FCC Seeks Comment on NCTA Proposal to Allow Agency to Eliminate 47 U.S.C. § 224(e)

May 27, 2015

Introduction and Background

The Federal Communications Commission (“FCC” or “Commission”) has restarted a proceeding which may dramatically reduce the rates communications companies pay for deployment of their network infrastructure.[1]  The NCTA and others initiated the proceeding in 2011 and now, after four dormant years, the FCC has reopened the record in the proceeding with a notice published in the Federal Register on May 14, 2015.[2]

“Who cares?” you ask.  You do.  People talk about the “Internet” and the “Information Superhighway” as if they are crystalline, definite things.  In fact, they are a conglomeration of wires, devices, poles, conduits, hardware, electronics, antennas and rights-of-way; facilities and equipment that enable the transport of electronic information.  And the price communications companies pay to attach their wires, antennas and related equipment to utility poles is a material factor in the availability and cost of video, Internet and telephony service to consumers.

Congress, the FCC, and certain states control the byzantine but interesting laws and contentious regulatory policy that apply to pole attachments.[3]  In 1978, Congress enacted Section 224 of the Communications Act, 47 U.S.C. § 224, granting the FCC authority to regulate the rates, terms and conditions upon which pole owning utilities – electric utilities and telephone companies – provided voluntary access to poles for attachments by the then-nascent cable television industry.  Section 224 has subsequently been amended, most recently in 1996 when, as part of the 1996 Telecommunications Act, Congress revised Section 224 to require mandatory access (subject to limited exceptions) for not only cable television systems, but also telecommunications carriers, on nondiscriminatory and regulated rates terms and conditions to poles owned by investor-owned electric utilities (“IOUs”) and incumbent local exchange carriers (“ILECs”).[4]

This relatively obscure provision of the 1996 Telecommunications Act sets up an ongoing clash of the diverse IOU, ILEC, cable service and competitive local exchange carrier (“CLEC”) industries.  They are often at odds because of their differing interests in major operational, safety and reliability issues and large sums of money are at stake.  And those interests are often in direct and dramatic conflict with one another.  Over time, IOU’s have become the de facto owners and operators of the nation’s pole infrastructure; i.e., the lessors, and are most concerned with the safety, reliability and integrity of the system that allows them to operate the nation’s electric grid.  On the other hand, attaching communications companies – the group of lessees which now include ILECs — are most concerned with the rapid deployment and ongoing maintenance of their communications wires, electronics and related equipment, and these lessees want the best service at the lowest rates from their lessors.

The Context of the Current Proceeding 

The 1996 amendments to Section 224 prescribed two specific rates: the Section 224(d) rate for “solely” cable, aka the “Cable Rate” and the Section 224(e) rate for telecommunications services, aka the “Telecom Rate” or the “Old Telecom Rate.”  The FCC implemented these rates and relevant rate methodologies in rulemaking proceedings following the 1996 Pole Attachment Act.[5]

In a follow-on rulemaking on April 7, 2011, the FCC issued another order under the 1996 Telecommunications Act (the “2011 Pole Attachment Order”) that, among other things, held for the first time that where ILECs had been provided voluntary access to IOU’s poles, the FCC had the authority to regulate, when appropriate, the rates terms and conditions of that access.[6]  The 2011 Pole Attachment Order also established the so-called “New Telecom Rate” which, for the first time, applied certain FCC established multipliers to the Old Telecom Rate in a stated effort to generally bring the rate for telecommunications service attachments down as close as possible to the Cable Rate.[7]  As it turned out, however, the FCC did not provide enough multipliers to apply in all circumstances under the New Telecom Rate formula, so that in many circumstances if pole owners used certain formula inputs establishing the average number of attachers as anything other than 3 or 5, the New Telecom Rate remained higher than the Cable Rate.

To address this perceived gap in the FCC’s approach, the National Cable and Telecommunications Association (“NCTA”), Comptel and tw telecom promptly petitioned the FCC for reconsideration, asking that the FCC adopt their proposed algorithm which would apply a specific multiplier in all instances so that no matter the average number of attachers, the New Telecom Rate would calculate as close as possible to the Cable Rate.[8]  The FCC has not acted on that petition.

Fast forward to 2015 and the FCC’s Open Internet Order, released March 12, 2015.  In a small and somewhat arcane portion of that order, the FCC held that for purposes of pole attachment rates, Broadband Internet Access Service (“BIAS”) providers were providing a telecommunications service subject to the New Telecom Rate for pole attachments.[9]  Realizing that this would affect the rate paid by cable service providers which did not provide “solely” cable television services but also were BIAS providers, the FCC cautioned utility pole owners that they should not raise the rates paid by cable companies from the Cable Rate to the New Telecom Rate.[10]  Which, of course, meant that the FCC was telling pole owners not to follow the law the FCC had itself prescribed for applicable rates, as Commissioner Pai noted in his dissent.[11]

In short, the 2015 Open Internet Order had the consequence, unintended, accidental, unavoidable or otherwise, of raising the potential rate applicable to any cable company providing a telecommunications service.  Which, of course, meant pretty much any cable company bigger than a mom-and-pop local CATV franchise.  The FCC has now acted to put itself in a position to fix the pole attachment rate consequence of the 2015 Open Internet Order by revisiting the NCTA’s petition for reconsideration and refreshing the record.  That the FCC pivoted to do so by May 6, 2015, less than two months after its 2015 Open Internet Order, can be no coincidence or mistake.  This is a clash between big cable, big telecom, Google and electric utilities.  And the FCC intends to weigh in.

A Long History of Rate Litigation

To be clear, there has been a long history of rate litigation among the competing industries involved in these issues.  Prior to the passage of the 1996 Act and the creation of the telecom rate, not surprisingly, most litigation focused on the proper calculation of the cable rate and the extent of  the FCC’s then-existing authority to regulate attachment rates.  For example, the Texas Utilities Elec. Co. case confirmed that the FCC’s regulatory authority extended to cables transmitting non-video communications as well as video communications.[12]  Similarly, the Supreme Court in the Florida Power case supported the FCC and rejected claims that the cable rate constituted an unconstitutional taking.[13]  Conversely, the D.C. Circuit in the Alabama Power case struck down the maximum cable rate set by the Commission because of the FCC’s exclusion of the expenses incurred by a utility in providing guy wires and anchors in determining the figure for the net cost of poles.[14]

After the passage of the 1996 Act and the introduction of the telecom rate, the focus of much litigation shifted towards the calculation of the new telecom rate and also towards challenges regarding the extent of the FCC’s increased authority under the 1996 Act.  In a succession of cases, Courts, for the most past, endorsed the numerous orders issued by the FCC to implement the new telecom rate and once again rejected arguments that the new telecom rate constituted an unconstitutional taking.[15]  However, many disputes during this period involved the resolution of questions with respect to the intricacies of the FCC’s new-fangled telecom rate formula.[16]  Many pole owners needed to adjust the rates for their attachers to reflect the reality of the FCC’s new rate ceilings.[17]

Consistent with the course of this history, much of the current litigation now pending before various courts and the FCC involves the rights of incumbent carriers and other changes introduced by the 2011 Pole Attachment Order.  The 2011 Pole Attachment Order was challenged initially but ultimately upheld by the DC Circuit.[18]  Since that time, a host of incumbent carriers have challenged their previously negotiated attachment rates as “unjust and unreasonable.” These carriers are now seeking an attachment rate as close to the “new telecommunications rate” or the cable rate as possible through both self-help and the institution of formal proceedings.[19]  Thus, a flood of new cases have been initiated both before the FCC’s Market Disputes Resolution Division and in the courts.

Section 224 Established One Rate for “Solely” Cable Service and One Rate for Telecom Service

The FCC is seeking to provide support for its goal of making the rate for pole attachments determined under Section 224(e) equal to the rate determined under Section 224(d).  In doing so the Commission is once again flouting the plain language of the statute and willfully ignoring the legislative history of those sections.  Further, should the Commission actually adopt changes to accomplish their preferred result, a court may overturn that action as arbitrary and capricious because the evidence before the Commission is that its justification for the 2011 Pole Attachment Order – that reducing the telecom rate to approximate the cable rate would promote broadband deployment and reduce rates for broadband consumers – clearly has no factual basis.

The cable rate established by Section 224(d) had been in place for nearly 18 years when Congress adopted the telecommunications service rate in Section 224(e) as part of the 1996 Act.  In 1996, the Section 224(d) rate was well understood and had been litigated multiple times, including in 1993 when the Court of Appeals for the DC Circuit upheld the FCC’s application of the Section 224(d) rate to cable system attachments that were used to provide both cable service and two-way broadband data services in the Texas Utilities Elec. Co. case as noted above.[20]  Section 224(d) explicitly allowed the FCC to adopt a range of reasonable rates that ranged from incremental cost to a percentage of fully allocated costs.   At the high end of the statutory range, the cable rate is determined by applying the same fractional multiplier to the cost for both usable and non-usable space.  This was the backdrop against which Congress adopted Section 224(e).  Mathematically the Section 224(d) formula is

Incremental cost < Cable rate < (space used by cable attachment/total usable space) x total cost of pole

This meant that the upper bound of the cable rate was a percentage of the fully allocated cost.  To use the example from the 1977 Senate report that is the legislative history of Section 224 as first enacted,  if a cable attachment occupied 1 foot out of 11 feet of usable space on a 35 foot pole, then the cable rate would equal total cost of the pole multiplied by one eleventh (i.e, 1/11 or 0.09).[21]  This means that if the total cost of the pole was $100 the cable rate would be $9.

While Section 224 as enacted allowed the FCC to set a range of reasonable costs, by the mid-1990s Congress demonstrated that it considered the 1978 formula inadequate in the context of a competitive telecommunications market.  In the House and Senate telecommunications bills, H.R. 3636 and S. 1822, respectively, that were considered by the two bodies in 1993 – 1994 Congress used the high end of the 1978 formula as a starting point and then added to it.  Both bills contained nearly identical language that necessarily Increased the rate cable companies would pay when they offered mixed cable and telecommunications services by directing the FCC to equally apportion the costs of the non-usable space on the pole among all attachments, and then apportion the usable space based on the percentage actually occupied by the cable attachment.[22]  Shown mathematically, the formula included in both H.R. 3636 and S. 1822 was

Cable rate =   (total cost of non-usable space/number of attaching entities) +  ((space used by cable attachment/total usable space) x total cost of usable space).

So using the prior example of a total cost for a 35 foot pole of $100 with eleven feet of usable space and three attachments (electric, telephone, and cable), under the 1994 legislative formula the new rate would have been ($68.60 divided by 3) plus ($31.40 multiplied by .09) for a rate of $25.70.  The fact that the House adopted H.R. 3636 and the Senate Commerce Committee reported S. 1822 with identical formulas containing a significant increase in the rate for pole attachments clearly illustrates Congress well understood in the mid-1990s that the cable rate was in fact a subsidy it wanted to end.

H.R. 3636 and S. 1822 were the foundation on which Congress built the 1996 Act.  As reported H.R. 1555, the House version of the 1996 Telecommunications Act, contained language on Section 224 that was identical to that in H.R. 3636.[23]  S. 652, the Senate bill that became the Telecommunications Act, introduced new language, but even that language as reported adopted a single formula based on a percentage of usable space rather than allowing for a range as in Section 224(d).[24]   The Senate amended the reported language through a managers’ amendment, and that is the formula that was ultimately adopted.[25]  Again, this formula clearly provided for an increase over the existing cable rate formula in the FCC’s regulations at the time.  Expressed mathematically, the Section 224(e) telecommunications service rate formula is

Telecom rate =  ((cost of non-usable space / number of attaching entities) x 2/3) + ((space used by cable attachment/total usable space) x total cost of usable space).

So the only real change in the formula between the 1994 version and the 1996 version is the decision to reduce the charge for non-usable space from an equal apportionment to two-thirds of an equal apportionment.  As a result, the new Section 224(e) rate using the same 35 foot pole with 11 feet of usable space, three attaching entities and a $100 total cost for the pole would be $18.07 – twice the high end of the Section 224(d) range.

The fact is that Congress in 1996 did not take the same approach as it did in 1978.  Not only did Congress not specify as an acceptable range incremental cost to a percentage of fully allocated costs, it chose to add to the fully allocated cost formula adopted in 1978 by requiring a greater proportion of the cost for unused space be allocated to telecommunications services attachments than is the case under the 1978 formula in Section 224(d).  And Congress explicitly limited the 1978 formula to attachments used “solely” for the provision of cable services.[26]  That Congress knew the result would be a higher rate for telecommunications service attachments is reflected in the fact that they directed that any rate increases be implemented over five years.  So far the courts have let the FCC get away with interpreting the statute so that two disparate statutory provisions result in very similar rates.  With this proceeding the FCC appears intent on revisiting the formula yet again to ensure that the rate is the same under both sections, notwithstanding the plain language differences to the contrary. 

The Future

The FCC moves promptly when it wants and needs to do so.  After the NCTA petition had been pending for four years, the FCC took less than 60 days to turn to the petition after the potential pole attachment rate increase caused to cable companies by the 2015 Open Internet Order.  It would seem that the FCC intends to take action.  If the FCC grants the petition, the pole attachment infrastructure deployment costs paid by cable companies, ILECs, CLECs and BIAS providers will be driven down to essentially equal the cable rate.  Revenues received by rate-regulated IOUs will decrease, while costs paid by companies providing services not subject to rate regulation will decrease.  And if market trends continue, electric ratepayers will be harmed while the cost to consumers of communications services will rise, as will the profits of the communications service providers.  And the express language and Congressional intent incorporated in the 1996 Act will be eviscerated as Subsection 224(e) is rendered meaningless by a made-up algorithm of multiplication factors.

This article was written by Charlie Zdebski, Rob Gastner, and Earl Comstock.  All are members of the Utilities and Telecommunications Practice Group in the Washington, D.C. office of Eckert Seamans LLC. 

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