Communications Law Bulletin-June 2004

The Month in Brief

This issue of our Bulletin reports on a wide range of important developments, but also goes to press as additional news is breaking. Notably, as our first item reports, the U.S. Supreme Court has upheld a preliminary injunction against enforcement of the federal statute regulating indecency on the Internet. Also, a three-judge panel of the Third Circuit Court of Appeals has directed the Federal Communications Commission ("FCC" or "Commission") to return to the drawing board and provide further support for the controversial relaxation of its media ownership rules -- a development that will be the subject of a special edition of our Bulletin, available shortly.

As always, we also provide a list of deadlines for your calendar.

As this issue of our Bulletin is going to press, a 5-4 decision of the U.S. Supreme Court has upheld a lower court's preliminary injunction against enforcement of the Child Online Protection Act ("COPA"), which made it a criminal act knowingly to post to the World Wide Web, for "commercial purposes," content that is "harmful to minors." In upholding the lower court's decision, the Supreme Court majority agreed that blocking and filtering software likely is a less restrictive alternative for protection of minors than the criminal penalties of COPA.

The Court's decision does not resolve the case against COPA on the merits, but holds that the injunction against enforcement of the statute must remain in place until a trial concerning COPA's constitutionality is concluded. The majority's decision strongly suggests, however, that the lower court's decision will be upheld if it rejects COPA as defective under the First Amendment, and the maintenance of the present injunction will prevent prosecution of Internet content providers while the lower court case is pending.

The Supreme Court decision represents an important victory for civil liberties and Internet organizations, including Volunteer Lawyers for the Arts, which was represented before the Supreme Court by Charlie Kennedy and Seth Galanter of Morrison & Foerster's Washington, D.C. office.

As we reported in our March, 2004 edition, the FCC has initiated a comprehensive investigation into the appropriate regulatory framework for so-called IP-enabled services, including Voice-over-Internet-Protocol ("VOIP") services that offer an alternative to the traditional voice telephone call. That FCC rulemaking continues, with reply comments due to be filed on July 14. In the meantime, however, federal, state and international developments in VOIP regulations have not stood still.

One of the regulatory issues facing many VOIP providers is their inability to obtain telephone numbers directly from the North American Numbering Plan Administrator ("NANPA"). Telecommunications carriers must have a state operating certificate in order to obtain numbering resources directly from the Pooling Administration ("PA") or the NANPA. Because VOIP providers typically are not state-certified, they have to acquire telephone numbers from local exchange carriers.

In a preliminary response to this limitation, the FCC recently permitted SBC IP, a subsidiary of SBC Communications, to obtain numbering resources directly from the PA for a non-commercial trial of VOIP services. SBC IP told the FCC that it wanted to acquire numbers directly from the NANPA or the PA to determine whether there are more efficient means of interconnecting VOIP services with the public switched telephone network ("PSTN").

The FCC agreed with SBC IP and allowed it to acquire up to ten blocks of 1,000 numbers for use in its trial. The FCC, concluding that granting SBC IP's request served the public interest, stated that "by receiving numbers directly, SBC IP will be able to interconnect with the PSTN on a trunk-side basis at a centralized switching location, whichÉwill allow it to more efficiently use its softswitch and gateways to develop services that overcome the availability and scalability limitations inherent in current VOIP interconnections with the PSTN." SBC IP's trial is supposed to last no more than nine months.

Although some states have decided to not make any decisions regarding the regulation of VOIP service until the FCC has concluded its pending rulemaking on IP-enabled services, two state agencies have moved forward in their investigations of such services.

In one proceeding, the New York Public Service Commission ("NY PSC") recently concluded that VOIP provider Vonage Holding Corporation is a "telephone corporation" under New York state law. According to the NY PSC, Vonage is subject to New York's basic telecommunications statutory requirements and such state regulation is not preempted by federal law.

The NY PSC decided that Vonage is statutorily required to obtain a "certificate of public convenience and necessity" in order to operate within the state and must file tariffs of its service rates, terms and conditions. The NY PSC, however, noted that it did not want to "needlessly impose costs that interfere with the rapid, widespread deployment of new technologies." It told Vonage that it is welcome to seek waivers of any of the NY PSC's rules and regulations it considers inappropriate or with which it cannot readily comply. Although the NY PSC seemed prepared to entertain waiver requests, it urged Vonage to work with NY PSC staff to develop alternative ways "of achieving necessary public safety and consumer protections."

In another proceeding, the Washington Utilities and Transportation Commission ("WUTC") has determined that LocalDial, a VOIP service provider, also is a telecommunications company. LocalDial's service consists of traditional phone-to-phone service that is routed over an IP network. The WUTC concluded that LocalDial's service was a regulated telecommunications service because it uses ordinary telephones and interconnects with the PSTN. The WUTC noted that LocalDial's VOIP service is substantially similar to AT&T's, which the FCC recently concluded was subject to access charges. LocalDial has announced that it will discontinue providing service and transition its existing customers to another carrier in light of the WUTC's decision. LocalDial told the WUTC that it is "not possible for the company to both comply with [the WUTC's order] and stay in business."

State regulatory commissioners from California and Florida also recently took a position contrary to that of many of their colleagues around the country by urging the FCC to assert federal jurisdiction over VOIP services. Susan Kennedy (CA) and Charles Davidson (FL), who spoke on a panel at the Supercomm conference, are known for their independent and sometimes controversial views on telecommunications regulation. Kennedy and Davidson remarked that a patchwork of state regulation would harm the development of VOIP services. They also asserted that if states did not focus on VOIP, they would have more time to address other significant policy issues.

The European Commission ("EC") has proposed guidelines to clarify how its directives regarding e-communications apply to VOIP. The EC noted that VOIP service is generally subject to the conditions that are applicable to publicly available electronic communications services, which differ from conditions that are applicable to traditional telephone services. The EC proposes to adopt certain guidelines to help VOIP providers enforce rights and negotiate with traditional telephone companies, inform consumers about the differences between VOIP and traditional services, and encourage the development of emergency services. The EC also raised questions regarding interconnection, interoperability, access, and numbering issues that could deter the rollout of VOIP services. Comments regarding the European Commission's proposal are due August 31.

On May 25, the FCC released its Notice of Proposed Rulemaking ("NPRM") to begin consideration of a new framework that will allow unlicensed use of vacant television channels to deliver wireless broadband services. The Commission's Part 15 rules currently prohibit operation of unlicensed devices in TV broadcast bands.

This NPRM is the latest of several Commission initiatives to open additional spectrum for unlicensed wireless broadband services that have been extremely successful in recent years (e.g., Wi-Fi, Bluetooth and Home RF). The NPRM indicates that additional unlicensed spectrum may be found in unused portions of the TV broadcast bands that are converting from analog to digital transmissions. Unlike spectrum in the 2.4 GHz or 5 GHz band, which is presently used for unlicensed operations, spectrum in the TV band is subject to less attenuation, which should result in improved service coverage and enhanced product offerings for wireless Internet service providers.

Broadcasters have expressed concern that unlicensed operation in the TV bands could pose a risk of interference to television broadcasts and could adversely impact the transition to digital, but any unlicensed use of the spectrum will be on a strict, non-interference basis consistent with Part 15 of the rules. The Commission believes that unlicensed devices can operate in unused portions of the TV broadcast bands without causing harmful interference or disrupting the digital transition. Unlicensed transmitters will be required to incorporate some form of "smart radio" in order to ascertain channel vacancies on a continuous basis.

The primary focus of the NPRM is to seek comment on and technical analysis of how unused TV channels can be identified and how interference can be avoided. There are two general categories of unlicensed wireless devices that could operate in the TV bands, and the method for determining TV channel availability will be different for each. For lower power "personal/portable" unlicensed devices, such as Wi-Fi cards in laptop computers, the Commission proposes that those devices only transmit on a TV channel after receiving a control signal that positively identifies the channel as vacant and available for use. For higher power "fixed/access" unlicensed devices that provide commercial wireless broadband Internet access, the Commission proposes use of a GPS receiver and computational software to determine which TV channels are available for use based upon location.

Comments in this proceeding must be filed with the FCC by September 1, 2004. Please contact us if you would like to submit comments in this proceeding.

The FCC Media Bureau is seeking public comment on questions initially raised by several Congressional leaders regarding the provision of a la carte and "themed-tier" programming on cable television and direct broadcast satellite ("DBS") systems. The Bureau will use the information gathered to prepare a report to Congress addressing the feasibility of a la carte and themed-tier services. Specifically, the report will address issues such as (1) the limitations on the ability of cable and DBS operators to offer programming on an a la carte or themed-tier basis; (2) the statutory or regulatory actions required to remove such limitations; and (3) the impact of a la carte and themed-tier programming on retail rates and on the continued provision of independent and niche programs. Cable operators and program suppliers have expressed concerns that an a la carte requirement could reduce programming choice, increase rates for consumers, and undercut the viability of independent and niche programming. Comments on the Bureau's public notice are due on July 8; and reply comments, on July 23.

The Bureau also will sponsor a symposium on July 29 to discuss the provision of a la carte programming services and its impact on consumer prices, retransmission consent, programming diversity, and cable and DBS operators in small and rural markets.

The FCC adopted a spectrum sharing plan requiring Globalstar to share (i) 3.1 MHz of its spectrum in the 1.6 GHz band with Iridium; and (ii) 5 MHz of its spectrum in the 2.4 GHz band with relocated licensees in the broadband radio service (formerly called multipoint distribution service) and instructional television fixed service. The FCC also issued a further notice of proposed rulemaking ("FNPRM") to consider requiring Globalstar to share an additional 2.25 MHz of spectrum in the 1.6 GHz band with Iridium. In adopting the spectrum sharing plan, the FCC attempted to balance Globalstar's and Iridium's competing interests by providing Iridium with additional spectrum, while allowing Globalstar's continued use of the spectrum. To date, the full text of the order and FNPRM has not been released.

The FCC proposed to fine DIRECTV $87,500 for moving one of its satellites to a Canadian orbital location without authorization. DIRECTV had sought special temporary authorization ("STA") to relocate its satellite, but admitted that an employee had commenced the relocation the next day as a result of an ambiguous directive from a senior vice president. Although the base forfeiture amount for the violation is only $4,000, the FCC proposed the statutory maximum of $87,500. The FCC stressed that strict adherence to the rules governing satellite modification is critical to minimizing the risk of collision with other satellites. The FCC further noted that larger companies such as DIRECTV could expect higher forfeitures than the base amounts. The proposed forfeiture puts other satellite licensees on notice that the FCC intends to strictly enforce its rules requiring prior authorization for satellite modifications and that the penalty for noncompliance may be substantially higher for companies with high revenues. DIRECTV is required to pay the proposed forfeiture or request a reduction or cancellation of the forfeiture by July 19.

The FCC adopted new rules requiring all satellite operators seeking space station authorization to submit a plan for mitigating orbital debris. It also offered guidance on the preparation of these plans and adopted post-mission disposal requirements for satellites operating in or near the two most heavily used orbital regimes, the low-Earth orbit and the geostationary-Earth orbit. Furthermore, the FCC announced its intent to issue a Further Notice of Proposed Rulemaking to consider extending the station-keeping requirement to maintain a satellite within 0.05 degree of its assigned orbital longitude to all satellites, including mobile satellite service and remote sensing satellites.

At the June 10 open meeting, the Commission voted unanimously to approve new rules to reband frequencies in the Multipoint Distribution Service ("MDS") and Instructional Television Fixed Service ("ITFS"). The rebanding will facilitate a new wireless broadband service that is expected to compete with cable and DSL and may extend broadband to rural and underserved areas. Rebanding will also make possible mobile use of the band by separating high-power and low-power uses. The Commission has not yet released the Report and Order and a Further Notice of Proposed Rulemaking.

The staff of the Wireless Telecommunications Bureau ("WTB") and the Commissioners previewed certain aspects of the new rules during the open meeting. MDS (including the Multichannel Multipoint Distribution Service) will be renamed the Broadband Radio Service. The Commission will not rename ITFS and will retain the existing eligibility restrictions that limit ITFS to educational institutions. Educators will not have the option of selling their licenses to commercial interests.

The Commission expects that incumbent licensees in the band will transition to the new band plan within three years. The Commission will not, at this time, mandate a transition by a date certain and will, instead, allow transitions on a market-by-market basis. Transition "planning" will be required on the basis of larger Major Economic Areas ("MEAs"). If a licensee in one market wishes to transition to the new band plan, the licensee must plan the transition in consultation with all other licensees in the surrounding MEA. Each licensee in the MEA will not be required to transition to the new band plan, but all such licensees must participate in the transition planning process. The Commission is releasing a Further Notice of Proposed Rulemaking to explore what mechanisms it should employ for markets that have not transitioned during the initial three-year period. Two-sided auctions may be considered once again.

Other features of the new rules and band plan are as follows:

• MDS channels 1 and 2/2A, which are presently operational at 2.1 GHz, will be relocated to the 2.5 GHz band, and an additional five MHz of spectrum will be added to the band. The new frequency set will extend from 2495 to 2690 MHz, a total of 194 MHz. The channels will be deinterleaved and the band will be broken into three segments in order to separate high power use from low power use.

• The lower band segment and the upper band segment will each contain four 16.5 MHz-wide channels. There will be a guard band of four MHz to separate the lower and upper band segments from the middle band segment.

• The middle band segment for high power, high-site operations will contain seven channels of 6 MHz each.

• The new rules will apparently allow cable operators to acquire MDS spectrum, but cable interests will be prohibited from using the spectrum to provide cable services. The Cable / MDS cross-ownership restrictions will continue in force.

The WTB will monitor progress in transitioning to the new band plan. Chairman Powell and the Chief of the WTB, John Muleta, both warned during the open meeting that spectrum in the 2.5 GHz band must now be used or lost. If sufficient progress in broadband deployments is not made within three years, the Commission may mandate alternate transition mechanisms as part of the Further Notice of Proposed Rulemaking.

After weeks of intensive lobbying on both sides, the US Solicitor General announced on June 9 that the Department of Justice ("DOJ") would not appeal to the Supreme Court the D.C. Circuit decision overturning much of the FCC's Triennial Review Order ("TRO"). Later the same day, FCC Commissioner Kevin Martin withdrew his support for an appeal, effectively ending any possibility of an FCC appeal to the Supreme Court. The stock prices of the Regional Bell Operating Companies ("RBOCs") rose after these announcements. Consumer groups and the National Association of State Utility Consumer Advocates ("NASUCA"), as well as FCC Commissioner Michael Copps, criticized the administration's decision not to appeal as anticonsumer and anticompetitive, while the RBOCs praised the decision as a victory for consumers and the economy. AT&T, MCI and other competitive local exchange carriers ("CLECs") warned that, without the FCC rules governing CLEC access to incumbent local exchange carrier ("ILEC") unbundled network elements ("UNEs") that were struck down by the D.C. Circuit, consumers may be deprived of local service choices, and rates will inevitably rise. Members of Congress on both sides of the issue released statements supporting or criticizing the decision not to appeal.

On June 10, AT&T, MCI, other CLEC interests and the National Association of Regulatory Utility Commissioners ("NARUC") asked the Supreme Court to stay the effect of the D.C. Circuit decision because they intend to file appeals of the decision by the June 30 deadline. On the same day, FCC Chairman Michael Powell announced that the FCC intends to start working immediately on the drafting of new access rules to replace the rules overturned by the D.C. Circuit decision and expressed optimism that the project could be completed as early as the end of this year. Chairman Powell stated that the new rules would not delegate so much authority to the state commissions. On June 14, the Supreme Court denied the CLEC/NARUC stay request, thereby allowing the D.C. Circuit decision to take effect on June 16. In light of the stay denial and the absence of a government appeal, most observers do not expect the Supreme Court to hear the CLEC/NARUC appeals. In response to the Supreme Court's stay denial, Chairman Powell repeated on June 14 his announcement concerning the preparation of new rules and stated that the FCC would also consider interim rules to bridge the gap preceding the adoption of final rules.

In his June 14 statement, Chairman Powell also acknowledged written commitments sent to him by each of the RBOCs not to raise UNE rates before the end of the year. Jason Oxman, the General Counsel of the Association for Local Telecommunications Services ("ALTS"), a CLEC trade association, pointed out that some of the RBOCs limited those commitments, which Chairman Powell released with his statement, to rates for "UNE-P" services -- leased combinations of the local subscriber line, local switching and shared transport UNEs. UNE-P is no longer required to be offered under the D.C. Circuit decision. Oxman stated that, by promising only not to raise rates for such service packages, the RBOCs have offered little rate relief to facilities-based CLECs needing only access to specific UNEs, such as subscriber lines and local transport elements. He also expressed puzzlement that the FCC "could leave facilities-based carriers in the lurch," given the emphasis that the FCC has placed on facilities-based competition. On June 15, a group of top executives from nine CLECs sent a letter to Chairman Powell stating that they were pleased that the RBOCs had agreed to "maintain the status quo" while expressing disappointment that the commitments "fall short of committing to maintain the status quo through the end of the year."

It was reported that the administration had been internally divided over whether to appeal the D.C. Circuit ruling and hoped that the intensive high-level ILEC/CLEC negotiations convened by the FCC over the Memorial Day weekend would make it unnecessary to reach a decision. Those negotiations, however, were unsuccessful. Sources say that the RBOC commitments not to raise rates were part of a "quid pro quo" with the White House, under which the RBOCs would ensure that there would be no bad publicity about consumer rate increases or CLECs going out of business before the November election if the administration agreed not to appeal or seek a stay of the D.C. Circuit ruling. Top advisors to President Bush decided not to appeal on June 8, and the decision was announced the following day. The dates of the RBOC commitments to hold UNE rates steady until the end of the year ranged from June 9 to June 14.

On June 16, two days after Chairman Powell's release of the RBOC commitment letters, the Bush administration, in a letter signed by National Telecommunications and Information Administration acting Director Michael Gallagher, urged the "rapid adoption of interim rules" by the FCC governing rates for those UNEs that are no longer required to be provided under the D.C. Circuit decision for the "maximum legally sustainable transition period." He indicated that these protections, which "should cover a full year," were needed in light of the Solicitor General's decision not to appeal the D.C. Circuit ruling and appeared to be an attempt by the administration to assuage CLEC concerns about a possible cut-off of their access to UNEs. Mark Cooper, research director at the Consumer Federation of America, stated that he is concerned about "extra-legal" contacts between the RBOCs and the White House and Chairman Powell leading up to the administration's decision not to appeal the D.C. Circuit ruling, especially given the status of the FCC as an independent agency. He characterized the accounts of conversations between the President and Chairman Powell prior to the decision not to appeal as "unseemly" "arm twisting." On June 22, Chairman Powell announced that he plans to have the FCC propose interim rules within two weeks and would be circulating a proposal to the other FCC commissioners within "two weeks, probably less." He promised to ensure that "the focus on UNE-P" following the D.C. Circuit decision "doesn't diminish facilities-based" service. It is expected that the interim rules will cover disputes about "change of law" provisions in interconnection agreements between ILECs and CLECs and similar contingencies.

Notwithstanding the RBOC commitments, the government's decision not to appeal and the Supreme Court's stay denial had an immediate impact on local service competition. MCI indicated that it would have to consider raising rates or ceasing local services if ILEC wholesale rates increase. BellSouth announced on June 21 that it would lay off 300 people in its wholesale division in Georgia, prompting one CLEC source to speculate that BellSouth expects to process fewer CLEC orders. On June 22, Z-Tel, a CLEC operating in 48 states, announced that it was suspending retail operations in eight states as a result of the administration's decision not to appeal the D.C. Circuit ruling. Although Z-Tel will not stop signing up customers in those states until October 5, it will cease marketing activities there. In response to Z-Tel's announcement, the chairman of the Nebraska PSC criticized the administration's decision not to appeal as "premature" and inevitably resulting in less local service competition in rural areas.

Most significantly, on June 23, AT&T announced that, as a result of the administration's decision not to appeal the D.C. Circuit ruling, it would stop competing for new residential customers in Ohio, Missouri, Washington, Tennessee, Louisiana, Arkansas and New Hampshire. Although it will not discontinue services to current customers in those states, it will no longer offer local or long distance services, separately or bundled, to new residential customers there. AT&T stated that the increases in RBOC wholesale rates that may be imposed as early as November makes it impossible for AT&T "to economically serve customers with the competitive bundles currently available." AT&T added that it is reassessing its ability to serve residential local service customers in other states as well. Chairman Powell expressed disappointment at the AT&T announcement but asserted that competition is "accelerating." Likewise, FCC Commissioner Kathleen Abernathy stated on June 24 that Z-Tel's and AT&T's decisions were not surprising and would not be a factor in designing interim or final unbundling rules, which must be "driven by the direction from the court." The RBOCs criticized the AT&T decision as a political statement, rather than a business decision, and asserted that AT&T would continue to compete in those states in other ways. Consumers Union Senior Public Policy Director Gene Kimmelman characterized the decision, on the other hand, as "the beginning of the end of local phone competition," brought on by the administration's failure "to stand up for a policy that supports competition."

The government's decision not to appeal and the stay denial also shift the focus of the disputed network access issues from the FCC to the ongoing skirmishes in the state commissions, at least temporarily. As of June 21, seven state commissions -- Connecticut, Michigan, New Jersey, Rhode Island, West Virginia, Indiana and Washington -- had issued interim orders prohibiting ILECs from making any unilateral UNE changes without state permission, at least until the ILECs' unbundling obligations are clarified. Three state commissions -- North Carolina, Utah and Texas -- have denied such relief, citing the ILECs' promises not to make any hasty changes. Petitions for similar "stand still" orders are pending in several other states, including Arkansas, Ohio and most of the BellSouth states. CompSouth, a coalition of 16 Southeastern CLECs, asked regulators in seven BellSouth states for emergency rulings compelling BellSouth to honor the network unbundling provisions of its current interconnection agreements until the legal uncertainty surrounding unbundling obligations is resolved. The first commission to rule on the CompSouth request, the North Carolina Utilities Commission, denied it, citing BellSouth's public commitment not to disconnect or change rates for UNEs under current contracts. On June 18, the California PUC suspended its proceeding to determine whether CLECs would be impaired in mass market local services without access to ILEC local switching and dedicated transport facilities until the FCC issues new or interim local competition rules. The following week, SBC similarly requested the Ohio and Wisconsin commissions to close their proceedings relating to unbundling obligations because the legal basis for the proceedings was eliminated by the D.C. Circuit ruling.

Prior to the Supreme Court's stay denial and the RBOC commitments, Verizon had informed the Wisconsin PSC that it sent notices to CLECs with which it has interconnection agreements alerting them that, after August 22, it will not accept orders for local switching or shared transport UNEs, which are no longer required to be offered under the D.C. Circuit's decision, at cost-based rates. CLECs wanting those services after that date will have to purchase them at market rates minus the standard resale discount or negotiate alternate access arrangements. It is not clear whether Verizon's June 11 commitment supersedes this earlier notice to the CLECs. Following that commitment, however, Verizon also announced that it will not allow CLECs to opt into currently effective interconnection agreements as they existed prior to the D.C. Circuit ruling. Verizon takes the position, which is now being tested in a declaratory ruling proceeding before the New York PSC, that any interconnection agreement provision affected by the D.C. Circuit ruling must be renegotiated before any other CLEC may opt into it as part of a new full-term agreement. Verizon indicated, however, that it would agree to allow temporary opt-ins to existing agreements during the period that it has agreed not to make any unilateral changes.

Notwithstanding the RBOCs' commitments not to raise UNE rates before the end of the year, they are continuing to seek UNE rate increases from state commissions to be effective in 2005. The Wisconsin PSC is set to decide an SBC request for wholesale rate increases this fall. BellSouth notified the Georgia, Kentucky and South Carolina commissions on June 18 that it intends to propose changes to its interconnection agreements in light of the D.C. Circuit ruling. It said that the changes will not affect its pledge not to raise rates this year. The modifications would eliminate provisions concerning UNEs that are no longer required to be provided. BellSouth plans to file similar requests in all of the remaining state commissions in its nine-state region. One CLEC source speculated that BellSouth was setting the stage for a demand in 2005 for rate increases retroactive to June 16, 2004, but BellSouth denied that it would be seeking retroactive rate increases.

Michigan PSC Commissioner Bob Nelson, who is also Chairman of NARUC's Telecom Committee, pointed out that if future FCC rules take away state control over wholesale rates, that could have repercussions for the RBOCs' long distance service authority under Section 271 of the Communications Act (the "Act") because the FCC's grants of long distance authority were predicated on states' ability to police local markets. In particular, the Michigan PSC's endorsement of SBC long distance entry in Michigan was predicated on the existence of robust local competition made possible by UNE-P. "Once the FCC pulls the plug on UNE-P, we may need to reevaluate."

The issue of whether interconnection agreements negotiated after the D.C. Circuit decision must be filed with state commissions also remains unsettled. On May 27, BellSouth filed an emergency petition with the FCC requesting a declaration that interconnection agreements for services not required under Section 251 of the Act are not subject to Section 252 of the Act and that inconsistent state actions, including state commission orders to file such agreements under Section 252, are preempted. As an alternative basis for the same relief, BellSouth also filed simultaneously a petition requesting that the FCC forbear from applying Section 252 to agreements for services not required by Section 251, which would preclude state commissions from requiring the public filing of agreements providing for UNE-P and other UNEs no longer mandated after the D.C. Circuit decision. BellSouth argued that subjecting such agreements to state filing and review processes under Sections 251 and 252 would "stymie further negotiation." SBC had filed a similar emergency petition with the FCC on May 3 (as discussed in the May Special Edition of the Communications Law Bulletin).

On May 27, the Texas PUC ordered SBC and Sage Telecom, Inc. to publicly file their April interconnection agreement in its entirety by June 21, finding that it is subject to the filing requirements of the Act. In response, Sage stated in testimony filed with the Texas PUC on May 28 that if any state commission requires it to disclose all of the details of the agreement, it will ask SBC to release it from the agreement in that state. In the week prior to the June 21 deadline, SBC requested the Texas PUC to stay or reverse its order, pointing out that the FCC has not yet ruled on its petition for a declaration that privately negotiated interconnection agreements are not subject to state review. That request was denied by the PUC on June 18, but on June 21, a state district court granted a temporary restraining order until July 1 against enforcement of the PUC public filing requirement pending further appeals by SBC and Sage. The Indiana Utility Regulatory Commission, which had also set a June 21 deadline for public filing of the agreement, agreed on June 18 to reconsider its order and to schedule an in camera hearing to examine the sensitive portions of the SBC/Sage agreement. In joint comments to the Wisconsin PSC, MCI, AT&T, the AARP and the Wisconsin Citizens Utility Board urged that SBC and Sage be compelled to publicly file their entire interconnection agreement because secret deals imperil the public interest. The Michigan PSC, the first state commission to require SBC and Sage to file their agreement publicly (although they requested that portions be kept confidential), has invited comments on whether the agreement complies with federal and state non-discrimination requirements and is in the public interest.

The government's decision not to appeal and the Supreme Court's denial of a stay also increase the stakes in the negotiations over interconnection and access terms to take the place of the overturned rules. After the D.C. Circuit decision and again after the stay denial, Chairman Powell and other FCC Commissioners encouraged carriers to continue negotiations over the terms of interconnection, which were successful in some cases. On May 28, after five weeks of mediation, Qwest agreed to provide MCI continued wholesale access to Qwest's network. Under this four-year agreement, which is the first between a major ILEC and a large long distance carrier/CLEC since the D.C. Circuit decision, prices for UNE-P combinations will gradually rise until January 2007. The average UNE-P rate will increase less than $5, according to Qwest, with residential rates increasing less than business rates. Following the stay denial, on June 15, Verizon and Granite Telecom announced a UNE-P pricing agreement using Verizon's Wholesale Advantage model contract. Shortly thereafter, Verizon and Sterling Telecom signed a letter of intent for a commercial agreement replacing the existing UNE-P pricing under the Wholesale Advantage program.

The Foundation for Taxpayer and Consumer Rights (the "Foundation") filed a suit in Los Angeles Superior Court alleging that the handset "locking" practices of AT&T Wireless, Cingular, and T-Mobile violate the California Unfair Competition Law. This lawsuit comes three months after Consumers Union wrote a letter to the FCC complaining about the same practice.

The companies named in the lawsuit use Global System Mobile ("GSM") technology. GSM-compatible phones contain a computer chip, called a SIM card, that links a phone to a particular network. The plaintiffs allege that the defendants are "thwarting" wireless number portability by "locking" the SIM cards, thus preventing handset portability between carriers that use the same wireless standard. According to Jordan Lurie, a lawyer for the Foundation, "If you can use the same phone number with other carriers, you should be able to use the same phone."

The wireless carriers deny any wrongdoing and respond that they often subsidize the cost of a handset. A Cingular spokesman explained that his company does not want to "subsidize the cost of a handset for another carrier." An AT&T spokesman added that the subsidy "is a great benefit to subscribers" and pointed out that the FCC has previously concluded that bundling phones and service promotes competition.

On May 28, the FCC began its annual Equal Employment Opportunity ("EEO") audit of broadcast stations and multi-channel video program distributors ("MVPDs"). Each year the FCC randomly selects about five percent of all licensees and MVPDs that will be subject to the EEO audit. The Media Bureau website contains a sample of the letter the FCC recently mailed and a list of the licensees and MVPDs that the FCC selected for the random audit. The May 28 letters represented the first round of the audit process, and the FCC is expected to send out additional letters over the next few weeks.

However, the joint State Associations filed a petition with the FCC requesting that it withdraw the letters mailed on May 28 and wait 90 days before mailing additional letters. The group argued that there are still unresolved issues with respect to EEO compliance, but the FCC responded that broadcasters have had ample time to comply with EEO rules. Richard Zaragoza, attorney for the joint State Associations, announced that the group has appealed the FCC's decision to the United States Court of Appeals for the D.C. Circuit.

On a related note, the FCC released a June 4 order in which it adopted revised annual employment forms for broadcasters and MVPDs. The order requires broadcasters and MVPDs to file Forms 395-B and 395-A, respectively. The FCC has sent the forms to the U.S. Office of Management and Budget for approval and intends to begin using the forms this year. The FCC will use the data provided on the forms to examine industry trends and compile reports to Congress, but it will not use the data to determine compliance with its EEO rules.

Despite the FCC's intended limited uses of the data, many broadcasters requested that the FCC not make the information public because they fear that the data might make them vulnerable to lawsuits. In order to address this concern, the June 4 order also contains a notice of proposed rulemaking in which the FCC requests comment on whether a broadcaster's Form 395-B should be subject to the Confidential Information Protection and Statistical Efficiency Act of 2002 ("CIPSEA"). CIPSEA allows government agencies to collect information for statistical purposes under a pledge of confidentiality. The Commission has also asked parties to comment on what public policy goals could be served by making the data public even if it is covered under CIPSEA.

Comments and reply comments are due July 14, 2004, and July 26, 2004, respectively.

In a June 18 public notice, the FCC has requested comment on the broadband PCS spectrum auction scheduled for January 12, 2005. Specifically, the FCC seeks comment on reserve prices, minimum opening bids and other auction procedures. The auction will include 234 PCS licenses, and according to one industry insider, "This is the best spectrum that's going to be available in the near future."

The spectrum, located in various markets throughout the country, includes spectrum that NextWave has returned. Despite pleas from major wireless carriers, the FCC has indicated that it will auction some of the licenses only to entrepreneurs in "closed" bidding. To qualify as an entrepreneur, an applicant must have had less than $125 million in revenues during each of the last two years and a total asset value of less than $500 million. The larger wireless carriers will likely continue to pressure the FCC to make all of the licenses available via "open" bidding. The Cellular Telecommunications and Internet Association ("CTIA") recently issued a press release criticizing the FCC's decision to restrict the availability of some licenses to "closed" bidding.

The deadlines for comments and reply comments are July 8, 2004, and July 15, 2004, respectively.

In a June 18 release, the FCC announced that it has amended Section 1.80(b) of its rules to raise the maximum monetary forfeitures that it can assess. This action is required under the Debt Collection Improvement Act of 1996, which provides that federal agencies shall raise maximum statutory civil penalties at least once every four years in order to reflect inflation rates.

The new maximum forfeitures will be effective 30 days after publication in the Federal Register and will apply to all violations occurring after the effective date. Under the amended rule, broadcasters and cable operators will pay $32,500 per violation or per day of a continuing violation, with $325,000 as the maximum for a continuing violation. Common carriers will be liable for $130,000 per violation or per day of a continuing violation, with the cap for a continuing violation set at $1.325 million. The new maximum forfeitures for other service providers subject to FCC monetary forfeitures will be $11,000 per violation or per day of a continuing violation, with the maximum fine for a continuing violation not to exceed $97,500.

The FCC has requested comment on the recommendation of the Federal-State Joint Board on Universal Service ("Joint Board") to limit high-cost universal service support that eligible telecommunications carriers ("ETCs") may receive to one line connected to the public switched telephone network per customer. Although restricting ETC support to primary lines is a fundamental shift from the current practice of allocating support to all carriers that qualify for ETC status, the Joint Board claims that such a move would preserve the Universal Service Fund.

The Joint Board also made additional recommendations, including that the FCC adopt "permissive" federal guidelines for states to follow when considering petitions for ETC status and cap high-cost support in areas served by rural carriers on a per-line basis where a competitive carrier is designated as an ETC. The Joint Board did not recommend that the FCC modify the methodology used to calculate support in areas in which multiple ETCs exist. Instead, it stated that such an evaluation should be part of an overall review of the high-cost support mechanism.

The FCC also is seeking comment on various related proposals regarding the universal service high-cost support mechanism. The FCC questions whether it should amend its rules to allow new competitive ETCs to receive high-cost support immediately upon designation (assuming they file appropriate certifications and line-count data). The FCC also proposes a particular procedure for accepting certifications for Interstate Access Support that were untimely filed.

Adoption of the Joint Board's recommendations could mean the loss of substantial universal service funding to competitive ETCs. The Joint Board's recommendations also may impose a higher burden on those seeking ETC status. In the past, the FCC has more often than not accepted the recommendations of the Joint Board. This proceeding will therefore likely be very contentious as battle lines are drawn between incumbent local exchange carriers, who receive the bulk of high-cost support, and competitive local exchange and wireless carriers. Comments and replies are due 30 and 60 days, respectively, after the proposed rulemaking is published in the Federal Register.

On June 9, 2004, the FCC entered into a record-setting $1.75 million consent decree with Clear Channel Communications, Inc. to resolve pending indecency charges, investigations and consumer complaints against the company. "Through the consent decree, we have secured the highest enforcement concessions by a broadcaster in Commission history," said FCC Chairman Michael K. Powell in a statement. "Not only will a substantial amount of money be submitted to the Treasury by the company, but we achieve significant commitments from the company that the fines are intended to produce." Clear Channel admitted to violations of the law and agreed to police its stations by adopting a company-wide compliance plan to prevent future broadcasts of indecent material. The agreement erases nearly $800,000 in pending fines against the company and halts the investigation of dozens of other incidents underway by the FCC's Enforcement Bureau and listener complaints yet to be reviewed.

On June 22, 2004, the U.S. Senate voted 99-1 to raise the maximum fine that can be levied against broadcasters for airing indecent material from $32,500 to $275,000 per incident and up to $3 million per day for one broadcast. The provision was approved as part of a package of media-related amendments to the Department of Defense Authorization bill. HR-3717, the House version, would raise fines up to $500,000 for each utterance if the license holder was a repeat offender. Also, the House bill would initiate an FCC license review if a broadcaster is fined three times and would allow the FCC to fine on-air talent. The differences between the two measures will be addressed once the bill reaches the House-Senate conference.

Also included in the Senate amendments was a stay of the FCC cross-ownership rules, which were relaxed by the FCC in its June 2003 media ownership ruling and recently were vacated and remanded by the U.S. Court of Appeals for the Third Circuit in Philadelphia. The cross-ownership rules, as currently written, permit common ownership of newspapers, radio stations and TV stations in markets with 9 or more TV stations. In markets with 4-8 TV stations, some combinations are permitted, but cross-ownership is banned in markets with three or fewer TV stations. Further amendments would grant authority to the FCC to issue fines for violent content and direct the Commission to take into account the size of a broadcaster when levying a fine.

The FCC's Localism Task Force held the third of its six public hearings on localism in radio and television on May 26, 2004, in Rapid City, South Dakota. Commissioners Jonathan Adelstein and Michael Copps presided over the hearing, and a panel of broadcasters and business and community leaders made presentations and answered questions posed by an audience of approximately 300. The Task Force was created to gather empirical data and grassroots information on broadcast localism and advise the FCC on concrete steps it can take to promote localism in radio and television broadcasting. The next hearing is scheduled for July 21 in Monterey, California.

The Schools and Libraries Universal Service program, or E-Rate Program, has been under close scrutiny and heavy criticism within the past year for various abuses, misuse and waste of E-Rate funds. The Universal Service Administrative Company ("USAC") and the FCC both are under fire for prior abuses that continue to go unfixed. With each discovery of a new abuse or fraudulent use of E-Rate funds, the operation of the E-Rate Program is further damaged, to the detriment of schools and service providers. Additional auditing and enforcement appear to be the primary solutions proposed to fix this abuse, but the prospects for success of those measures are questionable.

The Office of the FCC's Inspector General ("OIG") recently released a report noting that it is "increasingly concerned" that problems uncovered in audits of the E-Rate Program are not being resolved "in a timely manner and that, as a result, timely action is not being taken to recover inappropriate disbursed funds. In some cases, it appears that the delay is caused by USAC. In other cases, findings are not being resolved because USAC is not receiving necessary guidance from the Commission in a timely manner." The OIG also noted that USAC has been implementing policies without FCC approval, which puts into question the validity of those policies. The OIG is reportedly working on 26 investigations and monitoring 16 other cases, many of which include allegations of procurement irregularities, competitive bidding violations, billing for goods and services not provided, funding of ineligible items, and possible kickbacks. According to the OIG, USAC also has been inconsistently applying program rules.

The House Energy and Commerce Subcommittee on Hearings and Investigations also recently held a hearing on the E-Rate Program. The committee members blamed the FCC, vendors and schools for the numerous abuses that have occurred in the E-Rate Program. The hearing focused mainly on recent problems connected with E-Rate funding allocated in Puerto Rico, where more than $1 million for Internet access was wasted because schools failed to install computers or train teachers. Similar abuses have arisen in Atlanta, El Paso and Chicago.

Walker Feaster, the FCC Inspector General, told the subcommittee that he lacks the necessary funding to audit the E-Rate Program appropriately and said he would need $12 million to do so. Fester also said that of the 122 audits performed last year, 32% uncovered some level of noncompliance with E-Rate Program rules. Carol Mattey, Deputy Director of the Wireline Bureau, stated the program has overall been very successful, despite the discovery that certain bad actors have taken advantage of the E-Rate Program. George McDonald, Vice President of USAC, suggested that additional audits would help prevent the misuse of E-Rate funds. The House intends to hold further hearings regarding the E-Rate Program.

The FCC is seeking comment on minimizing interference to consumers when digital broadcasting is scheduled to replace analog broadcasting in 2006. The Commission is specifically trying to identify consumers who rely solely on over-the-air broadcasting and do not possess televisions capable of receiving digital broadcasts. The Commission wants to determine why this group of consumers has not subscribed to a cable or satellite service and explore options to reduce interference to this group of consumers during and after the switch from analog to digital broadcasting in 2006.

The Commission plans to make the switch from analog to digital broadcasting in 2006 or once 85% of households are able to receive the digital broadcasts. Although about nine million consumers have digital television monitors, only 1.2 million have the tuners necessary to receive the digital broadcast signals. The Commission is considering asking cable and satellite providers to down-convert digital signals to analog for their customers in order to speed up the transition to digital by increasing the number of people who will be able to receive and view digital broadcasts.

The Commission is primarily seeking comment to discern the best manner to minimize disruption to the group of consumers who neither subscribe to cable or satellite services nor own television sets with the capacity to receive digital broadcasts. Options the Commission is exploring include governmental action in the form of subsidies for converter boxes that will convert digital signals into analog for consumers who rely on over-the-air television broadcasts.

Once the transition from analog to digital is complete, the spectrum currently used for analog will most likely be given back to the federal government and resold for wireless purposes.

Comments are due on or before July 12, 2004, and reply comments should be filed by August 5, 2004.

On a 3-2 vote, the California Public Utilities Commission ("CPUC") approved Commissioner Geoffrey Brown's consumer "bill of rights" proposal over Commissioner Carl Wood's more controversial proposal, titled "The Telecommunications Consumer Bill of Rights," which commentators have said was the "most comprehensive and far-reaching set of consumer protection rules in the country." Brown's consumer protection proposal is viewed as "toned-down" in comparison to the rules that Commissioner Wood spent five years promoting. Still, the wireless industry claims that the decision to adopt Brown's less aggressive consumer protection rules does not take into account the negative impact that such rules are likely to have on consumers' invoices for telecommunications services.

Commissioner Brown's rules, which are applicable to both wireline and wireless carriers, are said to prohibit such carriers from: (1) using adhesion contracts and changing service terms without customer consent; (2) engaging in the practice of feeding contract terms to customers "piecemeal," by requiring carriers to provide disclosure of all terms and conditions of the contract to a consumer within seven days of signing; (3) making contract terms inaccessible and thus unknown to consumers; and (4) utilizing illegible agreements. The new rules will take effect in 180 days, or by November 27, 2004. Under the rules, carriers will be punished for making false and misleading statements in advertising and marketing materials. In a nod to carriers, Brown's rules allow them to include supplemental information, such as brochures explaining services, to become part of contracts.

Commissioner Wood supported Brown's measure over the proposal made by Commissioner Susan Kennedy. Following the decision to adopt Brown's rules, Commissioner Wood criticized the "bill of rights" proposed by Brown, claiming that the measure failed to provide certain privacy protections for consumer data and failed to require comprehensive advertising disclosures. Commissioner Wood also criticized the decision to have the regulations become effective no sooner than 180 days.

The CPUC's President, Michael Peevey, refused to vote on the proposal that Commissioner Wood had been crafting for the past five years. The proceedings involving Wood's measure were initiated in February of 2002, and an initial draft of Wood's rules was released in June of 2002. The draft met with considerable controversy, and Commissioner Wood suspended the procedural schedule to allow wireless, wireline and consumer groups time to develop compromises amongst each other.

While the rules are meant to protect consumers from poor telecommunications service, there is little in the adopted regulations providing consumers with guarantees of acceptable levels of service, or providing consumers with a simple method of comparing telecommunications rates and fees across different carriers. Thus, consumer groups were disappointed to see the CPUC adopt rules that were very watered-down in comparison to the original proposal. Nevertheless, they are pleased with the new regulations as a step in the right direction. Other states are expected to follow the steps taken by California.

CTIA President Steve Largent said that Commissioner Brown's rules place unnecessary burdens on wireless carriers, given the relatively low consumer complaint rate, and he vowed to fight the rules, claiming they will stifle competition, hurt small companies, and end up costing customers more. CTIA has been encouraging the wireless industry to develop its own voluntary best practices on service quality and billing in order to avoid costly state regulatory schemes, and unveiled its own voluntary consumer code last year.

On March 30, 2004, NASUCA, a voluntary national association of 44 consumer advocates in 42 states and the District of Columbia, filed a formal request with the FCC asking that long distance and wireless companies be banned from imposing misleading surcharges on customers' monthly bills. The Petition for Declaratory Ruling asks that the FCC declare that carriers are prohibited from imposing line-item charges unless those charges are expressly mandated by federal, state or local regulatory action.

NASUCA asserts that the FCC's 1999 Order in the "Truth-in-Billing" docket (the "TIB Order") was designed to address problems resulting from slamming, cramming and confusing billing practices designed to take advantage of consumers. But, by virtue of the FCC's failure to finalize certain aspects of the TIB Order, as well as the FCC's willingness, in a later order, to allow carriers to recover federal universal service contributions (i.e., ordinary operating costs) through separate line items, NASUCA argues that the FCC left a hole in the regulatory scheme, which carriers are using to their advantage and to the consumers' detriment.

In the Petition for Declaratory Ruling, NASUCA identifies several major carriers that introduced misleading and deceptive charges in response to the FCC's TIB Order. One example is the commencement by AT&T to "include a [$0.99] per month Regulatory Assessment Fee" that "applies each month in which [there are] any AT&T charges" on the customer's bill. AT&T stated in its disclosures to customers that the Regulatory Assessment Fee helps AT&T to recover the costs and expenses associated with interstate access charges, regulatory compliance and proceedings costs, and property taxes. A disclaimer advises customers that "[t]his fee is not a tax or charge required by the government."

NASUCA's argument is fairly simple -- the carriers' surcharges are not in compliance with the principles set forth in the TIB Order that require carriers' charges to be fully disclosed and non-misleading, and the carriers are not in compliance with the guidelines in the TIB Order that require standardized billing labels. Specifically, the TIB Order requires services included on a telephone bill to be accompanied by a "brief, clear, plain language description of the service rendered." The intent is to give consumers enough information to be able to assess that the services for which they have been billed correspond to the services they requested and received from the service provider, and to determine that the costs associated with those services conform to the customers' understanding of the price charged.

On May 25, 2004, the Commission released a Public Notice ("PN") seeking comment on NASUCA's Petition for Declaratory Ruling. The PN announced the establishment of a docket for comments on the petition (CG Docket No. 04-208), and was published in the Federal Register on June 14, 2004. Thus, comments from interested parties will be due on July 14, 2004. Reply comments were originally docketed as due on July 29, 2004, but because of the complexity of the issues and the expected volume of reply comments, the FCC granted NASUCA's motion for an extension of time. Accordingly, reply comments are due on or before August 13, 2004.

On June 9, 2004, California Public Utilities Commission Administrative Law Judge Anne Simon (the "ALJ") issued a Presiding Officer's Decision in Telscape Communications, Inc.'s complaint against SBC California. Telscape had alleged that SBC was refusing to process Telscape's orders to change a customer's local voice service to a competitive carrier if the customer subscribes to SBC Yahoo! DSL, SBC's retail DSL service. The ALJ found that SBC would automatically reject an order to migrate a mass-market voice customer to a CLEC using UNE-P if the customer also subscribed to SBC Yahoo! DSL. She also found that there were no technical or operational reasons for SBC's rejection of an otherwise valid order and concluded that this practice was not just or reasonable. SBC must cease this practice within 90 days of the date of the order unless it appeals.

The ALJ also considered several related matters that were consolidated with Telscape's complaint. Amongst these, she found reasonable a settlement reached by AT&T, MCI, and SBC regarding SBC's "winback" process. These carriers and Telscape had alleged that SBC's winback marketing personnel were encouraged to suggest to the former SBC customers that their local service had been changed without their authorization. Furthermore, the ALJ found that SBC's third-party verification process for substantiating allegations of slamming applied to allegations about local toll and long distance, but not allegations of slamming for local voice service. As a result, many customer allegations of slamming were not inaccurate. The ALJ ordered SBC to include residential local voice service in the services subject to its third-party verification process for slamming allegations within 30 days of the date of the order.

The ALJ's order will automatically become a final Commission decision on July 10, 2004, unless a party files an appeal of the order before that date or unless a Commissioner requests review. SBC has stated that it intends to appeal the order.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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