934, 47 U.S.C 151, 152, 154(i), 
303, 303(r), 403, 405, 522, 531, 541, 542, 545, 546, and 552, this 
Second Report and Order is adopted.
    54. It is further ordered that the Second Report and Order shall be 
effective December 24, 2007.
    55. It is further ordered that the Commission's Consumer and 
Governmental Affairs Bureau, Reference Information Center, shall send a 
copy of this Second Report and Order, including the Final Regulatory 
Flexibility Analysis, to the Chief Counsel for Advocacy of the Small 
Business Administration.
    56. It is further ordered that the Commission shall send a copy of 
this Second Report and Order in a report to be sent to Congress and the 
General Accounting Office pursuant to the Congressional Review Act, see 
5 U.S.C. 801(a)(1)(A).

Federal Communications Commission.
Marlene H. Dortch,
Secretary.
[FR Doc. 07-5802 Filed 11-21-07; 8:45 am]
BILLING CODE 6712-01-P