United States: Communications Law Bulletin - February 2004

The Month in Brief

February was a busy month at the Federal Communications Commission ("FCC" or "Commission"), in the Congress and at the state regulatory commissions.

Among many important stories, the fallout from Super Bowl Sunday continued, with Congress and the Commission both reacting to public outcry over indecent programming. At the same time, the states and the FCC took separate initiatives over the regulation of Internet telephone service, and the FCC's momentous Triennial Review Order came in for judicial criticism before the D.C. Circuit Court of Appeals. These and other legal developments, along with significant merger and acquisition news, made for a full month in all sectors of the communications industry.

In recent weeks, the FCC and both houses of Congress have expressed concern about indecency over the airwaves. Notably, the Commission recently issued notices of apparent liability for indecent programming and announced that it would reexamine last year's Golden Globe incident and conduct an investigation of the notorious Super Bowl half-time show. Finally, both houses of Congress have proposed legislation and held hearings on indecency issues.

The Commission's authority to regulate indecent programming is based upon its broad licensing authority over broadcast companies. Pursuant to that authority, the Commission defines broadcast indecency as language or material that depicts, or describes, in terms patently offensive as measured by contemporary community standards, sexual or excretory organs or activities. In determining whether programming is indecent, the Commission examines what was said, the meaning of what was said and the context in which it was said. (Obscenity, which has been defined by the courts primarily to include hard-core pornography, also is unlawful on the airwaves.) Congress has not given the Commission the authority to regulate indecent programming on cable systems.

On January 27, the Commission released two notices of apparent liability for forfeiture against broadcasters for violations of the indecency rules. It fined Young Broadcasting, the licensee of station KRON-TV in San Francisco, $27,500 for a segment of its morning news in which the host interviewed performers with the stage production of "Puppetry of the Penis" and one of the performers was exposed on camera. The incident aired at 8:25 a.m. The Commission found that although the broadcast of the indecent material was fleeting, as it occurred for less than a second, it was graphic and explicit, and the manner in which it was presented was intended to pander to, titillate and shock viewers. The Commission found that in light of the subject matter of the program, the station should have taken appropriate precautions to ensure that no indecent material was broadcast. Because no such measures were taken, the Commission proposed the maximum forfeiture. In his statement, Commissioner Martin noted that this was only the second time a television broadcast was found to be indecent.

The Commission also fined Clear Channel Communications a total of $755,000 for 26 instances of indecency during a broadcast of "Bubba the Love Sponge," including a penalty for failure of the stations involved to maintain public inspection records. This was the highest forfeiture ever proposed against a broadcast licensee. The Commission found that each violation involved graphic and explicit sexual and/or excretory material and was designed to pander to, titillate and shock. The Commission proposed the statutory maximum because of the licensee's history of indecency transgressions. In his statement, Commissioner Martin commented that the licensee should have been fined for each utterance and not just once for each program containing a series of utterances, which would have resulted in a much higher forfeiture. In his statement, Commissioner Adelstein commented that given the explicit nature of the broadcast and the history of prior offenses, outright license revocation might have been an appropriate sanction. Commissioner Copps dissented from the decision and generally supported the reservations expressed by Commissioners Martin and Adelstein.

In addition, the Commission upheld a $21,000 forfeiture order against Emmis Radio License Corporation for indecent material during "Mancow's Morning Madhouse." The Commission found that "there is no non-sexual meaning that a listener could have attributed to [the offending language]." In addition, the Commission issued a second forfeiture of $7,000 against Emmis for a separate broadcast of "Mancow's Morning Madhouse." Emmis attempted to argue that the sexual import of the material was not clear and that children would not understand that the material had any sexual meaning at all. The Commission stated that its interest in protecting children extends to minors under the age of 18, and that 17-year-olds would absolutely understand the sexual import of the material.

On numerous occasions, the Commission has announced that it is reexamining the Enforcement Bureau's decision last fall, finding that NBC did not violate the indecency rules when Bono, lead singer of U2, used a variant of the most notorious four-letter word during the 2003 Golden Globe Awards. In that case, the Bureau found that the use of the word as an adjective rather than a verb was not indecent. The Commissioners have indicated that they intend to overturn the decision, but have not yet indicated whether a fine would be imposed. The decision in this case could affect similar actions with respect to Fox's airing of the Billboard Music Awards and this year's airing of the Golden Globe Awards.

The day after this year's ill-fated Super Bowl broadcast, Chairman Powell announced that the Commission would begin an investigation into the halftime show. The Commission has since received more than 200,000 complaints. Powell himself is leading the investigation and has instructed the Enforcement Bureau to review the entire halftime show and not just the Justin Timberlake/Janet Jackson incident.

Chairman Powell, by letter, has asked the four major networks and the National Association of Broadcasters ("NAB") to reinstate the voluntary broadcasters' code of conduct to address indecent, profane and violent programming. He asked for responses within 30 days. To that end, the NAB has announced plans to hold a conference to address issues related to responsible programming. Powell has also asked the cable industry, by letter to the National Cable Television Association ("NCTA"), to clean up its act voluntarily. NCTA has indicated that it is working with its members to come up with a plan.

On January 27, Clear Channel requested that the Commission convene an industry-wide "Local Values Task Force" to develop indecency guidelines that would apply equally to television, radio, cable and satellite.

In the House, House Resolution 500 was referred to subcommittee on February 3. This Resolution expresses the sense that the FCC should vigorously enforce indecency and profanity laws to protect children. The Resolution cites specific cases that are of concern to Congress, and tells the FCC to reverse the Golden Globe case, enforce existing law, impose fines for each indecent utterance rather than each indecent program, and institute revocation hearings against violators. The Resolution also states that all indecency decisions should be examined at the Commission level rather than by the responsible bureau.

Representative Upton introduced HR 3717, the "Broadcast Decency Enforcement Act of 2004." This legislation proposes raising the fines for television and radio transmission of obscene, indecent and profane language from $27,500 to $275,000 for each violation or each day of a continuing violation, with a total of $3,000,000 for any continuing violation. The House Telecommunications Subcommittee unanimously approved the legislation on February 12. The White House has indicated its support for this legislation. (In the Senate, Senator Brownbeck has introduced S. 2056, which mirrors HR 3717.)

The House held hearings on these proposals on January 28 and February 11. The January 28 hearing included testimony by David Solomon of the FCC's Enforcement Bureau, Parents Television Council President Brent Bozell, Robert Corn-Revere and William Wertz, Executive Vice President of Fairfield Broadcasting Company. All of the members of the House Telecom Subcommittee criticized broadcasters for their declining standards. Some recommended the use of license revocation hearings. In addition, some members used the hearing as an opportunity to express concerns about media consolidation, affiliates' rights and cable programming. Some amendments to the legislation have been proposed, including: fining licensees a percentage of revenue instead of a flat fee (5% for a violation and 10% for a continuing violation); the initiation of revocation hearings after three indecency violations; increasing fines against on-air talent (fines that the Commission has never levied); the protection of affiliates from liability if the programming comes from the network; requiring cable companies to notify the public of their right to refuse a channel; and the redefinition of indecency to include violent programming. A third hearing was planned for the week of February 23.

At the February 11 hearing the following witnesses testified: Mel Karmazin, President and CEO of Viacom, Inc.; Paul Tagliabue, Commissioner of the NFL; FCC Chairman Michael Powell and Commissioners Kathleen Abernathy, Jonathan Adelstein, Michael Copps and Kevin Martin; and Henry Pappas, Chairman and CEO of Pappas Telecasting Companies. Mr. Karmazin and Mr. Tagliabue testified concerning the Super Bowl halftime show and denied advance knowledge of that program's content.

Senate Resolution 283, which was recently adopted by unanimous consent, urges the Commission to "vigorously and expeditiously enforce its own United States Supreme Court-approved standard for indecency in broadcast media."

The Senate held hearings on February 11, 2004. The Senate hearing took a broad look at violent broadcast content as well as indecent content. Senator Hollings has repeatedly introduced the "Children's Protection from Violent Programming Act." This bill requires the FCC to study whether the V-chip and the content-based ratings system effectively protect children from exposure to violent television programming. If the Commission were to determine that they do not, the Commission would be required to institute a safe harbor period for broadcast of material that is inappropriate for children.

The Senate hearing also included Senator McCain's proposed FCC Reauthorization Act, which would make several changes in FCC policy. This bill proposes fines of $250,000 for each violation, with a $2.5 million maximum. The bill also encourages the use of license revocation hearings for repeat offenders. McCain's bill has the support of Commissioner Powell and passed the Senate Commerce Committee in June, 2003. However, the bill also contains a number of provisions unrelated to indecency, some of which have raised concerns. Some have suggested that the provisions related to indecency be proposed as separate legislation.

The FCC Commissioners testified at the Senate hearing and recommended adoption of both of the Senate bills. In addition, it was recommended that cable operators be required to provide a family tier or require a la carte programming and that cable and satellite operators be subjected to the same laws as broadcasters. It also was suggested that broadcast network affiliates be given more rights to reject network programming; that the fines should be per utterance rather than per program; that the law against the use of profanity be enforced; and that violence should be included in enforcement of the indecency laws. In addition, much was made of the fact that market consolidation will decrease the effectiveness of fines and reduce local accountability for indecent programming.

A three-judge panel of the United States Court of Appeals for the District of Columbia Circuit heard oral argument in the consolidated appeals of the FCC's Triennial Review Order on January 28, 2004. (See August 2003 Special Edition "Triennial Review Order Summary," available at www.mofo.com.) The oral argument was divided into two parts, one addressing incumbent local exchange carrier ("ILEC") challenges to the Order's unbundling requirements and delegations of authority to the state commissions, and the other dealing with challenges by competitive local exchange carriers ("CLECs") and state commissions to various aspects of the Order, including the FCC's decision to free certain broadband services from unbundling requirements. Although the outcome of an appeal cannot always be predicted from the judges' questions at oral argument, the panel expressed skepticism about the FCC's decision and rationale and indicated that it is considering vacating or remanding at least part of the Order.

The panel questioned FCC counsel at length about the FCC's delegation of its authority to the state commissions to make more "granular" impairment analyses -- i.e., whether the FCC's national findings that CLECs will be impaired in competing with ILECs in the mass market if they do not have access to ILEC local switching, interoffice transport and other unbundled network elements ("UNEs") should be reversed in specific geographic markets. The judges noted that the Communications Act directs the FCC rather than the states to make determinations regarding impairment, and expressed dissatisfaction with FCC counsel's delegation arguments. The court also seemed dubious of the FCC's broad national impairment findings. FCC counsel pointed out, however, that none of the parties had challenged the FCC's impairment standard. The court also delved into whether the problems associated with "hot cuts" -- the process of switching customers from an ILEC to a CLEC -- justified the FCC's local switching impairment finding. Addressing the CLECs' challenges to the Order, the panel questioned why CLECs were provided access only to the narrowband portion of ILEC hybrid copper-fiber loops.

Although the questioning strongly suggests at least a partial remand to the FCC, the panel seemed less clear as to the appropriate remedy. As the court noted, if it agrees with the ILECs that the FCC delegated too much authority to the states, it is unclear how a remand to the FCC on that issue helps the ILECs, given the national impairment findings in the Order. ILEC counsel responded that the national impairment findings also should be remanded.

Following the argument, FCC counsel filed a letter with the court on February 4 providing an additional citation supporting the FCC's delegation of authority to the states. The FCC cited Section 410(b) of the Communications Act, which states that the FCC "may confer with any State commission having regulatory jurisdiction ... regarding the relationship between rate structures, accounts, charges, practices, classifications, and regulations of carriers.... The [FCC] is authorized ... to avail itself of such cooperation, services, records, and facilities as may be afforded by any State commission." The letter states that although the FCC had not expressly relied on that provision in the Order, it had done so in other orders.

The court is expected to rule on the appeals around April. It is likely that the decision will be appealed, possibly to the entire D.C. Circuit, then to the Supreme Court. Although the court has not yet ruled on the appeals, six state commissions -- the Virginia, Colorado, Utah, Minnesota, Nebraska and Oregon commissions -- stayed their mass market impairment proceedings following the oral argument in light of the possibility that the FCC's delegation of that issue to the states might be reversed. Commissions in two other states -- Arizona and North Dakota -- are considering such a stay. Two state commissions, the Washington and New Mexico commissions, have decided not to stay their impairment proceedings for now.

Internet telephone, or Voice over Internet Protocol services, have been with us for years; but the regulatory status of those services has never been clear. Notably, the industry and its investors and customers have faced continuing uncertainty concerning federal/state jurisdiction over those services and the obligations, if any, of providers of those services to pay access charges, contribute to universal service funds, offer 911 calling and meet other regulatory obligations that are imposed on conventional telephone companies.

Now, with the states and the courts sending inconsistent signals and new interest apparent on Capitol Hill, the FCC seems poised to bring some clarity to this industry.

Pulver.com Order and VOIP NPRM Adopted at Open Meeting

At its recent Open Meeting, the Commission granted a Petition for Declaratory Ruling by Pulver.com, holding that its Free World Dialup ("FWD") service is an unregulated interstate information service. In addition, the Commission adopted a notice of proposed rulemaking ("NPRM") seeking comment on the regulation of Internet Protocol-enabled services, including Voice over Internet Protocol ("VOIP").

The Pulver.com Order includes some interesting observations on the definitions of "telecommunications," "telecommunications service" and "information service." It also affirms FCC jurisdiction over VOIP in a way that sends a clear preemptive message to the states.

Pulver had argued that its FWD service, which works like a peer-to-peer community riding on the end user's broadband Internet access, is neither telecommunications, telecommunications service nor an information service. The last claim is the most startling, because it represents an effort, not only to escape common carrier classification and the obligations that follow from that classification, but to avoid FCC jurisdiction over FWD altogether. Not surprisingly, the Commission agreed with the first two claims but rejected the last.

On the first point, the Commission agreed that FWD is not telecommunications because Pulver provides no transmission capacity to its members. Pulver primarily provides a directory service, by means of which registered users can determine which other members are online and the Internet Protocol addresses at which those members can be reached. Pulver also provides the means for those users to connect with each other, and the software by which those users can exchange voice, video and text over the service; but all transmission is provided by the users' Internet service providers ("ISPs"). (No North American Numbering Plan numbers are used to establish FWD connections.) Accordingly, although Pulver is an indirect user of its members' ISP services, which include transmission, Pulver does not provide that transmission capability.

The Commission also agreed that FWD is not a telecommunications service: both because Pulver provides no telecommunications, and also because the FWD service is free and therefore not provided to the public for a fee, as the Communications Act's definition of "telecommunications service" requires.

The Commission rejected Pulver's claim that it does not provide an information service. Pulver had argued that because it does not provide telecommunications as part of the FWD package, the service does not meet the statutory definition of "information service," which refers to the offering of enhanced functions "via telecommunications." The Commission, quite correctly, noted that FWD service is provided via telecommunications, even if the telecommunications component is furnished by ISPs and their backbone providers rather than Pulver. The Commission also rejected Verizon's suggestion that FWD comes within an exception to the information services definition -- i.e., the exception for information functions used only in the internal management of a service or network. The Commission found that this exception is confined to internal uses of computing capacity by telephone companies and other providers of telecommunications services -- not to the provision of information functionality on a standalone basis.

On the jurisdictional question, the Commission made it plain that "FWD is an unregulated information service and state regulations that seek to treat FWD as a telecommunications service or otherwise subject it to public-utility type regulation would almost certainly pose a conflict with our policy of nonregulation." This declaration, which seems equally applicable to any VOIP service variant the Commission decides to treat as an information service, is a clear signal to the states to avoid further VOIP regulation while the FCC's pending NPRM, described below, plays itself out.

Commissioner Adelstein dissented in part and concurred in part; Commissioner Copps dissented; and Powell, Abernathy and Martin issued separate statements.

In addition to its resolution of the Pulver.com petition, the Commission also adopted an NPRM seeking comment on a broad set of regulatory issues concerning a wide range of IP-enabled services. Although the NPRM does not propose tentative rules or regulations, the predisposition clearly is to keep regulatory oversight -- if any -- of VOIP services at a minimum. The questions posed by the NPRM include:

• How should IP-enabled services be statutorily defined and classified?
• What factors should the Commission consider in its review of IP services? Examples include, but are not limited to, whether a particular IP service is a viable substitute for traditional telephone services and/or whether an IP service is connected to the public switched telephone network.
• If regulation is appropriate, what obligations should apply to VOIP and other IP-enabled services? In particular, should VOIP providers be required to: (1) contribute to the universal service fund; (2) pay access charges; (3) comply with rules concerning public safety, such as providing E911 services; (4) provide access to VOIP services to those with disabilities; and (5) comply with the Communications Assistance for Law Enforcement Act ("CALEA")?
• Should the Commission's decision to preempt state regulation of Pulver.com be applied to other IP-based services?

The FCC Commissioners voiced very strong opinions about the Pulver.com decision and the NPRM. Commissioners Copps and Adelstein stated that the Commission failed to look at the broad implications that classifying Pulver.com's service could have on the VOIP NPRM and expressed concern that the decision could prejudge the conclusions reached in that proceeding. Chairman Powell defended the Pulver.com decision, stating that it was "four squares on existing law." He said that the Pulver.com decision did not reclassify a service, but rather clarified that FWD service falls within the definition of an information service.

The FCC Commissioners were generally supportive of the NPRM, although Commissioner Copps argued that it is "getting rather too close to final conclusions" and that it is "judging IP-related services without defining them." Commissioner Abernathy noted that the time for regulatory action was ripe, given that the current regulatory framework provides arbitrage opportunities and that states are embarking on divergent regulatory paths. Throughout the Open Meeting, the mantra of the Commissioners was the importance of addressing certain critical legal and policy issues such as E911, universal service, intercarrier compensation, access to services by disabled persons, and CALEA. Accordingly, these are the issues that will receive the greatest scrutiny in the NPRM and on which regulatory action is most likely.

The NPRM brings the number of VOIP inquiries pending at the Commission to five, joining petitions filed by AT&T, Level 3 Communications, Vonage, and recent filings by SBC Communications (see below for further information regarding SBC's petitions). The Commission has indicated that it may consider other petitions regarding the classification of specific IP services on a rolling basis, subject to the conclusions reached in the rulemaking. In particular, the Commission is close to voting down AT&T's petition for declaratory ruling that its phone-to-phone IP telephony services are exempt from access charges. Commissioner Adelstein recently indicated that he will likely join Chairman Powell and Commissioner Abernathy in denying AT&T's petition.

The Commission also announced at its Open Meeting that it will be initiating a separate rulemaking in the very near future specifically to consider the ability of law enforcement to access Internet-enabled services under CALEA. In the weeks before the Open Meeting, the Federal Bureau of Investigation, the Department of Justice and the Drug Enforcement Agency asked the Commission to delay any action on broadband items until it addressed the application of CALEA to broadband services, including VOIP. The new CALEA NPRM was the result of an agreement reached between the Commission and law enforcement officials, which freed the Commission to rule on Pulver.com's petition and initiate a rulemaking concerning VOIP services. Under the agreement, the law enforcement agencies will file a petition for rulemaking, which will be followed with an NPRM in the spring.

The Commission's Internet Policy Working Group announced that it will hold the first of many "Solutions Summits" on Thursday, March 18. The Summits are intended to facilitate discussions between government and industry members regarding the legal and policy issues created by the migration of communications services to Internet-based platforms. The March 18 Summit will specifically focus on E911 issues, and participants will include members of the public safety community, industry representatives and FCC staff.

In two related petitions, SBC Communications urged the Commission not to regulate "IP platform services," which it defined as "services that enable any customer to send or receive communications in IP format over an IP platform." In its petition for declaratory ruling, SBC argued that IP platform services are interstate communications. As such, they are subject to regulation under Title I of the Communications Act and should be exempted from the regulatory requirements established in the Computer II proceeding. "To eliminate any doubt concerning the unregulated status of IP platform services," SBC also petitioned the Commission to forbear from applying Title II common-carrier regulations to IP platform services to the extent such regulations are found to apply. SBC contended that under Title I, the Commission could still require VOIP providers to comply with universal service, E911, CALEA and disability access obligations.

Comments and replies regarding SBC's forbearance petition are due May 12 and June 11, respectively. A pleading cycle for SBC's petition for declaratory ruling has not been established.

The VOIP debate also has moved to Capitol Hill. Senators Alexander (R-Tenn.) and Carper (D-Del.) have introduced legislation that would continue the moratorium on the Internet tax for another two years, but would allow taxation of VOIP calls. The measure is intended to prevent states from losing revenue as voice calls move from traditional networks to IP networks. Senator Sununu (R-N.H.) also intends to introduce legislation that would preempt state regulation of VOIP services.

Foreign regulators also are starting to review the regulatory obligations of providers of VOIP services. The United Kingdom's Office of Communications scheduled a hearing to consider regulatory and consumer protection issues concerning "voice-over-broadband" on February 25. Similarly, the European Commission has announced a March 15 workshop to review a recent report on VOIP and related services.

The California Public Utilities Commission ("CPUC") has taken a lead role in the debate over VOIP regulation. Deciding not to wait for the FCC to rule on whether, and to what extent, VOIP should be regulated, the CPUC issued a tentative decision and commenced its own investigation to determine the appropriate regulatory framework to govern the provision of VOIP.

Approved by the unanimous vote of five CPUC commissioners on February 11, 2004, the draft decision concludes that providers of VOIP services that interconnect with the public switched telephone network ("PSTN"), shall be deemed to be "public utilities offering a telephone service." Although its approach appears to be contrary to the developments at the FCC level, the CPUC's decision tentatively asserts state jurisdiction over any Internet phone call that connects with the PSTN.

According to the CPUC's draft decision, the CPUC's determination of whether a service qualifies as a public utility, and is, thereby, subject to the state's regulatory regime should be based upon the "functional nature of the service offered," as opposed to the underlying technology that is utilized to provide the service. While the CPUC's decision acknowledges that there are significant consumer benefits associated with treating VOIP service as an unregulated information service rather than a regulated telecom service, the decision also focuses on the need to address additional public policy concerns related to the effect of VOIP offerings on universal service, public safety, network reliability and numbering resources as mass market VOIP offerings become more common. Specifically, the CPUC's decision details numerous problems that could arise if VOIP providers are not required to contribute to the payment of access charges.

Carriers and other interested parties will be invited to participate in subsequent proceedings and the CPUC will seek their input on a variety of issues, including whether VOIP service providers should be required to contribute to universal service; whether VOIP providers should be required to pay access charges associated with interconnecting to the PSTN; whether VOIP providers should be subject to basic consumer protection rules; and whether exempting VOIP service providers from requirements applicable to traditional voice providers would create an unfair competitive advantage for VOIP.

Although the five CPUC commissioners approved the tentative decision, Commissioner Kennedy, who last November was quoted as saying regulators should keep their hands off VOIP and other new technologies, is expected to issue a separate decision suggesting that the CPUC acted prematurely by issuing its tentative decision. Although maintaining her belief that VOIP providers should not be subject to the CPUC's jurisdiction, Commissioner Kennedy approved the tentative decision in order to avoid any delay in the commencement of the VOIP investigation.

The vote in California sent a message to the FCC that the states continue to believe that they have a role in regulating Internet telephony. Of the twenty-five states that are drafting Internet phone rules, California is the most influential. Meanwhile, Utah and Missouri are commencing their own VOIP investigations and have opened dockets to consider the regulatory issues associated with VOIP. The Missouri Public Service Commission ("Missouri PSC") plans to prepare comments for the FCC's rulemaking and will be preparing a preliminary report by March 15, 2004. All interested parties seeking to participate and to render opinions as to whether VOIP service providers should be regulated were to notify the Missouri PSC by February 10, 2004.

The Utah Public Service Commission ("Utah PSC") will begin its VOIP investigation and docket with a technical conference scheduled for March 4, 2004, that will be conducted by the Utah PSC's Division of Public Utilities. The technical conference is intended to raise the Utah PSC's awareness as to the technical, legal, policy and economic issues associated with the unique characteristics of VOIP services.

In Minnesota, the Minnesota Public Utilities Commission filed an appeal of the October 16, 2003 ruling in Vonage v. Minn. PUC, in which the U.S. District Court found Vonage's VOIP service to be an information service not subject to regulation by the Minnesota Public Utilities Commission. The U.S. District Court refused to reconsider its order as requested by the Minnesota Public Utilities Commission. The court's prior decision was based upon a determination that Congress had pre-empted state regulation of any and all aspects of information services, and the court did not afford any weight to the Minnesota PUC's assertion that, historically, 97% of the Vonage calls come into contact with the PSTN.

Last fall, representatives of three regional Bell operating companies asked their equipment suppliers to help fund a lobbying effort aimed at overturning or reducing the Bells' interconnection obligations under the Telecommunications Act of 1996. Although the Bell companies insisted that this request was a standard effort to enlist political support from companies with similar interests, some suppliers apparently complained of undue pressure and competitors of the Bells cried foul. Since that time, competing telephone companies have tried to interest Congress and the states in bringing antitrust enforcement actions against the Bells.

Earlier this month, the Texas Attorney General stated that it will not initiate an antitrust investigation into the Bells' conduct. With Congress so far failing to take official action on the matter and other states showing no inclination to pursue investigations, antitrust action against the Bells is increasingly unlikely.

In a decision released on January 23, 2004, the FCC announced a more stringent standard for requests for designation as an eligible telecommunications carrier ("ETC") for the receipt of universal service support. The decision granted the petition of Virginia Cellular, LLC to be designated as an ETC in Virginia based on Virginia Cellular's commitments to extend its cellular services and on an expanded public interest showing.

Wireless carriers competing in high-cost service areas with ILECs have been filing ETC applications with increasing frequency. The ILECs have opposed the wireless ETC applications on the ground that the proliferation of ETCs imposes an excessive burden on the universal service fund ("USF"), while the wireless ETC applicants argue that they are providing customers with badly needed competitive choices, especially in rural areas, with relatively minor impact on the USF. In response to these developments, the FCC has requested the Federal-State Joint Board on Universal Service ("Joint Board") to review the FCC's rules relating to the calculation of USF support and the ETC designation process.

In the Virginia Cellular decision, the FCC determined that a more stringent public interest standard for ETC designations in rural service areas was needed pending the Joint Board's recommendations. Specifically, the FCC found that the value of the increased competition provided by an ETC applicant is not sufficient, in itself, to satisfy the public interest test in rural areas. Instead, the FCC will "weigh numerous factors," including the impact of multiple ETC designations on the USF, the unique benefits of the applicant's service offering, commitments regarding the quality of service to be provided by the applicant and the ability of the applicant to provide the supported services throughout the designated area within a reasonable time. The FCC also held that ETC designation in a nonrural service area would require a public interest showing, albeit a less rigorous one than the public interest showing required for rural applications.

Applying the more rigorous public interest standard, the FCC granted ETC status to Virginia Cellular for most of its licensed service area, based partly on its commitments to mitigate concerns about wireless service quality -- including commitments to build new towers and facilities to offer better coverage and to provide the FCC with consumer complaint data annually. The FCC also found that, for most of the ILEC service areas covered by Virginia Cellular's service licenses, ETC designation would not raise concerns as to "creamskimming," which occurs when competitors serve only the low-cost, high revenue customers in a rural ILEC's service area. As to one of the rural ILEC areas covered by Virginia Cellular's service area, however, the FCC found that Virginia Cellular served only the lowest-cost, highest density wire center in the ILEC's service area and that granting ETC status could place the ILEC at a significant unfair competitive disadvantage. ETC status was therefore denied as to that ILEC's service area as not in the public interest.

FCC Chairman Powell and three other commissioners supported the Order, citing the need for a strengthened public interest test in light of the increased demands placed by competitive ETCs on the USF, while Commissioner Martin dissented on the grounds that the Order incorrectly based ETC status on the public interest in greater mobility and consumer choice, which he believes are not the goals of the universal service program, and that wireless ETCs should bear the same carrier-of-last-resort obligations as ILECs, including the provision of equal access.

On February 23, 2004, the FCC released a notice of proposed rulemaking to consider changes to its Part 15 rules governing unlicensed services that are expected to jumpstart deployment of broadband services using power lines ("BPL"). Notably, the FCC proposed to: (1) retain existing emission limits, while developing guidelines for measuring radiofrequency ("RF") emissions from BPL devices and other carrier current systems; (2) require BPL devices to use adaptive interference mitigation techniques to prevent harmful interference to other services such as public safety and amateur radio services; and (3) establish a public database requiring registration of information such as location, operational frequencies, and modulation type of BPL devices. The proposal to retain the existing emission limits has been widely praised by the nascent BPL industry, but is expected to be strongly opposed by amateur radio operators. Moreover, the proposal to require adaptive interference mitigation techniques is intended to codify a technical requirement that already exists in many BPL devices. This capability would allow BPL devices to prevent harmful interference by ceasing operations, dynamically reducing power levels, or avoiding operation on certain frequencies. Furthermore, the proposal to establish a public database is intended to facilitate resolution of interference issues by enabling those receiving interference from BPL devices to identify the location of those devices and the responsible parties. The FCC expressed optimism that, by facilitating the use of existing power lines that reach virtually everywhere in the country, its proposed rules would extend broadband services to rural and underserved areas and introduce additional broadband competition to areas where broadband access already exists. It also anticipated that its proposed rules would enhance the ability of electric utilities to dynamically manage the power grid and provide additional benefits such as increased network reliability and improved load balancing.

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.

© Morrison & Foerster LLP. All rights reserved