AT & T WINS APPEAL

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Washington-AT & T Corp. won a sweeping victory over local governments last week when a federal court in San Francisco held that cities and towns itching to regulate cable Internet services are barred by federal law from doing so.

AT & T's triumph was the most significant legal victory for the cable industry in its two-year struggle to stymie a well-financed campaign to force cable operators to provide consumers with an array of Internet-service providers, instead of only offering ISPs controlled by or affiliated with the cable operators.

In the absence of some surprise move, the decision virtually guaranteed that AT & T and other cable operators may deploy broadband facilities and market Internet services in competition with local phone companies unfettered by regulation at the local level.

"That is probably the single biggest objective that we were seeking to vindicate in this case," AT & T vice president of law and chief of litigation Mark C. Rosenblum said. "This court clearly said they can't do that."

The 12-page decision, handed down by a panel of the U.S. Court of Appeals for the 9th Circuit, was written by Judge Sidney R. Thomas and joined by Judges Edward Leavy and Ferdinand F. Fernandez.

AT & T's success came at the expense of the city of Portland, Ore., and that state's Multnomah County, which, in reviewing AT & T's merger with Tele-Communications Inc., refused to transfer the TCI franchises in January 1999 unless AT & T agreed to provide nondiscriminatory access to other ISPs.

AT & T took Portland and the county to court and held back a rollout of Excite@Home Corp.'s Internet service there while the litigation was pending.

Portland and Multnomah won the first round in U.S. District Court in Portland last June. But AT & T officials said its appellate victory would free it to begin offering service in Portland and the county.

"This will allow us to go forward and deploy this service to the citizens of Portland who have been waiting for it," AT & T general counsel and executive vice president James W. Cicconi said.

With cities now handcuffed by the court's action, all that the cable industry has to fear is a change in attitude at the Federal Communications Commission, where chairman William Kennard has used the bully pulpit to advocate open access on cable but refused to impose it through regulation.

In a statement reacting to the decision, Kennard repeated his oft-stated views that the FCC has jurisdiction over cable Internet services, that it favors choice among ISPs and that it supports "fostering an environment of investment and innovation."

But open-access proponents found some news to cheer in the court ruling. The court's decision rejected AT & T argument that Excite@Home was a cable service. Instead, the court said, the underlying transmission of Excite@Home was a telecommunications service, potentially exposing AT & T to some degree of FCC open-facilities regulation that governs local phone companies.

But FCC officials interviewed said that although they continue to support open access, the nascent status of cable's rollout of broadband justified light oversight and monitoring under current market conditions. That stance suggested that AT & T can expect few, if any, problems in Washington.

Nevertheless, senior FCC officials said they expect open-access proponents to renew pressure on the agency to pry open cable Internet facilities.

"I think it's a reasonable conjecture that we will get petitions filed in front of us and we will have to resolve those petitions. I would not be surprised to see that," said one FCC official, who hailed the decision for reposing authority over cable Internet services with the agency.

While no petitions were immediately filed at the FCC, the rhetoric flowing from groups that had urged local governments to regulate cable indicated that they were prepared to move fast.

"The court's decision now opens the door to a national open-access policy," said Rich Bond, co-director of the OpenNet Coalition, an ISP organization that got initial backing from America Online Inc. before AOL decide to merge with Time Warner Inc.

"The same rules by which local telephone companies provide high-speed Internet access to their customers will now apply to cable," Bond said.

The United States Telecom Association-a trade group dominated by the four Baby Bells-urged the FCC to "level the playing field" by allowing phone companies to provide high-speed Internet access without having to share facilities with competing ISPs.

Local open-access regulation had suffered a lower-court defeat earlier in Virginia. U.S. District Court Judge Richard Williams in Richmond ruled that Henrico County violated state and federal law when it ordered MediaOne Group Inc. to open access by Dec. 31, 2000.

His reasoning was different, though. He said the open-access provision there treated Media-One's Road Runner service as a telecommunications facility when it is really a cable service.

Henrico County appealed that ruling earlier this month to the U.S. Court of Appeals for the Fourth Circuit.

In the Portland appeal decision, the court made two key findings.

COURT'S KEY FINDINGS

First, it held that Excite@Home was not a cable service. By definition, cable service, the court reasoned, was one-way, while Internet services involved two-way traffic. "Surfing cable channels is one thing; surfing the Internet over a cable-broadband connection is quite another," the court said.

That finding was fatal to Portland and Multnomah because they had asserted that the imposition of open access was based on Excite@Home being a cable service.

Second, saying that it was required to define Excite@Home under federal communications law, the court determined that Excite@Home was a telecommunications service "to the extent that [Excite@Home] provides its subscribers Internet transmission over its cable-broadband facility."

That finding was the second defeat for Portland and Multnomah because federal law bars local governments "from conditioning the franchise transfer upon AT & T's provision of the [Excite@Home] transmission element that constitutes telecommunications," the court said.

The fact that the court held that Excite@Home's transmission element was a telecommunications service triggered debate over whether AT & T had in fact attained a Pyrrhic victory.

Under federal law, telecommunications carriers provide telecommunications services, and all telecommunications carriers have a duty to interconnect their facilities with the facilities of other telecommunications carriers.

"That is my basic take-that we would have the right of interconnection and nondiscriminatory access. To sum it up in one sentence, AT & T won the battle, but they lost the war," said David Baker, vice president of law and public policy for EarthLink Network Inc., a 3.5 million-subscriber ISP based in Atlanta.

"Cable has argued for two years that they should not be a common carrier. The Ninth Circuit, in its decision, declared cable broadband a common-carrier service unless the FCC forbears," said Scott Cleland, a cable- and phone-industry analyst with Legg Mason Wood Walker's Precursor Group, based here.

GTE Corp.-which filed an antitrust suit in Pittsburgh against AT & T and Comcast Corp. over their Internet strategy-said the decision meant that "AT & T and the cable industry are now required to open their cable-modem networks to competitive ISPs on a nondiscriminatory basis."

Some sources said the impact of the ruling depends on the scope of the interconnection requirement.

As a threshold matter, ISPs would not have the right to interconnect if they are not telecommunications carriers. But many ISPs have been certified by states as competitive local-exchange carriers.

Daniel Brenner, senior vice president of law and regulatory policy for the National Cable Television Association, said the notion that open-access supporters could use the telecommunications-service designation to gain access to cable was a nonstarter.

Brenner added that interconnection essentially involves the exchange of traffic, and that is going on right now on the Internet.

Moreover, he said, no ISP has a right to access cable Internet facilities because cable operators sell transmission service as a stand-alone product. "We don't offer that unbundled transport path to the public for a fee," Brenner said.

Barbara Esbin-a lawyer based here who studied policy issues regarding cable Internet services at the FCC-said the decision took the issue away from the cities and placed it in the hands of the commission to wrestle with all of the complicated definitional matters.

"The bottom line is that they kicked the ball back to the FCC's court, which the FCC asked them to do," she added.

Local regulators' reactions to the decision were generally positive.

Portland officials said they are conferring with their litigation partners about a possible appeal or rehearing, but they feel like they have "already won the war" on open access.

An appeal would most likely be triggered if comments or actions by AT & T signal that the company's pledge to eventually open access is less than sincere, they indicated.

David Olson, director of Portland's Office of Cable Communications, noted that the weight of the panel's decision hangs on a narrow definitional issue that was neither briefed nor argued by the parties in the lower court.

"Obviously, at one level, we are disappointed that the court has rested its judgment on a distinction not fully developed or briefed by the parties, with actual and potential ramifications beyond anything developed in the court record by any party," he said.

But now that cable's "closed" proprietary Internet platform is deemed a telecommunications service and not a cable service, open access is inevitable, he concluded.

NATIONAL ACCESS?

Portland officials have said all along that open access should be a national policy. Perhaps this decision will prompt the FCC to be "motivated to step up to its responsibility," Olson said.

At first, Portland city commissioner Erik Sten was disappointed in the ruling. At second glance, he became enthusiastic.

"We may have achieved our objectives by losing," he chuckled. "The silver lining in this is the telecommunications definition. Telecommunications law will require providers to open up. The ground is set for open lines."

He noted that AT & T has no franchise in Portland to offer telecommunications services.

Portland will take time to determine whether it will ask for a rehearing on the issue. But in the hours immediately following the ruling, Sten said that request will depend on AT & T's actions regarding access going forward.

"This is certainly the death of local access policy going forward. This makes it pretty clear that there will be a federal policy or nothing," added Barry Orton, a professor at the University of Wisconsin (Madison) and a consultant to cities.

Like many local officials, Orton expressed concern that the redefinition of high-speed Internet as a telecommunications service will mean a loss of franchise fees. As long as operators agreed that Internet provision was a cable service, LFAs were able to ask for 5 percent of their gross earnings.

"But that is less important than open access," Orton added. And regulators noted that the revenue could be made up as a telecommunications or rights-of-way fee.

The failure of Portland to prevail on the city-rights issue was not totally unexpected, added Jane Lawton, cable administrator for Montgomery County, Md., and a former president of the National Association of Telecommunications Officers and Advisors.

"Convergence has called so many procedures into question," she said. For instance, policies regarding local regulation of plant installation "are often violently different" between cable and traditional telephone companies. Cable builds are more closely supervised.

"I'm sitting here with rights-of-way-management problems. Now Bell Atlantic [Corp.] is laying in huge bundles. I'm seeking accountability from the telcos similar to what we've had in the past from cable. It's a tremendous problem," she said.

And it is a problem that will presumably worsen if cable clings to telecommunications rights and eschews close local oversight.

Regulators are also concerned that in order to protect their oversight rights, they may have to revisit their current franchise agreements to change "cable service" to "telecommunications service" in all of the applicable definitions.

Los Angeles city councilman Alex Padilla called the court decision great news. Padilla's council subcommittee approved a proposal that would require open access as a condition for renewal of the city's 13 franchises, to be completed by 2002. It had not yet been approved by the whole council.

The court decision states that cable Internet service falls under the same open-access requirements that currently apply to telephone companies, Padilla said in a prepared statement. This means citizens will be assured the highest level of choice, he added.

The city will work with the California Public Utilities Commission and the FCC to develop customer-service and technical standards for the platform, Padilla said.

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