City of Dallas v. Federal Communications Commission

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_______________

No. 96-60502
_______________

CITY OF DALLAS, TEXAS,

Petitioner,

VERSUS

FEDERAL COMMUNICATIONS COMMISSION
and
UNITED STATES OF AMERICA,

Respondents.

* * * * * * * * * * * * * * * * * * * *

_______________

No. 96-60581
_______________

CITY OF DALLAS, TEXAS,

Petitioner,

VERSUS

FEDERAL COMMUNICATIONS COMMISSION
and
UNITED STATES OF AMERICA,

Respondents.

* * * * * * * * * * * * * * * * * * * *
 _______________

No. 96-60844
_______________

NATIONAL CABLE TELEVISION ASSOCIATION, INC.,

Petitioner,

VERSUS

FEDERAL COMMUNICATIONS COMMISSION
and
UNITED STATES OF AMERICA,

Respondents.

BELLSOUTH TELECOMMUNICATIONS, INC.,

Petitioner,

VERSUS

FEDERAL COMMUNICATIONS COMMISSION
and
UNITED STATES OF AMERICA,

Respondents.

UNITED STATES CONFERENCE OF MAYORS
and
NATIONAL ASSOCIATION OF TELECOMMUNICATIONS OFFICERS AND ADVISORS,

Petitioners,

VERSUS

FEDERAL COMMUNICATIONS COMMISSION
and
UNITED STATES OF AMERICA,

Respondents.
_________________________

Petitions for Review of Orders of the

2
 Federal Communications Commission
_________________________
January 19, 1999
Before SMITH, DUHÉ, and WIENER, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

The petitioners seek review of two orders of the Federal

Communications Commission (“FCC” or “Commission”) interpreting the

open video system (“OVS”) provisions of the Telecommunications Act

of 1996 (“the Act”), Pub. L. No. 104-104, 110 Stat. 56 (1996).1 We

grant the petitions for review and affirm in part and reverse in

part the Commission's orders.

I. Introduction.

Consistent with the Act’s primary goal of encouraging

competition in networked communication industries, the OVS pro-

visionsSSchiefly § 653 of the Act, 47 U.S.C. § 573SSaim to encourage

local exchange carriers (“LEC's”) to enter the market for video

programming delivery as OVS service providers. OVS's, which are

designed to compete with traditional cable television service,

resemble both common carriers and cable systems: Like common

carriers, they must share carriage capacity with unaffiliated

programming providers, but they may provide some programming of

1
See Implementation of Section 302 of the Telecommunications Act of 1996,
Second Report and Order, FCC 96-249 (released June 3, 1996) (“Rulemaking Order”),
on reconsideration, Third Report and Order, FCC 96-334 (released Aug. 8, 1996)
(“Reconsideration Order”).

3
their own, as cable companies may do. See 47 U.S.C.

§ 573(b)(1)(A).

To hasten the development of OVS's, Congress directed the FCC

to “complete all actions necessary (including any reconsideration)

to prescribe regulations” governing OVS's “[w]ithin 6 months after”

February 8, 1996, “the date of enactment of the [1996 Act].”

47 U.S.C. § 573(b)(1). Pursuant to this command, the agency

promulgated the orders under review.

Five petitioners challenge various aspects of the orders. The

challenges fall into three categories. The National Association of

Telecommunications Advisors and Officers (“NATOA”), the City of

Dallas, and the U.S. Conference of Mayors (collectively, the

“Cities”) complain of the impact of the Commission's OVS rules on

local governments. The National Cable Television Association

(“NCTA”) challenges the agency's treatment of cable operators under

the OVS rules. Finally, BellSouth, a LEC, attacks the requirement

that OVS operators obtain FCC approval of their certifications

before commencing construction related to their OVS's.

Agreeing with the Cities that the FCC exceeded its statutory

authority in granting OVS operators an enforceable right of access

to local rights-of-way, we reverse the rule preempting local

franchise requirements for OVS's. While we do not decide the issue

of what additional fees localities may charge OVS operators, we

affirm the limitations on fees localities may charge pursuant to

4
§ 653(c)(2)(B) of the Act, 47 U.S.C. § 573(c)(2)(B). We also

affirm the FCC's decision not to authorize local governments to

require OVS operators to provide institutional networks.

As for NCTA's claims, we reverse the agency's determination

that LEC's who are also cable operators may not provide OVS service

in the absence of effective competition. We invalidate and remand

the Commission's rules generally prohibiting in-region cable

operators from providing video programming on unaffiliated OVS

systems but permitting OVS operators to waive this prohibition. We

affirm, however, the rule prohibiting non-LEC cable operators who

do not face effective competition from operating OVS systems, and

the rule imposing the effective competition requirement on cable

operators whose franchises have expired. As BellSouth urges, we

reverse the requirement that carriers obtain the Commission's

approval before constructing new physical plants needed to operate

OVS systems.

II. Historical Background of the OVS Provisions.

We begin by tracing the history of cable regulation and

considering how OVS service differsSSboth in how it operates and in

how it is regulatedSSfrom traditional cable service and from common

carriers. Cable television first became publicly available in the

1950's. For more than a decade, the FCC refrained from regulating

the new service, believing it lacked authority to do so under

either the common carrier provisions of title II of the Communica-

5
tions Act or the radio transmission provisions of title III.

By the mid-1960's, however, the FCC had concluded that it

could not effectively discharge its statutory duty to regulate

broadcasting in the public interest without regulating cable, whose

proliferation could significantly affect broadcasting. The Supreme

Court upheld the agency's authority to adopt cable regulations that

were “reasonably ancillary to the effective performance of the

Commission's various responsibilities for the regulation of

television broadcasting.” United States v. Southwestern Cable Co.,

392 U.S. 157, 178 (1968). In 1970, the Commission, concerned with

preventing the expansion of local monopolies, adopted rules

prohibiting telephone companies from providing cable service in

their telephone service areas (the “cable-telephone company cross-

ownership ban”).

Almost twenty years after the FCC began regulating cable,

Congress weighed in for the first time, enacting the Cable

Communications Policy Act of 1984, which added title VI provisions

governing cable operators to the Communications Act. To preserve

the role of municipalities in cable regulation, title VI provided

that, with limited exceptions, “a cable operator may not provide

cable service without a franchise.” 47 U.S.C. § 541(b)(1).

Title VI also codified the cable-telephone company cross-ownership

ban.2

2
See 47 U.S.C. § 533(b) (1985), repealed by Telecommunications Act of 1996
(continued...)

6
 The robust growth of the cable industry in the 1980's caused

the FCC to reassess the need for the cable-telephone company cross-

ownership ban, and in 1992 the Commission recommended that Congress

lift the ban. When Congress did not immediately do so, the FCC

amended its rules to permit the provision of “video dialtone,” a

new service that would offer video programming over telephone

company facilities without violating the cross-ownership restric-

tion.

The Commission planned to regulate video dialtone under

title IISSthe common carrier provisions of the Communications Act.

Despite the Commission’s good intentions, the video dialtone policy

failed to provide any significant competition for cable systems.

Meanwhile, incumbent cable operators largely maintained their

monopoly positions.

Faced with this situation, Congress, in enacting the Telecom-

munications Act of 1996, sought to introduce competition into the

market for video programming delivery. Most significantly, the

statute repealed § 613(b), 47 U.S.C. § 533(b), the cable-telephone

company cross-ownership ban. See 1996 Act, § 302(b)(1). In

addition, § 653 of the 1996 Act, 47 U.S.C. § 573, created a new

method for entry into the market for video programming delivery:

the OVS.

2
(...continued)
§ 302(b)(1), Pub. L. No. 104-104, 1996 U.S.C.C.A.N. (110 Stat. 124) (hereinafter
“1996 Act”).

7
 Section 653 distinguishes OVS operators from common carriers

of video programming and traditional cable operators. Unlike

common carriers, OVS operators may select some of the video

programming transmitted over their systems; but, unlike cable

operators, OVS operators must make most of the channel capacity on

their systems available to unaffiliated video programming providers

on a nondiscriminatory basis. See 47 U.S.C. § 573(b)(1)(A). If

demand for OVS channel capacity exceeds supply, an OVS operator may

select programming for no more than one-third of the system's

channel capacity. See 47 U.S.C. § 573(b)(1)(B).

In other respects, OVS operators face fewer regulatory burdens

than do common carriers or cable operators. OVS operators are

exempt from the title II requirements governing common carriers.

See 47 U.S.C. § 573(c)(3). In addition, a number of the title VI

obligations imposed on traditional cable operatorsSSincluding the

franchise requirement under § 621 and the payment of franchise fees

under § 622SSdo not apply to OVS operators. See 47 U.S.C.

§ 573(c)(1)(C).

The Act does provide for some continued local regulatory

authority. Section 653 permits local governments to assess fees on

the gross revenues of OVS operators “in lieu of” cable franchise

fees, see 47 U.S.C. § 573(c)(2)(B), and § 601(a) of the Act

specifically provides that the amendments shall not impliedly

preempt state or local law, see 47 U.S.C. § 152(c)(1).

8
 III. Standard of Review.

Most of the petitioners' claims involve the question whether

the FCC had statutory authority to adopt various regulations in the

orders under review. When statutory construction is at issue, we

must review the Commission's interpretation under the standard

articulated in Chevron, U.S.A., Inc. v. Natural Resources Defense

Council, Inc., 467 U.S. 837 (1984), under which we first must

determine “whether Congress has directly spoken to the precise

question at issue.” Id. at 842. Where the intent of Congress is

clear, “the court, as well as the agency, must give effect to the

unambiguously expressed intent of Congress.” Id. at 842-43. On

the other hand, “if the statute is silent or ambiguous with respect

to the specific issue, the question for the court is whether the

agency's answer is based on a permissible construction of the

statute.” Id. at 843.

In resolving this question, we “may not substitute [our] own

construction of a statutory provision for a reasonable interpreta-

tion made by the administrator of an agency.” Id. at 844.

Instead, we generally must defer to the agency's interpretation

unless it is “manifestly contrary to the statute.” Id. at 844.

The petitioners bear the “difficult burden” of proving that the

FCC's interpretation of an ambiguous statutory provision conflicts

9
with the statutory scheme.3

IV. The Cities' Claims.

The petitioners representing the interests of local govern-

mentsSSthe City of Dallas, the U.S. Conference of Mayors, and

NATOASScomplain of the effects of the FCC orders on local govern-

ment. They assert that the FCC erred (1) in exempting OVS

operators from local franchise requirements; (2) in limiting the

compensation localities may recover under § 653(c)(2)(B) for use of

local rights-of-way; (3) in failing to authorize local governments

to require OVS operators to provide institutional networks; and

(4) in adopting rules that permit entities other than LEC's to

become OVS operators.

A. Exemption of OVS Operators from Franchise Requirements.

The Cities assert that the Commission exceeded its statutory

authority in exempting OVS operators from local franchise require-

ments. In the alternative, they claim that the agency's resolution

of this issue violates the Fifth and Tenth Amendments to the

Constitution. Because we agree with the Cities that the preemption

of local franchising authority violates the plain meaning of the

3
See Sta-Home Home Health Agency, Inc. v. Shalala, 34 F.3d 305, 309 (5th
Cir. 1994) (quoting Sun Towers, Inc. v. Heckler, 725 F.2d 315, 325 (5th Cir.
1984)).

10
statutory text, we do not reach the Cities' constitutional

arguments.

Section 653(c)(1)(C) of the 1996 Telecommunications Act states

that, with a few exceptions, parts III and IV of title VI shall not

apply to OVS operators. See 47 U.S.C. § 573(c)(1)(C). Included in

the title VI provisions that do not apply is § 621(b)(1), which

provides that, with some minor exceptions, “a cable operator may

not provide cable service without a franchise.” 47 U.S.C.

§ 541(b)(1). Based on the interplay of these statutory provisions,

the FCC reasoned that “[a]ny State or local requirements . . . that

seek to impose Title VI 'franchise-like' requirements on an open

video system operator would directly conflict with Congress'

express direction that open video system operators need not obtain

local franchises as envisioned by Title VI.” Rulemaking Order

¶ 211.

The Commission thus concluded that once it has certified an

entity as an OVS operator, that entity has an enforceable right to

access the right-of-way. That enforceable right is not subject to

local franchising authority. Id.; Reconsideration Order ¶ 193.

The FCC's preemption of local franchising requirements is at

odds with the Act's preservation of state and local authority and

with a “clear statement” principle the Supreme Court has articu-

lated. Section 601(c)(1) of the Act, which was adopted at the same

time as § 653, directs that “the amendments . . . shall not be

11
construed to modify, impair, or supersede Federal, State or local

law unless expressly so provided in such Acts or amendments.” 1996

Act, § 601(c)(1). We conclude that § 653(c)(1)(C)'s statement that

parts of title VI, including § 621, shall not apply to OVS

operators does not constitute the express preemption of local

franchising authority that § 601(c) requires.

Section 621 states that a cable operator may not provide cable

service without a franchise. This amounts to a federal requirement

that a cable operator obtain a franchise from a local authority

before providing service. Eliminating § 621 results in the

deletion of the federal requirement that cable operators get a

franchise before providing service; it does not eviscerate the

ability of local authorities to impose franchise requirements, but

only their obligation to do so. Consequently, simply saying that

§ 621 shall not apply to OVS operators does not expressly preempt

local franchising authority, as § 601(c)(1) requires.

The FCC's broad reading of preemptive authority also conflicts

with Supreme Court precedent. In Gregory v. Ashcroft, 501 U.S. 452

(1991), the Court held that if Congress intends to preempt a power

traditionally exercised by a state or local government, “it must

make its intention to do so 'unmistakably clear in the language of

the statute.'” Id. at 460 (quoting Will v. Michigan Dep't of State

Police, 491 U.S. 58, 65 (1989)). In this statute, Congress

certainly did not provide the clear statement that Gregory

12
requires. Because § 601(c)(1) and Gregory prohibit implied

preemption, and because § 653(c)(1)(C) expressly preempts only the

federal requirement of a local franchise, not the localities'

freedom to impose franchise requirements as they see fit, the

Commission erred in ruling that § 653 prohibits local authorities

from requiring OVS operators to obtain a franchise to access the

locally maintained rights-of-way.

The Commission argues that the position we adopt is based on

“the flawed premise that local governments possess cable franchis-

ing authority independent of § 621.” Without citing any

authority,4 the agency states that “[a]fter the 1984 Cable Act

added Title VI to the Communications Act, Section 621 became the

exclusive source of local franchising authority over cable

operators,” id., so § 653(c)(1)(C)'s directive that § 621 “shall

not apply” to OVS operators expressly preempts local franchising

authority over OVS operators, as § 601(c)(1) and Gregory require.

We cannot agree with the Commission's unsupported assertion

that local franchising authority arises from § 621. While the

agency cites no support for its position, there are persuasive

4
Instead of citing authority for the proposition that franchising
authority rests solely on § 621, the Commission merely argues that the Cities
must recognize that the source of their franchising authority lies in § 621, for
“[i]n 1994, when a number of local authorities . . . challenged the FCC's
determination that the franchise requirement of § 621 did not apply to video
dialtone, not a single city argued that it had independent authority to require
a video dialtone franchise regardless of whether § 621 applied.” There may have
been a number of reasons for various cities' decision, and we will not attempt
to discern a rule of law from unaffiliated parties' litigation strategies in
another case.

13
dicta supporting the contrary view that § 621 merely codified and

restricted local governments' independently-existing authority to

impose franchise requirements.5

Moreover, the legislative history of the 1984 Cable Act

contradicts the Commission's claim that that Act established § 621

as the sole source of franchising authority. According to the

House Report on H.R. 4103, whose terms were later incorporated into

S. 66 to become the 1984 Cable Act,

Primarily, cable television has been regulated at the
local government level through the franchise pro-
cess. . . . H.R. 4103 establishes a national policy that
clarifies the current system of local, state, and Federal
regulation of cable television. This policy continues
reliance on the local franchising process as the primary
means of cable television regulation, while defining and
limiting the authority that a franchising authority may
exercise through the franchise process.

H.R. Rep. No. 98-934, at 19 (1984). These sources suggest that

franchising authority does not depend on or grow out of § 621.

While § 621 may have expressly recognized the power of localities

to impose franchise requirements, it did not create that power, and

elimination of § 621 for OVS operators does not eliminate local

franchising authority.

The Commission could come to a contrary conclusion only by

5
See National Cable Television Ass'n v. FCC, 33 F.3d 66, 69 (D.C. Cir.
1994) (noting that one of the purposes of the 1984 Cable act was to “preserve[]
the local franchising system”); Time Warner Entertainment Co., L.P. v. FCC,
93 F.3d 957, 972 (D.C. Cir. 1996) (“[P]rior to the passage of the 1984 Cable Act,
and thus, in the absence of federal permission, many franchise agreements
provided for [public, educational and governmental access] channels. . . .
Congress thus merely recognized and endorsed the preexisting practice . . . .”).

14
reading its preemptive authority broadly. But § 601(c) precludes

a broad reading of preemptive authority, as does Gregory, 501 U.S.

at 460 (opining that courts must “assume Congress does not exercise

[the power to preempt] lightly” and must require Congress to state

clearly its intent to preempt). Chevron deference is not appropri-

ate here, for Congress, in § 601(c), already has resolved the issue

of preemption of local franchising authority.

The FCC also argues that to achieve Congress's deregulatory

objectives, it is necessary to interpret the statute to preempt

local franchising authority to achieve Congress's deregulatory

objectives. The provisions of title VI that “shall not apply” to

OVS operators do not merely require cable operators to obtain a

franchise from a local authority; they also place limits on the

conditions and restrictions a local franchising authority may

impose. See, e.g., 47 U.S.C. § 541(a)(2). The Commission

maintains that if § 653(c)(1)(C) does not preempt local franchising

authority altogether, but instead simply directs that local

authorities will no longer be constrained to regulate OVS operators

as provided in Title VI, localities will be able to impose more

onerous regulations on OVS operators than on cable operators. This

result would conflict with Congress's express desire to reduce the

regulatory burdens OVS operators face relative to their cable

15
operator counterparts.6

While the agency's argument is plausible, it does not affect

our holding. The statutory text, read in the light of Gregory's

and § 601(c)(1)'s warnings against implied preemption, does not

support the Commission's interpretation, and apparent congressional

intent as revealed in a conference report does not trump a pellucid

statutory directive.

B. Limitation of Localities' Compensation Under § 653(c)(2)(B)
to a Percentage of the Gross Revenues of the OVS Operator.

Section 653(c)(2)(B) provides for local franchising authori-

ties to collect fees from OVS operators “in lieu of” franchise

fees:

An operator of an open video system under this part may
be subject to the payment of fees on the gross revenues
of the operator for the provision of cable service
imposed by a local franchising authority or other
governmental entity, in lieu of the franchise fees
permitted under section 542 of this title. The rate at
which such fees are imposed shall not exceed the rate at
which franchise fees are imposed on any cable operator
transmitting video programming in the franchise area
. . . .

47 U.S.C. § 573(c)(2)(B). In the orders on review, the Commission

concludes that the fees assessed on OVS operators under this

6
Congress plainly wanted to lower the regulatory hurdles OVS operators
face. The Conference Report explained that Congress was “streamlining the
regulatory burdens of [open video] systems” for a number of reasons, including
the need to promote competition and encourage new entrants in the market for
video programming delivery. See H. Conf. Rep. No. 104-458 (hereinafter
“Conference Report”) at 178. In addition, the heading that Congress adopted as
part of § 653(c)SS“REDUCED REGULATORY BURDENS FOR OPEN VIDEO
SYSTEMS”SSunderscores its purpose to subject OVS's to decreased regulation. See
47 U.S.C. § 573(c).

16
provision will be based solely on the gross revenues of the

operators, “not includ[ing] revenues collected by unaffiliated

video programming providers from their subscribers or advertisers.”

Rulemaking Order ¶ 220. In other words, localities can charge OVS

operators a percentage of the operators' revenue but not a

percentage of their unaffiliated programmers' revenue.

The Cities argue that the Commission erred in calculating the

fees chargeable to OVS operators. They assert that (1) the statute

does not preclude a franchise authority from levying charges on

persons, unaffiliated with the OVS operator, who provide video

programming on the OVS; and (2) the statute does not say that the

franchise authority may not impose additional charges on OVS

operators beyond the “in lieu of” fees authorized by

§ 653(c)(2)(B). Limiting an OVS operator's fees to a percentage of

its gross revenue would result in OVS operators' paying less than

cable operators, who do not have extensive obligations to make

their channels available to unaffiliated programmers and thus

collect for themselves most of the revenue generated by their cable

systems. This result, the Cities contend, is contrary to Con-

gress's desire, expressed in the legislative history, to maintain

“parity” between cable operators and OVS operators.7

We affirm the rule limiting the fees collectible under

§ 653(c)(2)(B) to a percentage of the OVS operator's gross revenue.

7
See Conference Report at 178 (describing the fee-in-lieu provisions as
“another effort to ensure parity among video providers”).

17
The plain language, which merely authorizes “fees on the gross

revenues of the operator,” forecloses the argument that fees

charged under § 653(c)(2)(B) may be based on the revenues of

unaffiliated video providers.

The reference in the legislative history to “parity” between

cable operators and their OVS counterparts is not dispositive. The

parity to which Congress referred in the Conference Report is a

parity of rates, not actual fees: The statute provides that “[t]he

rate at which such fees are imposed shall not exceed the rate at

which franchise fees are imposed on any cable operator transmitting

video programming in the franchise area . . . .” 47 U.S.C.

§ 653(c)(2)(B). Hence, the narrow rule in the agency orderSSthat

the fee-in-lieu assessed on OVS operators must be based solely on

the gross revenues of the operator and its programming affili-

atesSSis wholly consistent with the statute.

Because the Commission neither considered nor resolved the

issues of whether local governments could also require unaffiliated

programmers to pay fees on their OVS revenues and whether locali-

ties could levy fees on OVS operators in addition to the fees-in-

lieu, the Cities' arguments on these points are premature. The

sections of the FCC orders dealing with compensationSSthe only

compensation rules under review hereSSmerely provide that fees

charged to an OVS operator under § 653(c)(2)(B) may not be based on

unaffiliated programmers' revenues. See Rulemaking Order ¶ 220;

18
Reconsideration Order ¶¶ 115-22. The Cities argue that “the

statutory provision does not prohibit the receipt of other

compensation from the OVS operator, or limit fees that may be

imposed upon persons who use the OVS system to provide service to

subscribers.” But the FCC did not state otherwise in the orders at

issue, and the Cities did not raise these arguments in the

rulemaking proceedings. Accordingly, we decline to address these

claims.8

C. The Commission's Failure To Authorize Local Governments
To Require OVS Operators To Provide Institutional Networks.

The Commission's rules require an OVS operator to provide

capacity on an institutional network9 only if the operator has

voluntarily elected to build such a network. See 47 C.F.R.

§ 76.1505(e) (1997). If the OVS operator has not elected to build

an institutional network, the rules do not give local governments

authority to require construction of such a network. Id. NATOA

contends that the agency acted contrary to the statute in failing

to authorize local governments to demand that OVS operators provide

institutional networks. This argument rests on a misreading of the

statute.

8
See Time Warner Entertainment Co., L.P. v. FCC, 56 F.3d 151, 201 (D.C.
Cir. 1995) (precluding party from raising issue on appeal because it “did not
raise the issue before the Commission in the first instance”).

9
An institutional network is “a communication network which is constructed
or operated by the cable operator and which is generally available only to
subscribers who are not residential subscribers.” 47 U.S.C. § 531(f).

19
 NATOA's four-step statutory argument proceeds as follows:

(1) Section 653(c)(1)(B) states that § 611 shall apply to OVS

operators. 47 U.S.C. § 573(c)(1)(B). (2) Section 653(c)(2) then

provides that the obligations on OVS operators under § 611 shall be

“no greater or lesser” than they are for cable operators.

47 U.S.C. § 573(c)(2). (3) Section 611 permits localities to

require cable operators to provide institutional networks.

47 U.S.C. § 531(b). (4) Hence, § 611, which applies jot-for-jot to

OVS operators, must permit localities to require OVS operators to

provide institutional networks. The problem with this argument

lies in step three: Contrary to NATOA's assertion, § 611 does not

permit localities to require cable operators to build institutional

networks but instead, by its terms, merely states that “[a]

franchising authority may . . . require . . . that . . . channel

capacity on institutional networks be designated for educational or

governmental use . . . .” 47 U.S.C. § 531(b). In other words,

localities may require that cable operators devote space on their

existing institutional networks, if there are any such networks, to

educational or governmental use, but the statute does not authorize

local governments to require the construction of institutional

networks.

Section 621(b)(3)(D) also indicates that NATOA is in error in

reading § 611 as empowering localities to require such construc-

tion. That section states:

20
 Except as otherwise permitted by sections 611 and 612 of
this title, a franchising authority may not require a
cable operator to provide any telecommunications service
or facilities, other than institutional networks, as a
condition of the initial grant of a franchise, a fran-
chise renewal, or a transfer of a franchise.

47 U.S.C. § 541(b)(3)(D) (emphasis added). If § 611 authorized

localities to require provision of institutional networks, the

words “other than institutional networks” would be surplusage.

Thus, the plain language of § 611(b), buttressed by the implicit

interpretation § 621(b)(3)(D) provides, supports the Commission's

conclusion that § 611(b) does not authorize local governments to

require the construction of institutional networks.10

D. Permitting Entities Other than LEC's To Become OVS Operators.

The first two sentences of § 653(a)(1) of the Act state:

A local exchange carrier may provide cable service
to its cable service subscribers in its telephone service
area through an open video system that complies with this
section. To the extent permitted by such regulations as
the Commission may prescribe consistent with the public

10
The FCC and Intervenors RCN and Bell Atlantic argue that § 621(b)-
(3)(D)SSnot § 611(b)SSis the source of local franchising authorities' power to
order cable operators to provide institutional networks. NATOA responds
convincingly by noting that the 1996 Act added § 621(b)(3)(D) and that the
obligation to provide institutional networks pre-dated the 1996 Act. Obviously,
then, the obligation could not stem from § 621(b)(3)(D).

This observation, however, does not disturb the conclusion that § 611(b)
does not authorize localities to order provision of institutional networks. That
conclusion follows from (1) the fact that the plain language of § 611(b) does not
give localities authority to order institutional networks, and (2) Congress's
implied assertion, in § 621(b)(3)(D), that § 611(b) does not grant such
authority. We do not have to decide that § 621(b)(3)(D) is the source of
localities' authority to order institutional networks to conclude that § 611(b)
is not the source of such authority. NATOA has cited no case or agency decision
interpreting § 611(b) to permit localities to order institutional networks, and
the plain language of § 611 does not provide such authority.

21
 interest, convenience, and necessity, an operator of a
cable system or any other person may provide video
programming through an open video system that complies
with this section.

47 U.S.C. § 573(a)(1). The orders under review permit non-LEC

cable operators who face “effective competition” to provide cable

service as OVS operators.

NATOA argues that the FCC erred in allowing non-LEC's to

provide OVS service, for Congress expressly permitted only LEC's to

do so. NATOA points out that the first sentence of § 653(a)(1)

says LEC's may provide “cable service” through an OVS, and the

second sentence merely gives the FCC authority to permit cable

operators to provide “video programming.” See 47 U.S.C.

§ 573(a)(1). NATOA notes that not only do these terms have

different common meaningsSScable service refers to the physical

connections, while video programming means television showsSSbut

they are also defined differently in the statute.

Section 602(6) defines “cable service” as “(A) the one-way

transmission to subscribers of (i) video programming, or (ii) other

programming service, and (B) subscriber interaction, if any, which

is required for the selection or use of such video programming or

other programming service.” 47 U.S.C. § 522(6). Section 602(20)

states that “the term 'video programming' means programming

provided by, or generally considered comparable to programming

provided by, a television broadcast station.” 47 U.S.C. § 522(20).

NATOA insists that the fact that Congress used two different terms

22
that it had defined differently elsewhere in the statute means that

it intended the two sentences of § 653(a)(1) to authorize two

distinct services: LEC's may provide cable service; cable

operators may only provide television shows on others' OVS systems.

The fact that the first sentence of § 653(a)(1) expressly

authorizes LEC's to provide OVS service, however, does not bar the

FCC from permitting other entities to provide it, for the FCC has

ancillary authority under § 4(i) of the Communications Act to

permit non-LEC's to be certified as OVS operators. Section 4(i)

gives the Commission authority to “perform any and all such acts,

make such rules and regulations, and issue such orders, not

inconsistent with [the Act], as may be necessary in the execution

of its functions.” 47 U.S.C. § 154(i). Even before Congress

expressly authorized any federal regulation of cable television,

both the Supreme Court and this court had acknowledged the

Commission's ancillary authority to regulate cable service under

§ 4(I). See United States v. Southwestern Cable Co., 392 U.S. 157,

171-78 (1968); General Tel. Co. v. FCC, 449 F.2d 846, 853-54 (5th

Cir. 1971). If the FCC had ancillary authority to adopt an entire

regulatory regime for cable television, it surely has ancillary

authority to extend to non-LEC's the permission to operate OVS's.

NATOA contends that § 4(i) does not apply, because the FCC's

actions are inconsistent with the Act. NATOA fails, however, to

point out the inconsistency. Citing no statutory provision that

23
supports its view, it states that “Congress never intended to allow

non-LEC's to be OVS operators.”

The language in § 653(a)(1) is not inconsistent with the

agency's interpretation. Sentence one says LEC's may provide cable

service, and sentence two merely states that cable operators may

provide video programming according to rules the FCC prescribes.

Permitting cable operators also to provide cable service according

to rules the Commission prescribes is in no way inconsistent with

the language of either of these sentences. Hence, the Commission

did not exceed its authority in adopting regulations permitting

non-LEC's to be certified as OVS operators.

V. The Cable Companies' Claims.

In its orders, the Commission generally takes the position

that a cable operator may provide neither OVS service nor video

programming on an unaffiliated, in-region OVS unless the cable

operator faces “effective competition.”11 This effective-competi-

tion requirement applies to LEC's that are also cable operators,

see Rulemaking Order ¶ 25, as well as to cable operators whose

cable franchises have terminated, see Reconsideration Order ¶ 27.

The rules regarding carriage of video programming do, however,

allow OVS operators to ignore the general ban on in-region cable

11
See Rulemaking Order ¶¶ 23, 25, 26 (stating that cable operator may not
provide OVS service in its cable service area in absence of effective competi-
tion); Reconsideration Order ¶ 51 (stating that cable operator generally may not
obtain programming capacity on an unaffiliated in-region OVS).

24
operators' providing programming on unaffiliated OVS's. An OVS

operator has discretion to determine whether it will carry an in-

region cable operator's programming. See Reconsideration

Order ¶ 52.

The NCTA challenges these rules on several grounds. First, it

argues that the Commission exceeded its statutory authority in

prohibiting LEC's that are also cable operators from being eligible

to be OVS operators in the absence of effective competition. Next,

it avers that it is arbitrary and capricious for the FCC to impose

an effective competition requirement on cable operators that seek

to provide OVS service in their cable service areas. Third, it

contends that even if it is reasonable for the agency to impose the

effective-competition requirement on current cable operators, it is

arbitrary and capricious for it to impose the requirement on cable

operators whose cable franchises have terminated. Finally, NCTA

urges that the Commission's rules generally prohibiting cable

operators from providing video programming on in-region OVS's, but

giving the OVS operators the discretion to grant access to cable

operators, violate provisions of the Act prohibiting discrimination

by OVS operators.

A. The Effective-Competition Requirement for LEC's
That Are Also Cable Operators.

The Commission contends that its rule prohibiting cable

operators who are also LEC's from providing OVS service in the

25
absence of effective competition represents a reasonable interpre-

tation of ambiguous statutory language and thus deserves Chevron

deference. Because we believe the Commission has ignored plain

text and has attempted to manufacture an ambiguity in order to

obtain an increased level of judicial deference, we invalidate the

rule imposing an effective competition requirement on LEC's who are

also cable operators.

The Commission argues that the first two sentences of

§ 653(a)(1) leave an ambiguous “gap.” The first sentence states,

“A local exchange carrier may provide cable service to its cable

service subscribers in its telephone area through an open video

system that complies with this section.” 47 U.S.C. § 573(a)(1).

The meaning of that language is evident: LEC's in compliance with

§ 653 may provide OVS service.

The second sentence then provides, “To the extent permitted by

such regulations as the Commission may prescribe consistent with

the public interest, convenience, and necessity, an operator of a

cable system or any other person may provide video programming

through an open video system that complies with this section.” Id.

Again, the language appears untroubling: Cable operators and

others may provide video programming, which the FCC has defined to

include OVS service, to the extent the agency determines that their

doing so is in the public interest.

The Commission insists that ambiguity results from the

26
conjunction of these two sentences. Sentence one deals with LEC's,

sentence two with cable operators; the statute is silent as to

LEC's who are also cable operators. Hence, the statute is

ambiguous, the Commission asserts, and in the face of such

congressional silence or ambiguity, we should defer to the agency's

reasonable interpretation that “hybrid” LEC/cable operators should

be governed by sentence two and thus are subject to the FCC's

public interest standards.

We do not accept the Commission's claim that the statute is

ambiguous as to “hybrid” LEC/cable operators. The language of

sentence one is straightforward: “A local exchange carrier may

provide cable service to its cable service subscribers in its

telephone area through an open video system that complies with this

section.” 47 U.S.C. § 653(a)(1) (emphasis added). The FCC

recognized the unequivocal nature of this provision when it stated,

“[T]he first sentence of Section 653(a)(1) allows LECs, without

qualification, to operate open video systems within their telephone

service areas . . . .” Rulemaking Order ¶ 25.

The Commission's assertion that Congress was silent as to

“hybrid” LEC's and that the Commission thus may treat them not as

LEC's under sentence one, but as cable operators under sentence

two, is not convincing. The agency claims that Congress was silent

on how to treat hybrid LEC's because it just never thought about

such entities. The Commission explains, “In light of the cross-

27
ownership ban, it is hardly surprising that Congress failed

specifically to address the conditions under which the hybrid

company described by NCTA could operate an open video system,

because no such company existed.” But such companies did exist,

and Congress did know about them.

While a general telephone company-cable cross-ownership ban

existed prior to the Act, for years telephone companies have been

able to apply for permission to provide cable service in their

telephone service areas pursuant to waivers or the liberal rural

telephone company exemption provided in the statute. See 47 U.S.C.

§ 533(b)(3), repealed by § 302(b)(1) of the 1996 Act. In 1984,

Congress codified the Commission's previously existing cable-

telephone company cross-ownership ban but eliminated the require-

ment that rural LEC's apply for exemption from the ban. It did so

out of concern that the FCC had been interpreting the cross-

ownership ban in such a way as “unnecessarily [to] prevent[] some

rural telephone companies from offering cable television service in

rural areas.”12 Apparently, then, although Congress was well aware

that there are LEC's that are also cable operators,13 it nonetheless

12
H.R. Rep. No. 98-934, at 56-57 (1984) (“It is the intent of Section
613(b) to codify current FCC rules concerning the provision of video programming
over cable systems by common carriers, except to the extent of making the
exemption for rural telephone companies automatic.”).
13
Moreover, two of the primary goals of the Act were to facilitate cable
companies' becoming LEC's and to permit LEC's to become cable companies. See
Conference Report at 148 (noting that “meaningful facilities-based [local
telephone] competition is possible given that cable services are available to
(continued...)

28
stated “without qualification” that LEC's may provide OVS service.

Congress also knew how to distinguish among respective groups

of LEC's, and the fact that it did not single out cable operator-

LEC's for different treatment under sentence one of § 653(a)(1)

indicates that it intended all LEC's to be treated the same. When

Congress wanted to distinguish traditional, “incumbent” LEC's from

the new “competitive” LEC's (including cable companies) whose entry

the Act facilitated, it did so in plain terms.

For instance, Congress established different interconnection

obligations for incumbent LEC's versus all LEC's. Compare

47 U.S.C. § 251(b) (obligations of all LEC's) with § 251(c)

(additional obligations of incumbent LEC's). The absence of

distinction among LEC's in sentence one indicates that Congress

intended the provision to cover all LEC's.

Finally, we reject the agency's reading of § 653(a)(1),

because it nullifies the first sentence of the provision. The

second sentence permits the Commission to apply its public interest

criteriaSSthe statutory basis for its effective-competition

requirementSSto “any other person” as well as to cable operators.

See 47 U.S.C. § 573(a)(1). If sentence one is subject to sentence

two, as the Commission's reading suggests, then every LEC is

13
(...continued)
more than 95 percent of United States homes” and that “[s]ome of the initial
forays of cable companies into the field of local telephony therefore hold the
promise of providing the sort of local residential competition that has
consistently been contemplated”); 47 U.S.C. § 571(a)(3) (§ 651(a)(3) of the Act)
(permitting LEC's to provide cable service).

29
covered by the second sentence and may provide video programming

only at the Commission's discretion.

Under this reading, however, the first sentence is a nullity,

because the FCC may always decide, on the basis of the public

interest, convenience, and necessity, which persons may provide

video programming. The only way to avoid nullifying the first

sentence is to recognize that the sentence carves out a

groupSSLEC'sSSwhose right to provide video programming is not

subject to the agency's public interest standard.

B. The Effective Competition Requirement for Cable Operators
Who Seek To Provide OVS Service.

NCTA challenges the rule that cable operators may not operate

OVS's in their cable service areas unless they face effective

competition, but it does not claim that the plain language of § 653

forecloses the effective-competition requirement. Instead, NCTA

argues that the Commission has exercised its authority in an

arbitrary and capricious manner in adopting the effective-competi-

tion requirement under § 653(a)(1)'s public interest standard.14

In particular, NCTA argues that the effective-competition require-

ment is unnecessary because OVS creates its own competition.15

14
See 5 U.S.C. § 706(2) (requiring reviewing courts to “hold unlawful and
set aside agency action, findings, and conclusions found to be . . . arbitrary,
capricious, an abuse of agency discretion, or otherwise not in accordance with
law”).
15
OVS's create their own competition because each OVS operator must
(continued...)

30
Because of the deference accorded agency judgments regarding the

public interest, and because the agency considered appropriate

arguments and reasonably adopted its conclusion, we affirm the

general effective competition requirement.

Judicial deference to agency judgments is near its zenith

where issues of the public interest are involved. In FCC v. WNCN

Listeners Guild, 450 U.S. 582, 596 (1980), the Court explained that

its opinions had “repeatedly emphasized that the Commission's

judgment regarding how the public interest is best served is

entitled to substantial judicial deference.” Accordingly, the

Court held that

[t]he Commission's implementation of the public-interest
standard, when based on a rational weighing of competing
policies, is not to be set aside by the Court of Appeals,
for the weighing of policies under the public interest
standard is a task that Congress has delegated to the
Commission in the first instance.

Id.16 Given these precedents, we affirm the Commission's policy

choice if it considered competing arguments and articulated a

reasonable basis for its conclusion. It did both.

NCTA presented to the FCC its argument that an effective-

competition requirement is unnecessary because an OVS creates its

15
(...continued)
surrender two-thirds of the system's carrying capacity to unaffiliated
programmers, as long as there is demand for carriage. 47 U.S.C. § 573(b)(1)(B).

16
See also American Transfer & Storage Co. v. Interstate Commerce Comm'n,
719 F.2d 1283, 1300 (5th Cir. 1983) (deferring to ICC's view of how to promote
public interest); Missouri-Kansas-Texas R.R. v. United States, 632 F.2d 392,
399-400 (5th Cir. 1980).

31
own competition, see Reconsideration Order ¶ 21, but the Commission

reasonably rejected that argument. The agency concluded, “There is

no assurance that any particular system will generate sufficient

competition between providers of 'comparable' video programming

services to qualify as a meaningful stand-in for effective

facilities-based competition.” Id. at ¶ 26. This, we believe,

represents a fair weighing of policies and a reasonably-based

conclusion.

The Commission did provide a plausible basis for its

effective-competition requirement. In essence, it determined, on

the basis of the text and legislative history of the Act, that

Congress wanted to exempt OVS operators from much title VI

regulation because they would be competing with incumbent cable

subscribers. If an entity is not facing competition, it should not

get the regulatory “break” the OVS provisions provide, especially

as its greater market power likely merits increased regulation.

Hence, the effective-competition requirement works to ensure that

the regulatory relief in § 653 is properly targeted at new

entrants. See Reconsideration Order ¶ 25.17

17
That part of the order states:

We believe that Congress exempted open video system operators from
much of Title VI regulation because, in the vast majority of cases,
they will be competing with incumbent cable operators for subscrib-
ers. Our effective competition restriction implements Congress'
intent by ensuring that, where it is the incumbent cable operator
itself that seeks to enter the marketplace as an open video system
operator, there is at least one other multichannel video programming
provider competing in the market (or, if the cable operator enters
(continued...)

32
 Given this reasonable argument and the substantial deference

courts should afford agencies implementing public interest

standards, see WNCN Listeners Guild, 450 U.S. at 596, we uphold the

effective competition rule.18 While we might have weighed the

competing policies differently, we cannot say that the balance the

Commission struck is irrational.

C. Extending the Effective Competition Requirement to
Cable Operators Whose Cable Franchises Have Terminated.

NCTA advances two arguments in support of its claim that the

Commission acted arbitrarily and capriciously in adopting a rule

precluding cable operators who do not face effective competition

17
(...continued)
under the “low penetration” test for effective competition, that it
does not possess a level of market power that Congress believed
requires regulation).

Reconsideration Order ¶ 25.

18
NCTA makes two other arguments that are worth addressing. It asserts
that if Congress had been as focused on fostering competition as the Commission
suggests, it would have forbidden OVS operators to start up service in areas
where they would be the sole video programming providers. There are two
responses to this argument. First, because 96% of homes have cable access, it
was reasonable for Congress not to spend time legislating over the few instances
in which an OVS operator who starts up will not face competition. See
Reconsideration Order ¶ 26. Second, while competition is ideal and should be
pursued to the extent possible, it is certainly in the public interest for OVS
operators to enter markets where there is no video programming. While they would
have a monopoly, at least some form of cable service would be available at some
price.

NCTA also argues that the fact that the FCC exempts cable operators from
the effective competition rule when entry by a competitor is infeasible, see
Rulemaking Order ¶ 24, indicates that the effective-competition rule is
irrational. Again, the fact that the Commission permits OVS service to exist by
itself in a few areas where competition simply could not occur does not mean that
it is irrational (or “arbitrary and capricious”) to require effective competition
when such competition is feasible.

33
from providing OVS service even after their cable franchises have

terminated. Although couched as a claim that the Commission made

an arbitrary and capricious policy choice, the first argument NCTA

makes is really a statutory claim. It contends that, as a matter

of law, once a cable operator's franchise has been terminated, it

is no longer a “cable operator” under the Act and therefore should

be subject to the same OVS requirements as “any other person.”19

In other words, the rule requiring effective competition for cable

operators does not apply to ex-cable operators.

While NCTA may be correct from a purely formalistic perspec-

tive, we do not find this argument convincing. Under the second

sentence of § 653(a)(1), the FCC could always regulate video

programming by former cable operators by using its power to set the

terms under which “any other person” may provide such programming.

For example, it could adopt a rule stating, “Any other person who

seeks to provide OVS service must face effective competition if he

used to be a franchised cable operator.” Such a rule would be

identical in substance to the rule the agency has adopted, and we

decline to require such extreme formalism.

NCTA's second argument does attack the soundness of the FCC's

policy choice. NCTA contends that a cable operator loses its

market power when it gives up its franchise, and it therefore

19
See 47 U.S.C. § 573(a)(1) (stating that “an operator of a cable system
or any other person may provide video programming” according to the rules the
Commission promulgates in the public interest).

34
should not be subject to the effective-competition requirement.

Because a cable operator may not provide cable service without a

franchise, see 47 U.S.C. § 541(b)(1), a disenfranchised cable

operator is impotent; it cannot provide any video programming, much

less dominate the local market. Moreover, even if the company is

certified as an OVS operator, it loses much of its market power

because it must surrender up to two-thirds of its programming

capacity. See 47 U.S.C. § 573(b)(1)(B). Hence, NCTA argues, the

Commission's decision to impose the effective-competition require-

ment on cable operators who have lost their franchises is arbitrary

and capricious.

The Commission offers a plausible response. It contends that

a cable company does not lose its market power upon losing its

franchise, for “[a] cable operator's market power arises from,

among other things, the ownership of its transmission network, its

customer base, and its carriage agreements with various program-

mers[,] . . . factors [that] would survive the termination of an

operator's cable franchise and would put any would-be competitor at

a substantial disadvantage.” Moreover, the Commission argues, if

a cable company could avoid the effective-competition rule by

giving up its franchise, it could just let the franchise expire,

then offer OVS service over its existing network. By so doing, it

35
could maintain its monopoly position20 and get the regulatory relief

available to OVS operators, who are expected to be new entrants.

Given this rational basis for the FCC's policy determination and

the deference owed its public interest decisions, we affirm the

rule precluding cable operators who do not face effective competi-

tion from providing OVS service even after their cable franchises

terminate.

D. Prohibiting In-region Cable Operators from Obtaining
Capacity on an OVS, While Permitting OVS Operators
To Waive This General Prohibition.

Claiming authority under sentence two of § 653(a)(1),

47 U.S.C. § 573(a)(1), the FCC generally banned cable operators

from providing video programming on unaffiliated OVS systems within

their cable service areas.21 The Commission also ruled, however,

that “a competing, in-region cable operator may access an open

video system when the open video system operator determines that it

is in its interests to grant access.”22 In other words, an OVS

operator has discretion to determine whether it will carry a cable

20
Of course, if the cable company gave up its cable franchise, the locality
likely would accept bids for a new cable operator. But whatever entity began cable
operations would have to construct or acquire a networkSSa costly and time-consuming
venture. The former cable operator probably would maintain a monopoly position and
get the benefits of regulatory relief, for some time.

21
See Reconsideration Order ¶ 51 (providing that “pursuant to the second
sentence of Section 653(a)(1), the public interest, convenience and necessity is
served by generally prohibiting a competing, in-region cable operator from
obtaining capacity on an open video system”).

22
Id. ¶ 52.

36
operator's video programming. Because this regulation is contrary

to the plain language of § 653(b)(1)(A), which requires the

Commission to “prohibit an operator of an open video system from

discriminating among video programming providers with regard to

carriage on its open video system,” 47 U.S.C. § 573(b)(1)(A), we

invalidate these rules and remand for further consideration. On

remand, the agency must forbid discrimination among video program-

ming providers, as § 653(b)(1)(A) requires.

The agency contends that its two rules (the “general prohibi-

tion” and the “discretion to waive the general prohibition”) are

authorized by the second sentence of § 653(a)(1), which provides

that a cable operator “may provide video programming through an

open video system” only “[t]o the extent permitted by such

regulations as the Commission may prescribe consistent with the

public interest, convenience, and necessity.” 47 U.S.C. § 573-

(a)(1). The general prohibition is authorized because the

Commission has determined that the public interest would best be

served by generally banning carriage of a cable operator's

programming on an OVS. This is so because “a competing, in-region

cable operator should be encouraged to develop and upgrade its own

system, rather than to occupy capacity on a competitor's system

that could be used by another video programming provider.”

Rulemaking Order ¶ 52.

This rule, the Commission argues, does not conflict with

37
§ 653(b)(1)(A)SSthe provision requiring it to enact regulations to

prohibit discrimination by OVS operators against and among video

programmersSSbecause “[b]y definition, an OVS operator does not

discriminate by denying carriage to one who, pursuant to the

Commission's rules, is not eligible 'to provide video programming

through an open video system.'” In other words, the Commission has

adopted a blanket rule that in-region cable operators are not

eligible to provide programming, and denying carriage of ineligible

cable operators' programming therefore is not discrimination

against a video programming provider.

This “eligibility” argument does not work as long as OVS

operators are permitted to ignore the ban and carry cable opera-

tors' video programming. If OVS operators may disregard the

general prohibition, then the FCC has not really declared cable

operators ineligible.

If the Commission is declaring cable operators ineligible to

the extent OVS operators want them to be ineligible, then it is

permitting discrimination by OVS operators among video programming

providers. Section 653(b)(1)(A) requires the agency not to do

that. Alternatively, the Commission is impermissibly delegating to

the OVS operators its authority to determine “the extent” to which

cable operator carriage promotes the public interest.23

23
See Carter v. Carter Coal Co., 298 U.S. 238, 310-11 (1936); Sierra Club
v. Sigler, 695 F.2d 957, 963 n. 3 (5th Cir. 1983) (holding that “an agency may
not delegate its public duties to private entities”); National Ass'n of
(continued...)

38
 The FCC argues that there is no impermissible delegation here,

as there was in the cases cited, because those cases involved

delegation where a private party had been given regulatory power

that could be exercised to the detriment of other regulated

entities or for the improper benefit of the entity receiving the

delegation. Here, by contrast, the OVS operator is merely given

power to invoke an exception and thereby benefit, at its discre-

tion, another regulated entity. The rule has the same effect as

would a private party's decision not to seek enforcement of some

administrative restriction against a regulated entity.

This argument elevates form over substance. Regardless of

whether the rule is that OVS operators may choose to disregard a

default rule granting cable operators carriage rights, or is that

they may elect to disregard one denying such rights, the fact

remains that they are being permitted to choose whether they want

to give cable operators access rights. This is a delegation of

regulatory authority to impose a cost on another regulated entity

and, hence, violates general principles of administrative law as

well as the particular anti-discrimination provisions of § 653(b).

The FCC's formalistic wrangling amounts to a distinction without a

difference, and the genesis of the rule reveals as much: Not until

the cable operators complained about illegal discrimination did the

23
(...continued)
Regulatory Utility Comm'rs v. FCC, 737 F.2d 1095, 1143-44 (D.C. Cir. 1984).

39
Commission switch from a rule allowing OVS operators to ban in-

region cable operators' video programming to one permitting OVS

operators to exempt such programming from a general ban. Compare

Rulemaking Order ¶ 54 with Reconsideration Order ¶ 52. Thus, we

invalidate the rule permitting OVS operators selectively to lift

the general ban on cable operators providing video programming on

OVS systems.

VI. BellSouth's Claim.

The FCC adopted a new construction notification rule requiring

a carrier to obtain FCC approval of its certification before

constructing new physical plants needed to operate OVS systems.

See Rulemaking Order ¶ 34. A carrier may not request certifica-

tion, however, until it can make detailed verifications concerning

the proposed OVS, including details about ownership, the communi-

ties to be served, the analog and digital capacities of the system,

and the number of channel ports.24 BellSouth claims this rule is

contrary to the statutory language and is arbitrary and capricious.

We agree that the rule violates the statute but do not reach

BellSouth's claim that the policy choices are arbitrary and

capricious.

Two convincing statutory arguments support the view that the

24
See Rulemaking Order Appendix C, Instructions for FCC Form 1275 Open
Video System Certification of Compliance.

40
Commission erred in adopting the new construction rule. The first

relies on the mandatory language of § 653(a)(1), the third sentence

of which states, “An operator of an open video system shall qualify

for reduced regulatory burdens under subsection (c) of this section

if the operator of such system certifies to the Commission that

such carrier complies with the Commission's regulations under

subsection (b) of this section and the Commission approves such

certification.” 47 U.S.C. § 573(a)(1) (emphasis added). Any new

construction rule the Commission promulgates is not a “regulation[]

under subsection (b),” so, consistently with the statute, failure

to follow the rule could not prevent an operator from qualifying

for reduced regulatory burdens under subsection (c).

The second argument rests on two provisions in the statute in

which Congress expressly exempted common carriers who operate OVS's

from the pre-construction notice requirement normally applicable to

common carriers. First, § 651(c) states that “[a] common carrier

shall not be required to obtain a certificate under section 214 of

this title with respect to the establishment or operation of a

system for the delivery of video programming.” 47 U.S.C. § 571(c).

It thus exempts common carriers providing video service from the

§ 214 rule that

[n]o carrier shall undertake the construction of a new
line or of an extension of any line . . . unless and
until there shall first have been obtained from the
Commission a certificate that the present or future
public convenience and necessity require or will require
the construction . . . of such additional or extended

41
 line . . . .

47 U.S.C. § 214(a).

Second, § 653(c)(3) states that “with respect to the estab-

lishment and operation of open video systems, the requirements of

[§ 653] shall apply in lieu of, and not in addition to, the

requirements of title II.” 47 U.S.C. § 573. Title II includes the

§ 214 pre-construction notice requirement. These two provi-

sionsSS§ 651(c) and § 653(c)(3)SSthus affirmatively prohibit the

Commission from adopting a pre-construction notice requirement for

OVS operators.

The FCC maintains that the certification it requires for OVS

operators is not nearly as complex or detailed as that required by

§ 214, so the pre-construction notice is not “precisely the same

requirement” as that imposed on common carriers under § 214. The

Commission then argues that, while the criticisms set forth above

assume that the agency may not adopt a regulation not specifically

prescribed in the Act, expressio unius “'has little force in the

administrative setting,' where [courts] defer to an agency's

interpretation of a statute unless Congress has 'directly spoken to

the precise question at issue.'” Mobile Communications Corp.,

77 F.3d at 1405 (quoting Texas Rural Legal Aid, 940 F.2d at 694).

Both of the Commission's arguments are inadequate. The

expressio unius argument fails because the reasoning does not rely

on the expressio unius canon. The Act plainly says a cable

42
provider “shall qualify” for regulatory relief as an OVS operator

if it complies with the FCC's “regulations under subsection (b).”

47 U.S.C. § 573(a)(1). The regulations required by subsection (b)

are narrowly tailored and relate to carriage obligations. The new

construction notification requirement is not a subsection (b)

regulation, and, consistently with the mandatory terms of the

statute, failure to comply with the requirement may not preclude a

cable service provider from qualifying for regulatory relief under

subsection (c).

Nor do we accept the agency's argument that its new construc-

tion rule is less onerous than is the § 214 requirement and

therefore should not be barred by the provisions exempting, from

§ 214, common carriers who provide video service from § 214. The

plain language of § 214 says “[n]o carrier shall undertake

construction . . . unless and until there shall have been obtained

from the Commission a certificate that the present or future public

convenience and necessity require or will require the construction

. . . .” 47 U.S.C. § 214. Sections 651(c) and 653(c)(3) state

that this rule shall not apply to common carriers providing an OVS.

The Commission should not be able to deny the regulatory relief

these sections provide merely by pointing out that there are some

differences between its new pre-construction certification rule and

the old one it is expressly forbidden to impose.

Moreover, the legislative history supports the view that

43
Congress meant to preclude all pre-construction notification rules

for OVS operators. The Conference Report states that Congress was

prohibiting the Commission from “impos[ing] title II-like regula-

tion” on OVS operators, see Conference Report at 178, and explains

that “common carries [sic] are not required to obtain certificates

under section 214 in order to construct facilities to provide video

programming services,” see id. at 175 (summarizing Senate

version). Even if it is less burdensome than the certification

required under § 214, the new construction rule is a title II-like

regulation that directly contravenes the text and legislative

history of §§ 651 and 653. Accordingly, we invalidate the rule.25

Finally, we note that the Commission's rationale for requiring

pre-construction certification likely disappears in the wake of

this opinion. The Commission ordered pre-construction certifica-

tion because of the need to let local authorities know which

entities had been granted enforceable rights to use local rights-

of-way. See Rulemaking Order ¶ 34. While the need to provide such

information may have been a genuine concern if the OVS provisions

had preempted local franchising authority, we say in this opinion

that localities retain franchising authority over OVS operators.

Hence, the rationale for the pre-construction certification rule no

25
See Presley v. Etowah County Comm'n, 502 U.S. 491, 508-09 (1992) (agency
entitled to Chevron deference “only if Congress has not expressed its intent with
respect to the question, and then only if the administrative interpretation is
reasonable”).

44
longer exists.26

VII. Conclusion.

The petitions for review are GRANTED, so we may interpret the

subject rules in such a way as to be consistent with the text of

the Act and the principles of agency deference articulated in

Chevron, resulting in a regulatory regime for OVS's that preserves

local authority and permits widespread entry into this video

programming medium. In summary, on the issues raised by the

Cities, we reverse, on statutory grounds, the Commission's

preemption of local franchising authority. We affirm the rules

permitting non-LEC's to become OVS operators, the Commission's

formula for determining the “fee in lieu of” a franchise fee, and

its refusal to authorize local governments to demand provision of

institutional networks. As for the claims raised by NCTA on behalf

of cable operators, we hold that the Commission exceeded its

statutory authority in imposing an effective-competition require-

ment on LEC's that also are cable operators. We affirm, however,

the rules prohibiting non-LEC cable operators, even those whose

franchises have expired, from providing OVS service in the absence

of effective competition. We invalidate and remand the rules

generally prohibiting in-region cable operators from providing

26
During oral argument, counsel for the FCC admitted that the rationale
for the pre-construction certification rule would disappear were we to hold that
localities retain franchising authority over OVS operators.

45
video programming, but giving OVS operators discretion to lift this

ban. Finally, we invalidate the pre-construction certification

requirement, which violates the text of § 653 and is no longer

justified, given our conclusion that localities retain franchising

authority over OVS operators.

This matter is REMANDED for further proceedings consistent

with this opinion.

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