Appeals Court Upholds FCC SMATV Decision

(December 9, 1999) The U.S. Court of Appeals on December 7 upheld a decision of the FCC that SMATV providers are not cable operators that have to obtain franchises from local governments. The FCC and courts have yet to take a position on other classification issues, such as the status of broadband Internet access over cable.

Related Documents
Appeals Court Opinion in Chicago v. FCC, 12/7/99.
FCC Memorandum Opinion and Order, 6/30/98. (FCC web site.)
Tristani Dissent, 6/30/98. (FCC web site.)
SMATV Section of the FCC's "Fifth Annual Report", 12/28/98.

The Federal Communications Commission (FCC) released a decision June 30, 1998 that Entertainment Connections, Inc. (ECI), a satellite master antenna television system (SMATV) provider, is not a cable operator within the meaning of the Title 47, and therefore, does not have to obtain a cable franchise from the City of East Lansing, where it does business.

Petitions for review of this decision were filed by many parties, including local governments, the National Cable Television Association (NCTA), and the National Association of Telecommunications Officers and Advisors (NATOA). The cases were all consolidated into this one proceeding, Chicago v. FCC, in the U.S. Court of Appeals for the Seventh Circuit in Chicago.

A divided three judge panel ruled issued its opinion on December 7, 1999 upholding the FCC's decision. Judge Evans wrote the majority opinion, which Judge Bauer joined. Judge Rovner wrote a dissent. In addition, the FCC's ruling had been divided also, with Commissioner Gloria Tristani writing a lengthy dissent.

What is SMATV?
SMATV is an acronym for satellite master antenna television system. It is also sometimes referred to as "private cable." SMATV systems are satellite systems used to distribute television signals to households located in one or more adjacent buildings, primarily serving urban and suburban multiple dwelling units (MDUs). SMATV systems do not use public rights-of-way; hence, the FCC has determined that they fall outside of the Communications Act's definition of a cable system. There are about one million households with SMATV service, although estimates vary. In addition to offering video programming, some SMATV providers also offer Internet access and/or telecommunications services.

The federal and local governments share regulatory responsibilities for cable television. When Congress passed the 1984 Cable Act, it codified the existing practices of having local governments issue franchises to cable television operators, and having the FCC regulate these local regulators. (See, Section 621(b) of the Communications Act.)

When the Congress passed the Telecom Act of 1996, it added a new provision which that the term "cable system" does not include "a facility that serves subscribers without using any public right-of-way." The purpose was to increase competition in video programming.

Both local governments and cable TV companies have a shared interest in this local franchising arrangement. Cable TV companies benefit by getting a monopoly franchise. The local governments benefit by getting a share of the revenues. Congress limited the take to 5% in the 1984 Cable Act. However, noncash tranfers remain unregulated. These include political contributions, free equipment and services for local governments and community groups, and insider stock deals for local notables.

Historically, local franchising authorities have tended to protect their cable TV monopolies from competitors. Some competing cable TV companies have been deterred by onerous universal service requirements.

Also, both local governments and cable television companies have been hostile to other technologies that allow competition with cable TV companies. This has been evidenced by attempts by local governments to exclude or limit SMATV and private satellite dishes.

In contrast, the Telecom Act of 1996 is a pro-competitive statute. Moreover, the FCC is under considerable pressure from the Congress to facilitate increased competition in the provision of all communications and information services. In particular, cable TV rates are a major source of constituent complaints. Members of Congress are also want lower phone rates, and rapid and widespread deployment of affordable broadband Internet access. The dominant viewpoint in Congress is that competition is the solution.

The FCC adopted a pro-competitive position in its SMATV decision.

What is a Cable Operator?
(excerpts from the Communications Act)
Cable Operator: "... any person or group of persons (A) who provides cable service over a cable system and directly or through one or more affiliates owns a significant interest in such cable system, or (B) who otherwise controls or is responsible for, through any arrangement, the management and operation of such a cable system."
Cable System: "a facility, consisting of a set of closed transmission paths and associated signal generation, reception, and control equipment that is designed to provide cable service which includes video programming and which is provided to multiple subscribers within a community, but such term does not include . . . (B) a facility that serves subscribers without using any public right-of- way."

Nevertheless, the petitioners in the Seventh Circuit proceeding argued that the FCC misinterpreted the Communications Act's definition of the term cable operator. They argued that ECI should have been classified as a cable operator.

The Court disagreed.

It first analyzed what standard of review to apply. Under the Chevron doctrine, if a statute is silent or ambiguous, then the court must only decide whether the agency's determination is based on a permissible construction of the statute.

The Court determined that there are ambiguities in the statute, and that the FCC's interpretation was reasonable. However, the Court added that the FCC's interpretation "is one which we are now convinced we would arrive at ourselves, were we the ones making the original determination."

The Court reviewed in detail the nature of ECI's operations, and concluded that the FCC was reasonable in concluding that they did not meet the statutory definition of cable operator.

This case, Chicago v. FCC, is a dispute over how to apply a once clear regulatory category to an emerging type of service provider.

Until recently, most types of businesses and services regulated by the FCC fit into easily definable and distinguishable regulatory categories. Technologies were less developed, and many companies were prohibited from entering into certain other types of business. It was easy to distinguish a cable TV company from a broadcast company from a phone company. Also, it was easy to distinguish between unregulated information services and regulated communications services.

Recently, the advancement and convergence of technologies has made it harder to apply old categories. Also, the removal of government restrictions has allowed companies to compete in multiple types of markets. The boundaries between regulatory categories, and between regulated and unregulated services, is breaking down.

Perhaps one million households receive video programming via SMATV. Few people are now receiving Internet access from SMATV providers. However, there are other cable issues which are more important. For example, there is the question of whether broadband Internet access over coaxial able constitutes a cable service which is subject to local franchising, and FCC regulation.

The FCC filed an amicus curiae brief in the case AT&T v. Portland on August 16 in which it stated that it has not yet taken a position on this issue. Of course, local governments, such as the City of Portland, assert that broadband Internet access over cable is a cable service.