In the 1992 Cable Act, Congress has provided a statutory framework for completely separating the provision of cable subscriber equipment from the provision of cable service, although the Act does not contain an absolute requirement that the Federal Communications Commission (FCC or Commission) take such a step.(note 2) The FCC, however, already possesses a regulatory blueprint for creating a new communications equipment market, one written in its own history of unbundling customer-premises equipment (CPE) from communications services offered by common carriers. The FCC's history of allowing creation of private benefit, if it is without public harm, indicates that cable equipment can be separated from other cable services. The evolution of the FCC's policies on cable equipment will depend on many factors, but there is no question that the law and regulatory precedent support unbundling. Underlying this policy direction is the concept of a decentralized, multi-provider information environment that will be capable of operating at many different levels, and in which consumersnot service providerswill determine what equipment will be installed in American homes.
I. The Framework: Equipment Provisions of the Cable Act
The 1992 Cable Act includes provisions covering equipment
rates, home wiring, and compatibility between cable systems and
consumer electronics.(note 3) The
rate, wiring, and compatibility distinctions create the framework
for the equipment provisions within the Act.
A. Regulation of Cable Equipment Rates
The Cable Act significantly affects cable equipment rates. The
Act mandates reform of cable rates and charges the FCC with
creating and administering a new rate system.(note 4) These FCC rate guidelines will affect
every cable operator and subscriber.
"Cable equipment" and "cable subscriber equipment" are not
terms that appear in the Cable Act. As used in this Article, these
terms describe the equipment located on cable subscribers'
premises. The equipment is subject to the rate regulation
provisions of the Act because, generally, it is provided by cable
operators. Typically, this equipment consists of "converter boxes,"
associated remote control units, connections for additional
television receivers, and cable within subscribers' premises.(note 5) It does not include television
receivers, monitors, or videocassette recorders.(note 6) S. 12, the Senate's original version
of the 1992 Cable Act, contained no specific provisions relating to
the regulation of rates for equipment located on the premises of
cable subscribers.(note 7) The House
amendment, H.R. 4850, introducing language for the regulation of
cable equipment rates, was substantially included in the final
legislation.(note 8) The House-Senate
conference made two substantive changes in the Cable Act's
language: (1) the FCC was directed to create "standards," rather
than "a formula," for equipment rates; and (2) the description of
equipment was changed from that "necessary" for subscribers to
receive "basic service" to that "used" by subscribers for such
purposes.(note 9) The purpose of these
changes was to give the FCC greater flexibility and more authority
in crafting its equipment rate regulations.(note 10) Notably, the regulation of the
equipment covered in this provision does not vary based on the type
of service for which the equipment is used. The provision's phrase,
"such addressable converter box or other equipment as is required
to access programming described in paragraph (8)," refers to
"programming offered on a per channel or per program basis."(note 11) Thus, even though the
equipment regulation provision is within the heading of "basic
service tier regulation," the FCC's standards for regulation of
cable equipment are directed to be independent of the kind of
programming made accessible by this equipment, as long as the
equipment is "used" with basic service. In the provision requiring
the FCC to establish procedures and criteria for the regulation of
unreasonable rates for cable programming services,(note 12) the statute simply mentions cable
equipment rates as one of many factors to be considered in
determining unreasonableness.(note
13) A fair interpretation of the statute is that the rates for
subscriber equipment were not intended to be subsumed under service
categories, and equipment is thus distinct from "basic service,"
"cable programming service," or "per channel or per program
service."(note 14) The rates
for cable subscriber equipment have thus been "unbundled,"
(separately priced) to borrow the term applied to equipment used
with communications common carrier services, even though the
provision of this equipment remains primarily the domain of
cable operators.(note 15)
The FCC has designed a comprehensive scheme for cable
equipment rate regulation.(note 16)
Under the FCC's new rules, the rates for equipment will be based on
"actual cost," including an allocated share of overhead and a
reasonable profit.(note 17) This
approach is thus significantly different from the "benchmark"
approach applied to cable service rates and may even yield
different results than the "cost-of-service" regime that the FCC
will adopt in the near future.(note
18) Cable operators will follow FCC guidelines for identifying
the costs to be recovered through equipment and installation rates,
and for calculating those rates. At a minimum, there will be
separate charges for each significantly different type of remote,
converter box, and installation. Local franchising authorities will
regulate these rates, if the authorities are certified.(note 19) Under the FCC's guidelines,
cable operators will establish an Equipment Basket to which they
will assign the direct costs of service installation, additional
outlets, leasing, and repairing equipment. The Basket will include
an allocation of all those system joint and common costs that
installation, leasing, and repairing equipment share with other
system activities, including a reasonable profit, but excluding
general system overhead.(note 20)
The operator must also calculate an Hourly Service Charge (HSC)
through which it would recover all Equipment Basket costs,
including a reasonable profit, except for the operator's costs of
purchasing and financing the lease of customer equipment.(note 21) Equipment sales, like
equipment leases, shall be based on costs. In the case of sales,
subscribers must be warned of risks that cable system upgrades will
make the equipment incompatible. They must also be given notice of
pending changes that would make the equipment incompatible.(note 22) Promotional offerswhich may
include below-cost provision of equipment or installationswill be
allowed, so long as they are "reasonable . . . in relation to the
operator's overall offerings in the Equipment Basket."(note 23) The costs of such promotions must be
recovered as general system overhead, not through increases in
other portions of the Equipment Basket.(note 24) Costs of additional connections will
generally be recovered through charges for the related equipment
(converters and remote controls) and installation charges.(note 25) Additional programming costs,
if any, resulting from additional connections within a subscriber's
home can be recovered through monthly charges for the connections.
Costs associated with efforts to boost the signal within a given
customer's premises may also be recovered through monthly charges
to that customer. Network costs for designing the system so that it
can generally serve multiple outlets per home are to be treated as
part of general system overhead.(note
26)
Section 17 also calls on the FCC "to require cable operators
offering channels whose reception requires a converter box . . . to
the extent technically and economically feasible, to offer
subscribers the option of having all other channels delivered
directly to the subscribers' television receivers or videocassette
recorders without passing through the converter box."(note 38) This provision appears to be at cross
purposes with the Act's "buy-through prohibition."(note 39) However, in implementing the "buy-
through prohibition," the FCC resolved this apparent inconsistency
by noting that addressable systems "typically incorporate
encryption systems that frustrate the functioning of certain
features of home electronic equipment,"(note 40) contrary to Section 17's compatibility
directive. The FCC further held that "forcing the premature
upgrading of equipment could interfere with accomplishment of the
tasks set forth in Section 17."(note
41) The FCC thus declined "to mandate the continued use of any
particular mode of operation" in order to enforce the
prohibition.(note 42) Section 17
of the 1992 Cable Act requires the FCC to report to Congress in the
fall of 1993 on compatibility between cable systems and consumer
electronics and to adopt regulations 180 days after submitting its
report.(note 43) These regulations
are likely to be the most important factor in setting the stage for
cable subscriber equipment unbundling. Two important questions are
whether and how much the FCC will consider its own history of
unbundling communications customer-premises equipment from common
carrier services when it shapes these regulations.(note 44)
In Mebane Home Telephone Company, the Commission
extended "the broad principle" of Hush-A-Phone and
Carterfone to "interconnected devices such as PBXs and key
systems which may replace telephone system equipment," stating that
"experience indicates that not only have customers obtained
substantial private benefit from such interconnection, but there
has been no technical harm to telephone company operations."(note 50) One year later, the FCC
instituted an investigation into the economic effects and
interrelationships of telecommunications regulatory policies,
Docket No. 20003.(note 51) The
Commission found that there had been a great deal of innovation by
the so-called "interconnect" providers (i.e., providers of private
branch exchanges and customer-premises telephone systems) and
telephone companies in the "post-Carterfone years" and noted
the following:
[W]e find the interconnect competitive marketplace has been
characterized by innovation on the part of both interconnect and
telephone companies, thereby affording the public a wide range of
choices regarding the terminal device or private communications
system which best serves their needs. Benefits include availability
of new equipment features, improved maintenance, and reliability,
improved installation features including ease of making changes,
competitive sources of supply, option of leasing or owning, and
competitive pricing and payment options. Although it is difficult
to predict future innovative developments, because so much is
dependent on new product lines and new marketing strategies adopted
by the telephone carriers in response to competition, it appears
likely that the public will continue to benefit from the
competitive interconnect marketplace in terms of innovation in the
immediate future.(note 52)
A defining moment came when the FCC acted to ensure the
technical feasibility of its competitive CPE policy through a
telephone equipment registration program under Part 68.(note 53) The Part 68 program was
designed to promote competition by establishing technical standards
that ensured CPE could be directly connected to the network without
causing the network any harm. To prevent discrimination, the FCC
also required that customer-provided and carrier-provided CPE
connect in the same manner to carrier facilities. The Commission
perceived these rules as a natural outgrowth of the policies
enunciated in Hush-A-Phone and Carterfone and of the
need to determine exactly how interconnection should take place.(note 54) The Commission continued
its move toward a CPE unbundling policy when it rejected the
Primary Instrument Concept (PIC), which would have required each
single line subscriber to basic telephone service to lease one
telephone set from the telephone company.(note 55) Concluding that PIC was "fundamentally
inconsistent with the principles" enunciated in Hush-A-
Phone, Carterfone, Mebane, and the Registration
Program, the Commission stated:
We determined in Docket No. 19528 and elsewhere that the public
benefits from diversity in the supply of terminal equipment and
that consumers for this further reason should have the option of
furnishing their own terminals, including main stations. Among
these benefits as found in Docket No. 20003 (61 F.C.C.2d at 867),
are the public's wider range of options as to terminal devices,
competitive stimulus to innovation by telephone companies and
independent suppliers, the availability of new equipment features,
improved maintenance and reliability, improved installation
features including ease of making changes, competitive sources of
supply, the option of leasing or owning equipment, and competitive
pricing and payment options. . . . We remain of the opinion that
the proven and reasonably anticipated public benefits from the
competitive supply of terminal equipment, including primary
instruments, take precedence over the considerations urged by the
telephone industry. If anything, this judgment is the more firm in
light of potential developments in home and small business
terminals and the heightened desirability of protecting the
consumers' freedom of options in such circumstances.(note 56)
The FCC subsequently extended the Part 68 policy to additional
services in CC Docket Nos. 79-143 and 81-216, eliminating carrier-
imposed requirements for "interpositioned" carrier equipment and
other restrictive "connecting arrangements"(note 57) and proposing the unbundling of
equipment used with digital services.(note 58)
Computer II's decision completely unbundled,
detariffed, and separated CPE from carriers' basic regulated
services. It also required AT&T to provide CPE and enhanced
services through fully separated subsidiaries.(note 59) The Commission was motivated largely by
the benefits that competition could bring through a continued
pattern of separating CPE and ensuring interconnection:
Our action today is only another in a series of steps to isolate
terminal from transmission offerings, increase consumer choice, and
to open equipment markets to full and fair competition. By striking
down carrier-imposed restrictions on requiring equipment
interconnection over a decade ago, we foreclosed carriers from
offering only the single option of end-to-end communications
service. In implementing a registration program applicable both to
carrier provided and customer provided equipment, we sought to
isolate the technical standards for transmission and terminal
offerings and assure competitive parity among all suppliers of
customer provided equipment. In the same manner, in today requiring
equipment to be made available to interstate users on a cost-based
non-usage sensitive basiswith equipment investment fully isolated
from transmission investment and from the separations processwe
hope to strengthen further the prospects for comparing competitive
equipment offerings in the market.(note
60)
It was, however, the determination that CPE is "separate and
distinct" from transmission service that made it possible for
independent CPE vendors to compete on equal terms with carriers in
the provision of CPE.(note 61) This
rule, it should be emphasized, applies to all carriers. This
decision also reduced the scope of regulation by classifying CPE as
unregulated.(note 62) The
Commission also recognized the wisdom of the overall CPE policy it
had forged:
As a result of this policy the terminal equipment market is subject
to an increasing amount of competition as new and innovative types
of CPE are constantly introduced into the marketplace by equipment
vendors. We have repeatedly found that competition in the equipment
market has stimulated innovation on the part of both independent
suppliers and telephone companies, thereby affording the public a
wider range of terminal choices at lower costs. Moreover, this
policy has afforded consumers more options in obtaining equipment
that best suits their communication or information processing
needs. Benefits of this competitive policy have been found in such
areas as improved maintenance and reliability, improved
installation features including ease of making changes, competitive
sources of supply, the option of leasing or owning equipment, and
competitive pricing and payment options.(note 63)
The Computer II decision lauded detariffing and unbundling
for its effect on the pricing of transmission services:
We believe that the provision of terminal equipment on an unbundled
and detariffed basis should enhance significantly our flexibility
to assure cost-based provision of transmission services in an
increasingly competitive marketplace. This step will also promote
our objective of assuring a viable competitive market for terminal
equipment. As a result of our actions in requiring interconnection
in Carterfone and in subsequently establishing technical
standards in this area, we are convinced that there has now
developed a strong viable market for equipment which assures users
a wide range of competitive alternatives.(note 64)
Computer II was a regulatory watershed, which
successfully defined two marketsone for CPE, one for communications
serviceswhere before there was only one. This "market rules"
approach continues to be sustainable in today's regulatory
environment.
The benefits of such competition are palpable. It is estimated that
sales revenues in the CPE market increased by nearly 50% between
1983 and 1985. More than 2000 vendors are supplying end users with
$14 billion worth of terminal equipment. The introduction of
competition has also provided consumers with a wider variety of CPE
options and with less expensive alternatives than existed in the
earlier monopoly market. Consumers can obtain such new CPE features
as automatic redial, hold, and other call-handling options. A wide
variety of new terminal equipment has also appeared, including
wireless telephony, customized dialing, and other specialty phones,
as well as varieties of decorator phones. It is estimated, for
instance, that there are currently 3 million cordless telephones in
use. The benefits for business users have also been substantial;
PBX and key system prices have been dropping. Nevertheless, the
capabilities of business CPE have increased, with such features as
high-speed facsimile and integrated data and voice capabilities now
being commonplace.(note 70)
These benefits did not arise fortuitously; rather, they resulted
from intentional policy choices made by the FCC over the period of
nearly twenty years that preceded these observations.
Since that article was written, the CPE unbundling rule has
survived virtually intact. There have been conflicts over tariffs
or petitions for services that include carrier-provided equipment
located on customers' premises, but most of these decisions have
vindicated the unbundling rule.(note
71) The Commission's Computer III rulemaking clarified the
unbundling rule to allow carriers to install equipment on
customers' premises which would be used solely for network
testing.(note 72) In 1990, the FCC
proposed a modification of the rule to allow AT&T to provide
bundled "packages" of unregulated CPE and services subject to
"streamlined" regulation.(note 73)
After strong opposition from users, CPE manufacturers, and
competing carriers, the proposal was not adopted.(note 74) The only significant modification of the
rule was effected in 1992, when limited bundling of cellular
service and cellular CPE was permitted, with the requirement that
"stand-alone" prices for cellular service remain constant.(note 75) For equipment that is located
on customers' premises and connects to telephone company
facilities, unbundling is a fundamental fact of life and a policy
that has withstood the test of time.
The CPE unbundling requirement has been a beneficial and
viable policy for more than twenty-five years, ever since its
regulatory origins with the Carterfone decision. A similar
unbundling of cable subscriber equipment from cable service would
produce comparable benefits. Indeed, the rewards might be even
greater if there is a "multiplier effect" that could be generated
when cable, telephone, and computer technologies can be
successfully integrated in interactive, multimedia devices
available across a mass market. Movement toward unbundling cable
CPE has been initiated by Congress in the 1992 Cable Act. History
indicates cable CPE can be unbundled from other services without
public harm. Based on its experience in unbundling common carrier
equipment, the FCC should be willing to unbundle cable subscriber
equipment. It will be an interesting process to follow.
-----------
The regulations prescribed by the Commission under this subsection
shall include standards to establish, on the basis of actual cost,
the price or rate for
(A) installation and lease of the equipment used by
subscribers to receive the basic service tier, including a
converter box and a remote control unit and, if requested by the
subscriber, such addressable converter box or other equipment as is
required to access programming described in paragraph (8); and
(B) installation and monthly use of connections for additional
47 U.S.C.A. Section 543(b)(3) (West Supp. 1993).
The "benchmark" approach involves the Commission setting a
rate, based on a formula derived from cable system characteristics,
against which a given cable operator's rates would be compared.
Id. paras. 34-35. The "cost-of-service" approach involves
examination of the particular costs of the individual cable system
using ratemaking principles set up by the Commission. Id.
para. 39.Cable Act regarding the equipment rate provisions of the
Act. These members had interpreted the "actual cost" standard to
exclude any reasonable profit. H.R. Rep. No. 628, supra note
8, at 187.
1. The Cable Act and Equipment Rates
2. The
FCC's Equipment Rate Regulation
B. Cable Home Wiring
Section 16(d) of the 1992 Cable Act comprises the "home
wiring" provision of the statute, and directs the FCC to create
rules for "the disposition, after a subscriber . . . terminates
service, of any cable installed by the cable operator within the
premises of such subscriber."(note
27) This provision is intended to give subscribers who have
terminated cable service "the right to acquire wiring that has been
installed by the cable operator in their dwelling unit."(note 28) In adopting this provision,
Congress was mindful of cable systems operators' responsibility to
prevent signal leakage and their legitimate interests in preventing
cable service theft.(note 29) The
House Commerce Committee report also stated that "the Committee
does not intend that cable operators be treated as common carriers
with respect to the internal cabling installed in subscribers'
homes."(note 30) Within this
narrow mandate, the FCC has adopted rules that establish a
"demarcation point" that is located at (or about) "twelve inches
outside of where the cable wire enters the outside wall of the
subscriber's premises."(note 31) The
location of the cable demarcation point is thus similar to the
network demarcation point separating the facilities of
communications common carriers from customer-owned inside wiring.(note 32) Under the current rules for
cable home wiring, however, the demarcation point has no meaning
until a subscriber terminates service and opts to purchase the
wiring installed in the home.(note
33) In cases where subscribers own their home wiring, and seek
service from a cable operator (for example, from a second cable
operator or "overbuilder") who requires the use of converter boxes
provided by that cable operator, the results would resemble the so-
called "interpositioning" situations that arose in the 1970s
involving telephone equipment.(note
34) When service provider equipment is interpositioned,
questions may arise concerning subscriber control over wiring that
is "theirs," but functions only to connect a cable system-provided
converter box with cable system facilities.C. Consumer Electronics Compatibility and the "Buy-Through
Prohibition"
Section 17 of the 1992 Cable Act(note 35) and the FCC's proceeding on
compatibility between cable systems and consumer electronics
provide the largest number of pieces in the unbundling jigsaw
puzzle. The main thrust of the statute and the FCC's inquiry is how
to eliminate the impairment of the advanced capabilities of
television receivers and videocassette recorders by "cable
scrambling, encoding, or encryption technologies and devices,
including converter boxes and remote control devices required by
cable operators to receive programming."(note 36) The FCC has been directed to craft
regulations "to promote the commercial availability, from cable
operators and retail vendors that are not affiliated with cable
systems, of converter boxes and of remote control devices
compatible with converter boxes."(note
37) This provision constitutes a direct invitation to the FCC
to fashion regulations that would unbundle the provision,
not just the rates, of cable equipment from cable service.
A comprehensive regulatory scheme with the ultimate goal of cable
equipment unbundling would likely satisfy this statutory
requirement and the larger goal of compatibility with consumer
electronics.II. The Blueprint: The FCC's History
of CPE Unbundling
Converter boxes and the like may be "necessary" to receive
cable service in many cable systems, because of system design,
frequency mapping, encryption, or other technical reasons. But mere
"necessity" for delivery of service is not a sufficient
justification for bundled, sole-source provision of equipment to
cable subscribers. Telephones, answering machines, fax machines,
and so forth are necessary to receive telephone service, but the
FCC long ago began a regulatory process that led to the unbundling
of this equipment from telephone service. Throughout that process,
the FCC focused on a central theme: creation of private benefit as
long as there is no public harm. The same philosophy can be applied
to cable equipment.A.The Origins of the Unbundling Policy
The policy favoring unbundling of customer-premises equipment
first began to develop with the assault upon the restrictive
interconnection practices of AT&T in 1948. A petition was filed
against AT&T for interference with the use, distribution, and
interconnection of the Hush-A-Phone, a cup-like device that snapped
onto the telephone handset to reduce the interference of ambient
noise and to increase privacy, but which had the side effect of
making the user's voice somewhat softer and less clear.(note 45) The court of appeals stated
in its review that the issue to be addressed was "whether the
Commission possesses enough control over the subscriber's use of
his telephone to authorize the telephone company to prevent him
from conversing in comparatively low and distorted tones."(note 46) After observing that such a
reduction in quality affected only the two parties to the call and
not the entire network, the court concluded that the tariff
constituted an unwarranted interference with the "subscriber's
right reasonably to use his telephone in ways which are privately
beneficial without being publicly detrimental."(note 47) In 1968, the FCC began its own
crusade for interconnection with its Carterfone decision,(note 48) which the Commission later
called its point of embarkation "on a conscious policy of promoting
competition in the terminal equipment market."(note 49) Relying on the principle established in
Hush-A-Phone, the Commission invalidated the tariff that
prohibited the attachment of customer-provided devices on the
switched telephone system, including the Carterfone. Since
communications users who utilized the switched network prior to
Carterfone were restricted to the use of Bell System
equipment, Carterfone provided customers with the
opportunity to choose between AT&T and the various independent
terminal equipment suppliers for their interconnection needs on the
switched network.B.The Computer II Decision
Historically, most CPE was unbundled (separately priced) from
transmission services, but offered pursuant to tariff. The
telephone company was the sole provider for most CPE. Later,
customers could provide their own CPE or obtain the CPE from the
carrier pursuant to tariff. Carrier-provided CPE was generally only
available to a customer of that carrier's regulated transmission
services.C.Post-Computer II Developments
Two years after the Final Decision in Computer
II, the AT&T divestiture consent decree was approved with
modification by the district court,(note
65) and two years after that, AT&T petitioned for relief from
the structural separation requirements embodied in 47 C.F.R.
Section 64.702.(note 66) The
comments filed in response to the petition led to the creation of
CC Docket No. 85-26, in which the FCC amended certain aspects of
the Computer II regulatory model.(note 67) This order permitted AT&T to provide CPE
free from the structural separation requirements set forth in the
Computer II decision.(note
68) The CPE unbundling and detariffing requirements, however,
were not revised. In fact, these requirements were extended in 1984
to equipment located on customers' premises used to terminate
digital communications services, so-called network channel
terminating equipment (NCTE).(note
69) In 1986, the unbundling of CPE was hailed as a major
achievement by then-Chairman Mark Fowler, former Common Carrier
Bureau Chief Albert Halprin, and James Schlichting, when they
explained the benefits of competition in CPE:Conclusion
There is no doubt that there is a convergence of technology
that is taking place in the telecommunications and electronic mass
media markets. One manifestation is the FCC's "video dialtone"
decision, which permits telephone companies to provide "switched
video" on a common carrier basis.(note
76) Cable companies are likewise jumping into new, wireless
"personal communications services" as fast as the technology
develops.(note 77) Another form of
convergence takes place when a consumer buys a high-resolution
monitor that can display computer graphics or full-motion video, or
simply purchases a universal remote control unit that can
interoperate with her television, VCR, home stereo, and cable
converter box. What has been absent thus far is the integration of
telecommunications and computer technology with cable systems at
the subscriber's premises. Cable companies have not, however,
overlooked the promise of integrating computer "intelligence" with
cable equipment.(note 78) The issue
that is presented is who will control this technologyconsumers or
cable operators.Notes
*J.D. Catholic University of America, 1985; LL.M. Georgetown
University Law Center, 1987. Currently, an associate specializing
in telecommunications at Squire, Sanders & Dempsey, Washington,
D.C. The Author gratefully acknowledges the suggestions and
assistance of Herbert E. Marks, James L. Casserly, and Martha H.
Platt. The views expressed herein are entirely those of the Author
and do not necessarily reflect the views of any of his colleagues
at Squire, Sanders & Dempsey or any of the firm's clients.
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