Court Ruling Breathes Life Into OVS

1/24/1999 7:00 PM Eastern

A federal court in New Orleans last week gave the cable
industry some incentive to re-evaluate whether it makes sense to become open-video-system
operators and programmers.

Under a ruling by a three-judge panel, cable operators won
new freedom from federal rules to convert to OVS in their cable-franchise areas and to
reserve channel capacity on a competing OVS.

However, there was a downside in the opinion, handed down
by the Fifth U.S. Circuit Court of Appeals last Tuesday, that could nullify some of its
benefits: Cities, the court held, may require would-be OVS operators to obtain local

The court reasoned that even though Congress declared that
cable-franchising rules would not apply to OVS operators, the law did not specifically
prohibit cities from imposing franchises on OVS operators.

"It removes one of the major advantages of becoming an
OVS operator," said Frank Lloyd, a Washington, D.C., cable attorney with Mintz,
Levin, Cohn, Ferris, Glovsky and Popeo.

Lloyd said the court used "very broad language that
[cities] will be able to use in various contexts."

Cable upstart RCN Corp. has several OVS approvals to serve
major East Coast cities and northern California. And in some cases, RCN has applied for
cable franchises after obtaining OVS certification from the Federal Communications

"We have never implemented an OVS in any jurisdiction
without first working closely with the municipal authorities and entering into a
franchiselike agreement, and we fully expect to continue this policy in the future,"
said RCN counsel Andrew D. Lipman, in a prepared statement.

"We fully expect that the decision will not materially
affect the company's aggressive expansion of its video, telephone or Internet
offerings," added David C. McCourt, RCN's chairman and CEO, in the same

As part of the Telecommunications Act of 1996, Congress
established the OVS primarily as a vehicle for local phone companies to compete against
entrenched cable operators.

In exchange for an exemption from cable-franchising
requirements, Congress said OVS operators had to allocate two-thirds of their channels to
unaffiliated programmers, but only to the extent that demand for such space outstripped

The FCC, in turn, adopted various OVS rules, including one
that said cable operators not subject to effective competition were ineligible to be OVS
operators in their franchise areas, even if they were certified to provide local phone

The federal panel tossed this rule out, saying that
Congress severely limited the agency's authority to block local phone companies from
being OVS operators.

The court said the FCC had "ignored plain text"
of the 1996 law and "attempted to manufacture an ambiguity" in order to obtain
"judicial deference."

But the court upheld the FCC's position that cable
operators that are not certified to provide phone service could convert to OVS only if
they were subject to effective competition -- a statutory term that typically means that
the cable operator has lost 15 percent of its market share. The court said its holding
applied to cable operators with expired franchises.

In another setback for the FCC, the court struck down a
rule that said incumbent cable operators were barred from occupying channels on a
competing OVS without the permission of the OVS operator.

The FCC erred, the court said, when it placed in the hands
of OVS operators the power to include or exclude competing cable operators seeking channel
space. Although it invalidated the rule, the court gave the FCC the opportunity to rewrite

According to Washington, D.C., cable attorney Arthur
Harding of Fleischman and Walsh, the FCC could respond with an even more restrictive rule
now that discretion on the part of OVS operators has been taken away.

"It may not be helpful. It makes me worry that the FCC
might decide that it might make the ban absolute," Harding said.

OVS has not been a raging success. RCN is one of the few
companies that have taken the path. Few major phone companies have chosen it. Ameritech
Corp.'s Ameritech New Media, the most aggressive cable overbuilder, has been
steadfast in relying on the traditional franchised-cable-operator model.

While asserting that cities won an important victory with
regard to OVS franchising, Lloyd said the court sided with the cable industry on an issue
that he described as one of the hottest at the local level: the right of cities to demand
institutional networks (I-nets).

In the opinion, the court said I-nets are not an obligation
that cities may impose on either cable operators or OVS operators.

In other decisions, the court ruled that:

• Cities could collect OVS fees based on a percentage
of the OVS operator's gross revenue, but not on the revenue collected by unaffiliated

• The FCC could no longer require OVS operators to
certify with the agency prior to constructing OVS facilities.

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