Communications Law Bulletin, May 2006


In this issue:

The Month in Brief

Perhaps the most significant news of the month of May came on Friday, May 26, when the U.S. Senate confirmed Robert McDowell, a Republican, to serve on the Federal Communications Commission ("FCC" or "Commission").  With McDowell’s confirmation, the Commission at last will have a full complement of commissioners and a Republican majority, which should facilitate the FCC’s resolution of media ownership and other controversial issues.

May also saw progress, if not definitive resolution, on issues ranging from broadcast indecency to Net neutrality.  Those developments are reviewed here, along with our usual list of deadlines for your calendar.

D.C. Circuit Appears Unlikely to Overturn FCC Order Forbearing from Application of Unbundling Rules to ILEC Broadband Networks

Oral argument was held before the U.S. Court of Appeals for the D.C. Circuit on May 9 in EarthLink Inc.’s appeal of an October 2004 FCC forbearance order.  Based on the judges’ questioning, the court appears unlikely to overturn the order, which granted the Bell Companies’ petition for forbearance from application of the unbundling requirements of Section 271 of the Communications Act (the "Act") to broadband networks previously relieved of unbundling obligations under Section 251 of the Act. 

In the Triennial Review Order and follow-up orders, the FCC held that competitive local exchange carriers ("CLECs") would not be impaired in competing with incumbent local exchange carriers ("ILECs") without access to certain currently unbundled elements of ILEC fiber-based broadband networks.  Accordingly, the FCC relieved the ILECs of any obligation under Section 251(c) of the Act to offer broadband fiber unbundled network elements ("UNEs") to CLECs.  That decision was upheld by the D.C. Circuit in 2004.  Following the FCC’s decision, the Bell Companies requested that the FCC forbear from applying the unbundling requirements of Section 271 of the Act, which sets forth the criteria for Bell entry into the long distance service market, to the broadband fiber UNEs controlled by Bell.  In the order appealed by EarthLink, the FCC granted the Bells’ forbearance request, finding that continued application of the Section 271 unbundling requirements was not necessary to ensure just and reasonable broadband rates or to protect consumers and that forbearance would promote broadband competition.

Only one judge on the panel, David Sentelle, asked questions at the argument, and he repeatedly questioned EarthLink’s argument that the FCC did not properly analyze the state of broadband competition before deciding to relieve ILECs of the Section 271 broadband unbundling requirements.  EarthLink’s counsel argued that broadband competition from cable modem service was not an adequate basis to find that the broadband market was sufficiently competitive to dispense with the ILEC broadband unbundling requirements.  He asserted that a cable-ILEC "classic duopoly" "isn’t what Congress meant by competition."  Judge Sentelle pressed EarthLink to show where the statute mandates a particular type of analysis and pointed out that cable providers have a larger share of the broadband market than the ILECs.  FCC counsel argued that the broadband market is increasingly competitive and that the FCC properly determined that there was no rationale "to saddle the number two provider with an unbundling requirement."  There were no reports of any questioning of FCC counsel by the panel.

Core Communications Forbearance Petition Would Subject All Intercarrier Traffic to Reciprocal Compensation Rules

On April 27, 2006, Core Communications, Inc., filed a Petition for Forbearance requesting that the FCC forbear from access charge regulation under Section 251(g) of the Communications Act (the "Act") and from geographical rate averaging and integration rules under Section 254(g) of the Act.  Core states that the granting of its petition will subject all telecommunications carriers to the reciprocal compensation requirements of Section 251(b)(5) of the Act, thereby eliminating regulatory arbitrage resulting from inconsistent intercarrier compensation regimes.

Section 251(g) of the Act preserves all access charge regulations until the FCC replaces them.  Because Section 251(g) has been interpreted as a "carve-out" from Section 251(b)(5), which covers all "telecommunications," the latter would apply to all intercarrier traffic in the absence of Section 251(g) and the access charge rules preserved thereby.  Core requests that the FCC forbear from enforcing Section 251(g) in order to subject all intercarrier traffic, including intrastate and interstate access services, to the reciprocal compensation requirements of Section 251(b)(5).  Core cites FCC findings that "the transport and termination of traffic, whether it originates locally or from a distant exchange, involves the same network functions" and "that the rates that local carriers impose for the transport and termination of" local and long distance traffic "should converge."  Core points out that such convergence has not occurred, however, and that reciprocal compensation rates remain lower than interstate and intrastate access charges.

Core notes that interexchange carriers ("IXCs") are required by Section 254(g) to charge rates in rural and high-cost areas that are no higher than the rates they charge in urban areas (this is the "geographic rate averaging rule") and to charge rates in each state that are no higher than those in any other state (this is the "rate integration rule").  Core alleges that these rules create an implicit subsidy from IXCs to local exchange carriers ("LECs") by enabling LECs to charge high access rates to IXCs while maintaining low retail rates.  IXCs, which must charge averaged and integrated rates, thus are forced to absorb the higher access rates in high cost areas.  The rate averaging and integration rules accordingly create subsidies flowing from customers in low-cost areas served by IXCs to customers in high-cost areas, who pay artificially low retail rates to LECs. 

Core argues that for these reasons, forbearance from Sections 251(g) and 254(g) meets the statutory criteria for such relief and would advance the rate unification goals of the pending intercarrier compensation reform proceeding.  Not only is Section 251(g) not necessary to ensure just, reasonable and nondiscriminatory charges and practices, but "[e]liminating the 251(g) carve-out and consolidating telecommunications traffic in 251(b)(5)" would eliminate the "regulatory arbitrage" resulting from "disparate rates for identical functionality" and advance the public interest.  Enforcing Section 251(g) also is not necessary for the protection of consumers and, in fact, harms them by creating implicit subsidies that distort competition.  Similarly, Section 254(g) is not necessary to ensure that interexchange rates are just and reasonable or for the protection of consumers because the long distance market is fiercely competitive.  Finally, eliminating the implicit subsidies created by Section 254(g) would further the public interest and promote competition. 

Initial comments on the Core petition are due June 5 and reply comments are due on June 26.

Panel Questions Part of Triennial Review Remand Order

On May 15, 2006, oral argument was held before the U.S. Court of Appeals for the D.C. Circuit in cross-appeals of the FCC’s February 2005 Triennial Review Remand Order ("TRRO").  The TRRO was the FCC’s fourth attempt to fashion unbundling rules governing competitors’ access to ILEC network elements under Section 251 of the Communications Act.  Although the TRRO cut back on the availability of ILEC UNEs provided in the FCC’s prior orders, ILECs challenged certain aspects of the unbundling as still too strict.  CLECs appealed other aspects of the order as having eliminated or relaxed ILEC unbundling obligations unduly. 

Chief Judge Douglas Ginsburg led the questioning and pressed FCC counsel to explain, in response to ILEC challenges to the criteria set forth in the TRRO governing access to ILEC high-capacity local subscriber "loops" and transport UNEs, how the FCC arrived at the quantitative measures it used.  For example, the FCC held that CLECs are "impaired" in competing with ILECs without access to ILEC DS-3 loops in wire centers with no more than 38,000 business lines and no more than four fiber-based colocators and are impaired without access to DS-1 loops in wire centers with no more than 60,000 business lines and four colocators.  FCC counsel replied that, because the FCC was unable to study every market or every state, it made "reasonable inferences" from a review of competitive markets throughout the nation and picked these numerical "proxies" based on what constituted competition in the markets studied.  CLEC counsel supported these impairment criteria and stated that CLECs had provided data for the FCC to use in choosing the measures.  He pointed out that it is not feasible for a CLEC to deploy its own high-capacity facilities for a small amount of traffic.  ILEC counsel argued that the new impairment criteria still require ILECs to make high-capacity UNEs available in 99.5 percent of all wire centers, in spite of widespread competition.  

Other CLEC counsel argued that the FCC went too far in cutting back on the availability of UNEs.  One counsel asserted that the FCC should not have used a wire center test in fashioning an impairment standard for high-capacity UNEs used by CLECs in competing for large business customers.  When asked by Judge Ginsburg whether he favored a "building-by-building approach," he conceded that might be difficult but that "sampling" methods would work better.  Another CLEC attorney argued that the FCC should not have eliminated local switching facilities as an available UNE in the consumer mass market.  She asserted that the FCC eliminated the switching UNE in the mass market based on evidence of competition in the large business market, ignoring significant differences between the two markets.  FCC counsel disagreed, arguing that there is no significant variation in the availability of switching facilities among markets.  The panel did not question FCC counsel significantly with regard to the CLEC challenges to the order.

Based on the thrust of Judge Ginsburg’s questions, observers seemed to agree that, in response to the ILEC challenges, the impairment criteria in the TRRO might be remanded to the FCC for further explanation but that any ILEC advantage would be incremental at most. 

Broadcast Developments

Congress Set to Dramatically Raise Indecency Fines

On May 18, 2006, the Senate unanimously approved S-193, an indecency bill that would raise maximum fines for broadcast of indecent programming from $32,500 to $325,000.  The next day, the bill was received in the House and referred to the House Committee on Energy and Commerce.  According to Senate Majority Leader Bill Frist’s (R.-Tn) spokesperson, the bill will either go to conference with HR-310, which the House passed last year, or be voted upon by the House.  Senator Brownback (R.-Ks), the sponsor of the bill, has "urge[d] the House to take action on increasing indecency fines so we can send a bill to the White House."  "It's time," he remarked, "that broadcast indecency fines represent a real economic penalty and not just a slap on the wrist."  The House bill, sponsored by Representative Fred Upton, includes fines up to $500,000 and potential license revocation if a broadcast contains three or more violations.

A spokesperson for the National Association of Broadcasters ("NAB") stated that "[r]esponsible self-regulation is preferable to government regulation."  "If there is regulation," the NAB spokesperson continued, "it should be applied equally to include cable, satellite TV, and satellite radio."  Concerned Women for America ("CWA") welcomed the bill, said Lanier Swann, CWA’s Director of Government Relations.  Jack Valenti, former Motion Picture Association of America President and CEO, has been advocating an industry-wide education campaign about the V-Chip and other technological solutions to protecting children from indecent programming, but these efforts have not appeased the CWA.  "We're advocating for whatever [bill] will get to the President the fastest," Swann said.

Universal Music Group Settles NY Payola Suit

In mid-May, New York Attorney General Eliot Spitzer announced that Universal Music Group agreed to pay $12 million to settle Spitzer’s charges that it made illegal payments to radio stations in exchange for airplay.  Spitzer said that the company agreed to adopt reforms, including the cessation of all payola activity, and agreed to pay the funds to charities running music education and appreciation programs.  Spitzer added that while the company did not admit guilt, it acknowledged that "various employees and independent promoters acting on behalf of the company" engaged in illegal activities.  Spitzer remarked that his office had obtained e‑mails demonstrating that Universal executives knew about the payoffs and trained and pressured subordinates to buy airplay.  A Universal spokesman said in a written statement that "[t]he reforms that we have agreed to with the attorney general are consistent with the policies that we voluntarily implemented over a year ago."  Spitzer also is investigating Britain's EMI Group Plc.  A company spokeswoman said EMI is cooperating with the attorney general but declined further comment.  Spitzer also has issued subpoenas to radio broadcasters Clear Channel Communications Inc., Cox Radio Inc. and CBS Radio, formerly known as Infinity Broadcasting.  Last March, he sued radio broadcaster Entercom Communications Corp., the nation’s fifth largest radio chain, charging that its executives were involved in payola practices.  At that time, Spitzer commented, "We have moved from the label side, those who put out the records and are forced to pay for air time," said Spitzer, "and switched to the radio conglomerates . . . that are extracting money."  Two major recording companies agreed last year to settle with Spitzer to end payola investigations.  Warner Music Group Corp. said it would pay $5 million, and Sony BMG Music Entertainment agreed to pay $10 million.  Spitzer has accused the FCC of being "asleep at the switch" with regard to payola and said that the Commission should consider revoking licenses.  The FCC sharply disputed this characterization and recently launched its own investigation, issuing letters of inquiry to Clear Channel Communications Inc., CBS Radio Inc., Entercom Communications Corp. and Citadel Broadcasting regarding compliance with the Commission’s payola regulations.

Federal and State Video Legislation Progresses, but Carriers are Not Waiting to Enter Model Agreements

Developments in local video competition are proceeding along several tracks.  State legislation granting statewide video franchises has prompted federal legislation addressing local franchising requirements.  Meanwhile, video service providers are seeking practical relief from franchising requirements through business arrangements.

In May, states made significant progress on a number of initiatives affecting local video franchising.  Notably:

  • The South Carolina Governor has signed into law a measure that empowers the Secretary of State to issue statewide video franchises.  Indiana, Kansas, Texas and Virginia passed similar legislation over the past year.  
  • The New Jersey Senate passed a statewide video franchising bill that would shift franchising from municipalities to the Board of Public Utilities.  Reports suggest quick action by the state Assembly.
  • Florida’s House of Representatives passed The Consumer Choice Act of 2006, which simplifies and streamlines the municipal franchise approval process while protecting municipal control over rights-of-way, municipal authority over local cable providers, local government capacity for public, educational and governmental ("PEG") channels.
  • The Louisiana House passed legislation to shift authority over video franchising from municipalities to the Secretary of State.  The measure sent to the Senate would require state video franchises to be renewed every 10 years.
  • In Oklahoma, the Attorney General has rendered an opinion that telephone companies are not required to obtain additional municipal franchises to use the public rights-of-way to deliver video services. 
  • The Connecticut Department of Public Utility Control similarly has concluded that AT&T is not required to secure video franchises to offer Internet-based video services over its telephone network. 
  • House committees in Michigan and California planned hearings for the end of May on state video franchise bills.

State developments also are spurring Congress to revise federal franchising law.  At the first of two hearings on the Senate Commerce Committee telecommunications bill, Committee Chairman Ted Stevens (R.-Ak) characterized as "fair criticism" complaints that the bill’s local franchising provisions were "too aggressive."  Even so, however, Stevens said that he "is going to see that this bill gets to the floor . . . and we’ll do so this year."  Ranking Member Daniel Inouye (D.-Hi) , who co-sponsored the bill in a "spirit of bipartisanship," said that he does not support it in current form: "The key elements of reform in S-2686 will require substantial revisions if we are to pass legislation this year."  Inouye explained that the bill does not affirm local government interests in the local franchising process, as Senator Burns (R.-Mt) and he had suggested.  The legislation "would eliminate key consumer protections regardless of whether new competition emerges or not," Inouye remarked.  Senator Stevens said that he plans for Inouye to chair a hearing on May 25 and to release a revised draft of the bill June 5.  A second hearing is scheduled for June 13 on the revised substitute bill, amendments are due June 16, and a markup set for June 20.

Reports indicate that Senator John McCain (R.-Az) imminently plans to introduce the Consumers Having Options in Cable Entertainment Act ("CHOICE Act"), which would provide incentives for cable and telephone company video providers to allow subscribers to purchase channels a la carte.  Although the bill had not been introduced by the time this article went to press, FCC Chairman Kevin Martin endorsed the CHOICE Act in an op-ed piece that he co-authored with Senator McCain on May 25.  According to an anonymous McCain aide, the Senator will offer a "bucket of goodies" to counter strong industry opposition to a la carte pricing.  "It’s an incentive-based bill to ensure that consumers are provided more options and choices of buying channels," the aide remarked.  Reports suggest that McCain would offer cable companies some reduction in the five percent maximum local franchise fee municipalities can demand for use of their rights of way and provide other unspecified relief.  The legislation also would provide telephone companies seeking to provide video with a national franchise system in exchange for those agreeing to a la carte pricing.  Senator McCain plans to attach the legislation to Senator Stevens’s telecommunications bill. 

Additionally, Senator Ron Wyden (D.-Or) reportedly is searching for a Republican co-sponsor for a cable-content bill designed to provide consumers at least three viewing options: a family-oriented programming tier; programming tiers subject to indecency regulation; and a tier priced on an a la carte basis.  Wyden, who is not on the Commerce Committee, would need his co-sponsor to serve on the Committee to introduce his amendment as an addition to the Stevens bill.  He reportedly had been in discussions with Kay Bailey Hutchison (R.-Tx), but Senator Hutchison’s focus apparently has been elsewhere.  On May 23, Senator Hutchison introduced legislation reportedly modeled on a Texas state statute that addresses the video franchising process, provides some revenue to local governments, allows for public access channel support, and defines state and local roles in rights-of-way management.

Carriers are not waiting for Congress and the states to act on franchising issues, but are seeking to streamline the franchising process through model agreements and other practical business arrangements.  AT&T has announced that it has initiated cable franchise negotiations with Michigan municipalities instead of waiting for state or national video franchising legislation.  AT&T will begin with Detroit and will move to other municipalities from there.  Qwest tentatively has reached a model cable franchise agreement with Denver and 32 surrounding communities.  While the model agreement addressed public access channels, franchise fees, a government access channel exclusively devoted to regional content, issues related to rights-of-way management, and enforcement, the agreement does not address buildout and service deployment.  The model agreement provides for a six-year franchise term.

New "Designated Entity" Rules Challenged as FCC Delays AWS Auction Until August 9, 2006

Multiple parties have challenged the FCC’s order that was released last month modifying the rules applicable to designated entities ("DEs").  The order made significant changes to the DE rules by including certain "material relationships" as factors in determining DE eligibility, modifying certain unjust enrichment rules, and imposing new reporting requirements on DEs.  The rules will become effective on June 5, 2006.  Although the FCC had deliberately released the item in time for the new rules to apply to the Advanced Wireless Service ("AWS") auction originally scheduled for June 29, 2006, the FCC subsequently issued a public notice rescheduling the auction for August 9, 2006.

Council Tree Communications, Inc., Bethel Native Corp., and the Minority Media and Telecommunications Council filed a petition for expedited reconsideration of the new DE rules and a motion to stay the AWS auction, urging the FCC to rescind the new rules and apply existing DE rules to the AWS auction.  The petitioners argue that the new rules violate Section 309(j) of the Communications Act and the Regulatory Flexibility Act.  The petitioners further argue that adoption of the new rules violates the Administrative Procedure Act because they were adopted without adequate public notice and input from affected companies.  The petition for reconsideration also maintains that the new rules will be extremely detrimental to DEs and their ability to participate in FCC auctions and seek capital, and will hinder the DEs’ operational flexibility.  In addition, the petitioners claimed that the order, which was released two weeks before the deadline for applications to participate in the AWS auction, provided DEs no time to adapt their business plans relating to the auction. 

On May 19, 2006, a week after the deadline for AWS auction applications, the FCC issued a public notice rescheduling the auction for August 9, 2006.  The FCC stated that it would re-open the application filing window, which now will be open from June 5 through June 19, 2006.  The public notice does not explain the reason for the delay, except "to provide applicants additional time for preparation and planning."  Consequently, any party, regardless of whether it previously filed an application to participate in the AWS auction, can submit an application during the new filing window.  Parties that had filed during the earlier filing window may withdraw or amend their existing applications.  If a party determines that its application still is complete and accurate, it does not need to resubmit the application, unless the new DE rules necessitate an amendment. 

Those that had petitioned the FCC for reconsideration of the new DE rules claim that the public notice delaying the auction does nothing to address their arguments that the rules should be rescinded.  The petitioners also have stated that they are preparing a court appeal if the FCC does not act on their petition for reconsideration, although they have not yet decided whether an appeal will be filed.

Net Neutrality Regains Some Life as Bipartisan Bills are Introduced in Both House and Senate

In the U.S. House of Representatives, following the Commerce Committee’s rejection of a Net neutrality amendment last month, turf wars have developed over Net neutrality.  Representative Barton (R-Tex.) wants to keep the issue with the Commerce Committee and avoid the adoption of stricter Net neutrality rules.  After failing to get a referral of the House bill to the Judiciary Committee, Chairman Sensenbrenner (R-Wis.) (along with several Democrats) introduced a new bill that would punish Net neutrality violations under the antitrust laws (which would afford treble damages in federal court).  Specifically, the bill would require broadband providers to furnish content providers with the same speed and quality of service that the broadband providers enjoy, and would require them, if they provide enhanced service quality, to provide the same level of service to all similar content at no charge.  The House Judiciary Committee approved this bill, the Internet Freedom and Nondiscrimination Act, by a vote of 20-13 on May 25th.    

The Net neutrality battle has also moved to the Senate.  As expected, Senators Snowe (R-Maine) and Dorgan (D-N.D.) (along with six other Democratic co-sponsors) introduced the Internet Freedom Preservation Act, which would (a) bar broadband providers from blocking or degrading Internet content, (b) ban broadband providers from charging fees to content providers in order to obtain priority treatment, and (c) give the FCC jurisdiction to enforce the rules and address complaints.  (The bill would also mandate the offering of "naked" Digital Subscriber Line service.)  Senator Wyden (D-Ore.), who had introduced an earlier stand-alone Net neutrality bill in the Senate, was one of the co-sponsors of the new bill, which is expected to come up for a vote in the Commerce Committee on June 20th. 

The interesting thing about these new bills is that each has a Republican co-sponsor and some measure of Republican support.  Accordingly, they represent at least a partial shift in the previously partisan nature of this issue, although it is not clear that either bill has sufficient Republican support for passage. 

Finally, at the FCC, Commissioner Copps has stated that he believes enforceable rules on Net neutrality are necessary, and that the FCC has the authority to impose such rules on information service providers under the FCC’s Title I ancillary jurisdiction.

FCC Issues Second Order Implementing CALEA Requirements for Broadband and VoIP Providers, While Appellate Court Questions Basis for These Requirements During Oral Arguments

On May 12, 2006, the FCC issued a second order addressing the assistance capabilities required under the Communications Assistance for Law Enforcement Act ("CALEA") for facilities-based broadband Internet access ("broadband") providers and interconnected Voice over Internet protocol ("VoIP") providers.  Specifically, the FCC affirmed May 14, 2007, as the CALEA compliance deadline for broadband and VoIP providers.  It also permitted the use of certain third parties to satisfy CALEA compliance obligations and restricted the availability of CALEA compliance extensions.  It concluded that broadband and VoIP providers generally are responsible for CALEA development and implementation costs, and declined to adopt a national surcharge to recover CALEA costs.  Additionally, it required broadband and VoIP providers to file interim progress reports to ensure that they will be CALEA-compliant by May 14, 2007.

Shortly before the FCC released its second order, the U.S. Court of Appeals for the District of Columbia heard oral arguments on an appeal of the FCC’s first order imposing CALEA requirements upon broadband and VoIP providers.  The judges repeatedly questioned the FCC’s basis for applying CALEA requirements to broadband and VoIP services, given the statutory language stating that CALEA does not apply to information services.  Two of the three judges on the panel challenged the FCC’s contention that broadband services may be treated as telecommunications services under CALEA, even though the FCC also concluded that they are information, not telecommunications, services under the Communications Act of 1934, as amended.  Additionally, the judges may be receptive to the petitioners’ argument that the FCC’s decision to apply CALEA to VoIP should be remanded because it failed to resolve the threshold issue of whether VoIP services qualify as telecommunications or information services.

Legislative Developments

On May 1, 2006, Senate Commerce Committee Chairman Ted Stevens (R-Ak.) released a draft bill that would provide comprehensive reform of existing communications laws.  The draft bill would authorize the FCC to consider banning digital broadcast radio and satellite receivers that permit recording of audio broadcasts.  It also would authorize the FCC to ban digital TV tuners that permit users to save video broadcast recordings without copy protection, but would allow users to share recordings over their home networks and make short excerpts available over the Internet.  Additionally, the draft bill would shorten, but not bypass, the process for telephone companies to obtain local video franchises.  It also would overhaul and expand the scope of the federal universal service fund.  It would not empower the FCC to adopt or enforce Net neutrality regulations, but rather would direct the FCC to prepare annual reports on the issue.  Although Sen. Stevens predicted that the Senate will pass the bill by the end of the year, many analysts are skeptical that the bill will be enacted this year because of the broad scope of the bill, the challenge of reconciling it with the much narrower House version, and the short legislative calendar resulting from the November midterm elections.

State Legislatures Wrap Up Their 2006 Sessions

The state legislatures’ 2006 sessions are coming to a close and, as they do, telecommunications bills are being sent to governors for signature.  The Florida legislature, which adjourned on May 5, sent Governor Bush a bill revising the telecommunications reform legislation passed in 2003.  The new bill would restrict telecommunications carriers’ ability to designate services as "non-basic" but would allow incumbents to detariff those services already designated as non-basic, provided that the terms and conditions are publicly available.  The bill also would reduce to one day from fifteen days the notice period for price changes to non-basic rates.  The Florida Public Service Commission may establish guidelines for the published terms and conditions, provided that the guidelines do not require more information than currently is required to be included in a tariff.  In addition, the bill would remove a carrier of last resort’s obligation to provide basic service to specific multi-tenant businesses and residential properties under certain circumstances and would establish the criteria for the Commission to apply when considering carriers’ requests to change the regulatory status of retail services.  The bill was sent to Governor Bush on May 23.

On May 22, 2006 the New Hampshire legislature passed and, on May 25, 2006, Governor Lynch signed a bill revising the requirements that small incumbent local exchange carriers must satisfy in order to qualify for the reduced regulations applied to competitive local exchange companies’ services.  Existing New Hampshire law already requires small incumbents to show that competitive wireline, wireless, or broadband services are available to a majority of their retail customers in each of the exchanges they serve as a condition for relaxed regulation.  The new law, HB 1756, will require that a small incumbent’s plan for alternative regulation also include rates for basic local service that do not exceed the comparable rates charged by the largest incumbent local exchange carrier operating in New Hampshire, and that these rates not increase by more than 10 percent per year in each of the 4 years after a plan is approved.  Finally, the bill allows the Public Utilities Commission to re-impose rate of return regulation if the small incumbent fails to meet any of the conditions in its approved plan.

Vonage Goes Public

Vonage Holdings Corp. ("Vonage") completed its initial public offering ("IPO") on the New York Stock Exchange on May 24, 2006.  The offering, which raised $531 million, was priced at $17 a share.  The share price, however, fell by almost 13% on the first day of trading for the steepest one-day decline of any IPO in almost two years. 

There are several reasons for the weak IPO, analysts say.  Vonage, the largest independent provider of Voice over Internet Protocol ("VoIP") phone service in the U.S. with over 1.6 million subscribers, is facing tough competition from other VoIP providers, as well as large cable operators that can provide bundles of services to customers.  Vonage, formed in 2001, has incurred losses in every quarter since its creation, for a total loss of $455 million at the end of the first quarter of 2006.  The company spends heavily on marketing to add new customers, and its business plan continues to focus on growth over profits.  In addition, Vonage has been challenged by customer complaints about inferior sound quality and poor customer service.  

Vonage offered 20% of its stock in the IPO.  The remaining shares are owned by Vonage’s chairman, Jeffrey A. Citron, who owns 33% of the company, and venture-capital funds that own another 45% of the company.  According to the Vonage prospectus, the company expects a large portion of its public shares to be held by individuals rather than institutions. 

FTC Sues Data Brokers as Anti-Pretexting Legislation Stalls

On May 1, 2006, the Federal Trade Commission ("FTC") filed enforcement actions against five companies that allegedly sold consumers’ unlawfully obtained telephone records.  The five defendants in the actions, which were filed in various U.S. district courts around the country, are 77 Investigations, Inc., AccuSearch, Inc., CEO Group, Inc., Information Search, Inc., and Integrity Security & Investigation Services, Inc.  The FTC charges that the defendants’ practices of obtaining telephone records for which they are not authorized, and selling those records to third parties, constitute unfair practices under section 5 of the Federal Trade Commission Act.

Also, on May 2, 2006, the House of Representatives postponed action on H.R. 4943, the Prevention of Fraudulent Access to Phone Records Act, which was to be taken up by the full House on that date.  The bill, which would have outlawed "pretexting" to obtain telephone records and the sale or lease of consumer telephone data, reportedly was pulled to explore the need for an exemption for certain intelligence-gathering activities.

In response to this delay, in a letter dated May 11, 2006, Rep. Edward Markey (D.-Mass.) asked the Speaker of the House whether the "disappearance" of H.R. 4942 might be related to the revelations concerning the National Security Agency’s telephone traffic monitoring program.  Markey noted that this possibility "raises important questions concerning whether intelligence agencies are seeking an exemption in order to obtain the phone records of Americans without legal due process as part of some future plan, or whether entities were seeking an exemption in the bill to clarify the legality of such a program because they are currently gathering such records today without clear authority."

California PUC Issues Decisions on Broadband over Powerlines and VoIP

On April 27 the California Public Utilities Commission adopted a regulatory framework to encourage the deployment of broadband-over-powerlines ("BPL").  The decision, adopted 4‑1 with Commissioner Brown dissenting, permits electric utilities to invest in BPL systems without complying with a number of regulations that would otherwise apply to investments in utility assets and construction of new facilities.  To encourage the additional competition for broadband services that BPL can potentially provide, the decision waives the pre-approval requirement that would normally apply to utility investments and grants a categorical exemption to the California Environmental Quality Act for the construction or installation of BPL equipment in existing utility structures.  Utilities’ transactions with their BPL affiliates will be subject to the Commission’s affiliate transaction reporting requirements and the utilities may not make rate‑base investments in the BPL affiliates if the BPL will be used for commercial broadband deployment.  The utility will be required to share the revenues it obtains from BPL services between its ratepayers and shareholders.

Commissioners Peevey and Chong hailed the decision as a solution to the "last mile" problem that will increase the choice of broadband services available to consumers.  Commissioner Brown, on the other hand, called the decision "galling" and criticized the Commission for overstepping its authority and creating a permanent market imbalance for broadband services by granting BPL affiliates waivers and other favorable regulatory treatment not available to cable or DSL providers.

In early May a California Administrative Law Judge issued a draft decision closing the California Public Utilities Commission’s investigation into the regulations it should apply to Voice over Internet Protocol services.  The draft decision states that "[o]ur investigation centered on determining the appropriate regulatory framework for VoIP.  Since the FCC has determined that it is charged with that role and is exercising its authority, we conclude that it is premature for us to assess what our regulatory role over VoIP will be and to address the issues raised in this investigation.  We anticipate the role for state commissions will be defined in the future."  The draft decision is subject to approval by the full Commission.

Upcoming Deadlines for Your Calendar

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