by the chief, common carrier bureau: table of contents ... · hawaii. gte virginia, gte florida,...

DA 95-1012

Before theFEDERAL COMMUNICATIONS COMMISSION

Washington, D.C. 20554

In the Matter of the Applications of

CONTEL OF VIRGINIA, INC., doing business as GTE Virginia

GTE Florida Incorporated

GTE California Incorporated

GTE Hawaiian Telephone Company, Inc.

File Nos. W-P-C-6955 W-P-C-6956 W-P-C-6957 W-P-C-6958

For Authority pursuant to Section 214 of the Communications Act of 1934, as amended, and Section 63.01 of the Commission's Rules, to construct, operate, and maintain facilities to provide video dialtone service to communities in Virginia, Florida, California, and Hawaii

ORDER AND AUT"QttT7.ATfOTM

Adopted: April 28, 1995

By the Chief, Common Carrier Bureau:

Table of Contents

Released: May 5, 1995

I.

Paragraph No.

Introduction 1

n. The Applications ........................................ 3

ffl. Discussion ........................................... 12

A. Video Dialtone Issues ................................ 12

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1. Sufficient Capacity ............................. 132. Non-Discriminatory Access ........................ 223. GTE Provision of Video Programming ................. 40

B. Section 214 Issues .................................. 42

1. Section 214 Legal Standard ........................ 422. Economic Justification ........................... 503. Cross-Subsidy Issues ............................ 90

C. Accounting Conditions and the Tariffing Process ................ 101

D. Public Interest Benefits of the Proposed Video Dialtone Systems ...... 105

E. Pole Attachment Issue ................................ 110

IV. NCTA Motion to Dismiss .................................. 112

V. Conclusion ........................................... 114

VI. Ordering Clauses ....................................... 115

Appendix A: Pleadings and Documents Filed

Appendix B: Site Specific Statistics for GTE's Proposed Video Dialtone Systems

I. INTRODUCTION

1. On May 23, 1994, Contel of Virginia, Inc., which merged into GTE South, Incorporated, on September 30,1994 (GTE Virginia), GTE Florida Incorporated (GTE Florida), GTE California Incorporated (GTE California), and GTE Hawaiian Telephone Company, Inc. (GTE Hawaii), each filed an application pursuant to Section 214 of the Communications Act of 1934, as amended (Communications Act or Act), 1 for authority to construct, operate, and maintain facilities to provide video dialtone service in various communities in Virginia, Florida, California, and Hawaii.2 For the reasons discussed below, we grant GTE's applications, subject

47 U.S.C. § 214.

GTE Virginia, File No. 6955, proposes to provide video dialtone service in ' Manassas, Virginia. GTE Florida, File No. 6956, proposes to provide video dialtone service in Pinellas and Pasco Counties, Florida. GTE California, File No. 6957, proposes to provide video dialtone service in Ventura County, California. GTE Hawaii, File No. 6958, proposes to provide video dialtone service in Honolulu,

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to the conditions described herein. We conclude that the applications as presented, with certain exceptions, satisfy the Commission's video dialtone rules and policies, and the proposed construction will serve the public convenience and necessity.

2. In the Video Dialtone Order the Commission determined that, local telephone companies could participate through video dialtone in the video marketplace, consistent with statutory restrictions on telephone company-cable television cross-ownership. 3 "Video dialtone" is defined as the provision by a local telephone company of a basic common carrier platform to multiple video programmers on a nondiscriminatory basis. 4 A "basic platform" is a common carriage transmission service which allows end-user subscribers access to all video programming carried on the platform. 5 If a local telephone company offers such a basic platform, it may also provide enhanced and non-common carrier services related to the provision of video programming. 6 The Commission also determined that a Section 214 application was. the proper procedural vehicle for proposing video dialtone service. 7

H. THE APPLICATIONS

Hawaii. GTE Virginia, GTE Florida, GTE California, and GTE Hawaii are collectively referred to herein as GTE. Because of their substantial similarity, we consolidate our consideration of the four applications for purposes of this Order.

3 The Commission adopted video dialtone rules in Telephone Company-CableTelevision Cross-Ownership Rules. Sections 63.54-63.58. Second Report and Order. Recommendation to Congress, and Second Further Notice of Proposed Rulemaking. 7 FCC Red 5781 (1992) (Video Dialtone Order), aff d in part and modified in part. 10 FCC Red 244 (1994) (Video Dialtone Reconsideration Order), appeal pending sub nom.. Mankato Citizens Telephone Company v. FCC. No. 92-1404 (D.C. Cir. Sept. 9, 1992).

4 Video Dialtone Order at para. 2.

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6 Video Dialtone Order at para. 2. The telephone company may offer enhanced and other nonregulated services related to video programming to any video programmer, in areas substantially served by a video dialtone platform, without regard to whether the video programmer purchasing such services uses the platform. Video Dialtone Reconsideration Order at para. 88.

7 Video Dialtone Order at paras. 21, 72, 141-142. Generally, Section 214 requires Commission authorization before a carrier extends a new interstate line of communication. For Section 214 purposes, a "line" means "any channel of communication established by appropriate equipment, other than a channel of communication established by the interconnection of two or more existing channels." 47 U.S.C. § 214(a).

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3. On May 23, 1994, four operating companies of GTE (collectively GTE) filed Section 214 applications for authority to provide video dialtone service in certain areas within Virginia, Florida, California, and Hawaii. GTE amended each of its applications on June 15, 1994, and December 16, 1994. 8 Fifteen parties filed petitions to deny or comments in response to'one or more of the applications. 9 On July 20, 1994, GTE filed a Consolidated Opposition to Petitions to Deny (GTE.Jul. 1994 Consolidated Opposition). Six parties filed replies. 10_.In a December 9. 1994, letter, the Chief of the Common Carrier Bureau asked GTE to respond to staff questions regarding the applications and to submit specific data. 11 GTE filed a response on December 16, 1994 (GTE Dec. 1994 Response). Also on December 16, 1994, GTE amended each of its applications. 12 By the filing deadline of January 18, 1995, eight parties filed responses to GTE's amendments and replies to GTE's Response to the Bureau's Data Request. On February 2, 1995, GTE filed a Consolidated Reply Comments and Opposition to Petitions to Deny (GTE Feb. 1995 Consolidated Reply). On March 10, 1995, the Common Carrier Bureau released Guidelines on Video Dialtone Applications. 13 The Guidelines clarify certain requirements of Sections 63.01 of the Commission's Rules and identify information likely to be relevant in determining whether an application satisfies the Commission's video dialtone requirements. In response to the Guidelines, GTE filed an ex pane document entitled "GTE Supplemental Information" on March 31, 1995 (GTE Mar. 1995 Supplemental). Three parties responded by filing ex pane comments on April 14, 1995.

4. On November 21, 1994, the United States Court of Appeals for the Fourth Circuit ruled that the 1984 Cable Act's telco-cable cross-ownership ban violates the First Amendment

8 GTE Virginia submitted an additional amendment to its application on October 20, 1994.

9 A list of the pleadings filed on the applications and the citations used in this order are contained in the Appendix.

10 A complete history of the filings in these proceedings is contained in Appendix A.

11 Letter from Kathleen M.H. Wallman, Chief, Common Carrier Bureau, to Edwin J. Shimizu, Director-Regulatory Matters, GTE Service Corporation, December 9, 1994 ("Data Request").

12 Pleading Cycle Established for Comments on GTE's Amendments to its Section 214 Application and GTE's Response to Data Request. W-P-C-6955. W-P-C-6956. W-P- C-6957. and W-P-C-6958. DA 94-1534, Public Notice rel. Dec. 19, 1994.

13 News Release, Common Carrier Bureau Provides Guidance on Video Dialtone Applications. Report No. CC 95-18, rel. Mar. 10, 1995.

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rights of telephone companies. 14 In January, 1995, the U.S. District Court for the Eastern District of Virginia found, in accordance with the Fourth Circuit's ruling in C&P Tel. Co. v. U.S.. that the cross-ownership ban is unconstitutional and enjoined enforcement of the statute against GTE. 15 On March 17, 1995, the Commission announced its enforcement policy with regard to Section 613(b) of the Act and Section 63.54 of the Commission's rules. 16 The Commission stated that, pending the outcome of any further judicial review, it will not enforce the telephone company-cable television cross-ownership restriction against GTE.

5. GTE states that its proposed video dialtone service will enable customer-programmers to purchase transport and interconnection services to provide subscribers with video programming and non-video programming material. 17 GTE anticipates that this material eventually will include interactive services such as home shopping, educational programming, information services, video-on-demand, enhanced pay-per-view, and a full selection of broadcast and cable-like programming. 18 The proposed systems will also be capable of providing two-way service, making distance learning and video conferencing accessible to subscribers. 19

6. GTE proposes to construct a stand-alone hybrid fiber-coaxial cable ("HFC") facility with a bandwidth of 750 MHz.20 GTE's proposed HFC architecture will use fiber optic cables containing a minimum of six fibers to connect the head-end to multiple nodes located throughout

14 Chesapeake & Potomac Tel. Co. of Virginia v U^fr?^ fitfltPii No. 93-2340 (4th Cir. Nov. 21, 1994) rC&P Tel. Co. v. U.S.).

13 GTE South. Inc. and GTE Corporation v. U.S.. No. 94-1588-A (E.D.Va. Jan. 13, 1995) slip op. at 1-2 (GTE v U.S.).

16 Public Notice. DA 95-520, rel. Mar. 17, 1995, Erratum. DA 95-722, id. Apr. 3, 1995.

17 GTE May 1994 Applications at 2.18 IsL

19 Id, at 2-3.

20 Id. at 6. GTE describes the basic platform as consisting of standard video head-end equipment, fiber optic transmission and receiving equipment, and directory functions. Id., at 7. GTE will establish a point of termination at the head-end for customer- programmer connection of analog or digital video and audio signals to the video dialtone network. Id. at 7. GTE will either modulate or encode analog signals for transmission on an analog or digital channel, and will multiplex digital signals onto the video dialtone network. Id. at 8.

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the market area. 21 Each node serves approximately 500 homes. 23 From the node, coaxial cable will run to the subscriber's premises. 23 GTE intends to use its proposed HFC network solely to provide video dialtone. GTE states that it is not currently technically or economically feasible to provide telephony over its video dialtone network. 24

7. GTE proposes to construct video dialtone facilities in Virginia that will pass approximately 67,000 premises in year 1; 116,000 by year 5; 134,000 by year 10: and 148.000 by year 15. M In Florida, GTE proposes to pass approximately 231,000 premises in year 1. 490,000 by year 5; 522,000 by year 10; and 554,000 by year 15. 26 In California, GTE proposes to pass approximately 83,000 premises in year 1; 126,000 by year 5; 136,000 by year 10: and 146,000 by year 15." Finally, in Hawaii, GTE proposed to pass approximately 171,000 premises in year 1; 370,000 by year 5; 441,000 by year 10; and 522,000 by year 15. 28 Looking beyond the scope of the current applications, GTE says it is planning to extend video dialtone to approximately 7 million homes, in a total of 66 markets, within the next 10 years. 29

8. GTE states that its proposed systems will initially provide 80 analog channels, the equivalent of four reverse analog channels,30 and approximately 168 compressed digital channels. 31 GTE further states that an additional 24 compressed digital channels can be added

21 Id, at 8, 12.

22 LI at 8.23 Id,

24 GTE Dec. 1994 Response at 4. GTE states that certain issues remain unresolved, including: (1) an economical method of powering the HFC network; (2) uncertain quality and reliability; and (3) high maintenance costs. Id.

25 GTE Virginia Dec. 1994 Amendment at 3; GTE Dec. 1994 Response at Attach. 1.

26 GTE Honda Dec. 1994 Amendment at 2; GTE Dec. 1994 Response at Attach. 1.

27 GTE California Dec. 1994 Amendment at 2; GTE Dec. 1994 Response at Attach. 1.

28 GTE Hawaii Dec. 1994 Amendment at 2; GTE Dec. 1994 Response at Attach. 1.

29 GTE Jul. 1994 Consolidated Opposition at 3.

30 Reverse analog channels allow upstream transmission of full-bandwidth analog video signals, from points on the network to the head end.

31 GTE May 1994 Applications at 13.

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without reducing the number of analog channels. 32 GTE plans to offer channel capacity on a first- come, first-served basis. 33 According to GTE's proposal, no programmer will be permitted to purchase more than 60% of the network's analog capacity. Any capacity unused after six months will be allocated on a first- come, first-served basis, contingent upon the agreement that a customer-programmer exceeding the 60% limit (excluding shared channels) will relinquish such additional channels on a timely basis if another customer-programmer requests them. 34

9. GTE proposes a shared channel arrangement for some video signals. GTE defines shared channels as those channels designated by any customer-programmer for transpon of the signals of local commercial television stations, qualified noncommercial educational television stations, and those channels voluntarily made available by GTE to local governmental entities. 35 GTE states that: (1) no programmer is required to subscribe to any of the shared channels to gain access to the platform; (2) shared channels will be made available to all interested programmers under the same terms, conditions, and rates; (3) shared channels are based on existing regulatory criteria; (4) local broadcast channels are designated as shared since they typically constitute the most popular local channels;36 (5) designation of a channel as shared, if carried by one or more programmers, does not place GTE in the position of exercising any

32 GTE Jul. 1994 Consolidated Opposition at 11; GTE Feb. 1995 Consolidated Reply at 28. GTE states that its initial capacity of 248 channels is designed to meet initial anticipated demand, but that its system can be adjusted to provide over 600 channels. GTE July 1994 Consolidated Opposition at 9. GTE projects a digital compression ratio of 6 to 1. GTE May 1994 Applications at 13.

33 GTE states that its digital compression technology is scheduled to be available late in the first quarter or early in the second quarter of 1995.

34 GTE Dec. 1994 Response at 19; GTE Dec. 1994 Amendments at 2-3; GTE Mar. 1995 Supplemental at 14.

35 GTE Dec. 1994 Amendments at 2-3; GTE Dec. Response at 19; GTE Feb. 1995 Consolidated Reply at 32; GTE Mar. Supplemental at 15. GTE states that it will not make channels available to local government agencies unless and until the Commission approves such a proposal. GTE Mar. 1995 Supplemental at 15 n. 6.

36 GTE asserts that: (a) its proposal to offer local broadcast and non-commercial educational stations as shared channels does not discriminate against any class or category of programmer; (b) programmers that desire to deliver local broadcast-type channels as part of a package of video programming services will be able to do so; and (c) other programmers that prefer to offer their services on an individualized basis will be afforded equal opportunities to lease analog channels on GTE's networks. GTE Feb. 1995 Consolidated Reply at 33; GTE Mar. 1995 Supplemental at 15.

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editorial control over the programming decisions of customer-programmers; and (6) no channel administrator or manager exists under the proposal. 37

10. GTE states that it will offer, under tariff, basic video dialtone platform service and related equipment to all video programmers on a nondiscriminatory basis in accordance with our video dialtone requirements. 38 GTE-affiliated programmers will take service pursuant to tariff under the same rates, terms, and conditions as other programmers. 39 GTE has stated in each of its applications that it reserves the right to offer platform service to an affiliated customer- programmer, and has requested authority to offer video dialtone service to both affiliated and unaffiliated customer-programmers.40 GTE proposes provision of service to a affiliated customer-programmer in reliance on GTE v. US.41 In an exparte letter dated April 25, 1995, however, GTE makes the following request: "If GTE's requests for authority to provide [video dialtone] service to affiliated programmers will delay consideration of GTE's application, GTE respectfully requests that the Bureau act upon the above-referenced applications upon delegated authority, excluding only the portion of each application which request for authority to provide [video dialtone] service to affiliated programmers."42

11. GTE proposes to provide non-tariffed video customer premises equipment (CPE) and ancillary services such as billing, collection, and order processing on a nonregulated basis in accordance with Part 64 of the Commission's rules.43 According to GTE, a video decoder is necessary for subscriber access to all channels and all services. GTE proposes to provide decoders on a nonregulated basis and states that subscribers may obtain decoders from other sources.44 GTE further states that subscribers will have the option of obtaining decoders with

37 GTE Feb. 1995 Consolidated Reply at 32-33.

38 See GTE Mar. 1995 Supplemental at 16; Video Dialtone Order at para. 2; Video Dialtone Reconsideration Order at para. 30-34.

39 GTE Mar. 1995 Supplemental at 16-17.

40 GTE Virginia May 1994 Application at 2; GTE California, GTE Hawaii, and GTE Florida May 1994 Applications at 3 n. 4; GTE Mar. 1995 Supplemental at 16.

41 GTE v. US. No. 94-1599-A (E.D.Va., Jan. 13, 1995).

42 See Letter from Edwin J. Shimizu, Director - Regulatory Matters, GTE Service Corporation, to Kathleen M.H. Wallman, Chief, Common Carrier Bureau, Federal Communications Commission (April 25, 1995) (GTE Apr. 25, 1995 ex parte).

43 GTE May 1994 Applications at 3; GTE Dec. 1994 Amendments at 4.

44 GTE May 1994 Applications at 9; GTE Dec. 1994 Amendments at 2; GTE Mar. 1995 Supplement at 8. GTE states that analog decoders currently are available from

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analog-only capabilities or decoders with combined analog and digital functionalities.45 GTE states that it will also account for the investments and expenses associated with the provision of video dialtone service in accordance with Parts 32, 36, 64 and 69 of the Commission's rules. 46 According to GTE, the incremental investment costs to achieve and maintain video dialtone capability and the overhead costs to support both telephony and broadband capacity will be assigned to the appropriate jurisdiction by the use of the Commission's Part 36 (Jurisdictional Separation) rules. 47

ra. DISCUSSIONA. Video Dialtone Issues

12. To qualify as video dialtone under the Commission's rules, a service must meet the requirements set forth in the Video Dialtone Order, as modified and clarified in the Video Dialtone Reconsideration Order. Among other things, the service must include a basic common carrier platform available to multiple video programmers on a nondiscriminatory basis, and a selection system (level 1 gateway menu) that allows end-user subscribers access to any and all of the video programming offered. 48 The platform must provide "sufficient capacity to serve multiple video programmers. " 49 Carriers must also expand capacity to the extent "technically

different manufacturers. GTE Mar. 1995 Supplement at 8. GTE states that it has vendor commitments sufficient to meet its demand for hybrid analog/digital decoders, but is unaware of plans for retail distribution of such decoders. Id. GTE states that "to the extent any decoder manufacturer allows direct purchases of its products, end- users connected to GTE's video dialtone networks would be permitted to obtain their own decoders provided that such equipment is compatible with GTE's system technology and standards." Id.

45 GTE Dec. 1994 Amendments at 2; GTE Mar. 1995 Supplemental at 6.

46 Id., at 13.

47 GTE Dec. 1994 Amendments at 3-4.

44 Video Diahone Orderat para. 2 & n.3. See also Video Dialtone Reconsideration Order at paras. 30-34.

49 Video Dialtone Order at para. 29. The platform also must be expandable, pursuant to the Commission's requirement that "the platform must have the ability ... to expand as demand increases so as not to become a bottleneck that will thwart realization of our public interest goals." Id. at para. 30. The Commission has subsequently clarified that "under our video dialtone requirements, local exchange carriers (LECs) are required to expand whenever, and to the extent that, expansion is technically

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feasible and economically reasonable. "50 We conclude that the system proposed by GTE satisfies the "basic platform" requirement of our video dialtone rules. For the reasons set forth below, we find that GTE's applications meet the Commission's video dialtone requirements of nondiscrimination and sufficient capacity.

1. Sufficient Capacity

a. Pleadings

13. Several petitioners argue that GTE's applications should be rejected because the proposed systems fail to provide sufficient capacity to serve multiple video programmers. 51 One petitioner contends that digital capacity will be unavailable initially and that 80 analog channels are insufficient to serve multiple video programmers. 32 Another petitioner asserts that, even if digital capacity were available initially, 248 channels is insufficient in light of the Commission's requirement that Ameritech provide 390 channels.33

14. Petitioners also express concern about GTE's description of how it will handle capacity limitations. Although GTE promises to convert analog to create digital capacity to meet demand, petitioners claim that GTE offers no plan to expand analog capacity. 54 Petitioners also assert that, because it will not be economically feasible for all subscribers to obtain a set-top box with digital capabilities, GTE's promise of expansion through digital compression is an empty one. 55 In addition, CFA/CME asserts that GTE's failure to provide clear expansion guidelines

feasible and economically reasonable. " Video PiflltQfle Reconsideration Order at para. 38. The Commission addresses claims that expansion is not technically feasible and economically reasonable on a case-by-case basis. Id.

50 Video Pifllfone Reconsideration Order at para. 38.

51 See Virginia Cable Television Association (VCTA), Hawaii Cable Television Association (HCTA), California Cable Television Association (CCTA), State of Hawaii Reply, Vision Cable of Pinellas County (Vision Cable).

52 VCTA Jul. 1994 Petition to Deny at 25-26.

53 CCTA Jul. 1994 Petition to Deny at 20-21. See Ameritech Operating Companies. FCC 94-340 (rel. Jan. 4, 1995) (Ameritech Order) at para. 14.

54 FCTA Jul. 1994 Petition to Deny at 16-17; VCTA Jul. 1994 Petition to Deny at 29 & n. 93; FCTA Jul. 1994 Petition to Deny at 21; HCTA Jul. 1994 Petition to Deny at 18.

55 FCTA Jan. 1995 Comments at 23.

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will result in manipulation of its system to the disadvantage of independent programmers. 56

15. In response, GTE asserts that its system has sufficient capacity to satisfy current demand and identifies four methods for expansion. 57 With regard to arguments that GTE's proposed systems will initially rely solely on analog technology, GTE states that digital compression technology is currently available and will be deployed in all phases of its video dialtone network development." GTE further asserts that vendors are expected to be able to deliver set-top boxes capable of delivering digital signals in sufficient quantities in 1996 or even as early as the fourth quarter of 1995. 59

2. Discussion

16. A local telephone company that wishes to provide video dialtone service must make available a basic common carrier platform to multiple video programmers, and must be able to expand its capacity to accommodate increasing demand, 60 to the extent it is technically feasible and economically reasonable. 61 The Commission has stated in several orders recently that, in applying the capacity requirement, it would review each application on a case-by-case basis taking into consideration: (1) the initial capacity available; (2) the applicant's ability to expand this capacity; and (3) the demand for capacity.62 Under the Video Dialtone Order and the Video Dialtone Reconsideration Order, the question of adequate capacity is treated as a separate issue

56 CFA/CME Jul. 1994 Petition to Deny at 10.

57 GTE Feb. 1995 Consolidated Reply at 28. GTE has identified four methods for expanding channel capacity: (1) converting analog channels to compressed digital channels; (2) altering the mix of analog and compressed digital channels; (3) promoting sharing of common analog channels by multiple customer-programmers so as to make more efficient use of available analog capacity; and (4) narrowing the delivery area of the video serving office. See also Ameritech Order at para. 11.

f

58 GTE Feb. 1995 Consolidated Reply at 28.\.

59 JjL at 28-29; GTE Apr. 1995 Supplemental at 8.

60 Video Dialtone Order at paras. 2, 29, 30.

61 Video piftltone Reconsideration Order at para. 38.

62 New Jersey Bell Telephone Company (Dover). Order and Authorization. 9 FCC Red 3677, 3685 at para. 41 (1994) (Dover Order): Ameritech Order at para. 13 ; New England Telephone and Telegraph Company. FCC 95-50 (rel. Mar. 6, 1995) at para. 21 (NYNEX Order): see also Southern New England Telephone Co.. 9 FCC Red 1019, 1021 at para. 13, n. 46 (SNET Trial). In SNET Trial, we also considered a fourth factor, applicable to trials, which is the duration of the offering.

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from the provision of nondiscriminatory access.63

17. The initial capacity of GTE's proposed systems will be 80 analog channels and 168 digital channels. GTE states that this allocation arrangement was designed to satisfy initial anticipated demand. GTE also states that it will expand capacity to meet demand and that its proposed network is capable of expansion to 600 digital channels. 64 No party suggests that 600 channels is insufficient capacity. Rather, petitioners question the ability of GTE initially to provide digital channels and assert that any initial capacity short of Ameritech's 390 channels is unsatisfactory.

18. The Bureau rejects arguments that it should deny GTE's applications because digital capacity is unavailable. GTE represents that digital technology, including compression technology, is available now, and that it can be deployed in video dialtone systems. 65 We note that in every application the Commission has thus far approved for a commercial HFC system, a high proportion of the capacity has been digital channels.66 Moreover, as stated in the NYNEX Order, digital capacity will provide a foundation for a wide array of interactive services that will allow subscribers to select unique video services with enhanced functionalities; digital networks are compatible with stored-digital technologies and advanced service features and capabilities; and digital networks can be maintained more efficiently. 67 GTE's anticipation of initial demand for analog channels does not undennine its showing that digital capacity is available, but, rather, indicates its awareness that in the short term video dialtone platform providers must be prepared to respond to both analog and digital demand.

19. We also reject petitioners' arguments that the cost of CPE to perform digital conversion undermines the sufficiency of GTE's digital offering.6* As an initial matter, there appears to be demand for services, such as Direct Broadcast Satellite, that require use of digital

63 See infra paras. 32-41, for discussion of the Commission's requirement of nondiscriminatory access to video dialtone capacity.

64 GTE May 1994 Applications at 13; GTE Jul. 1994 Consolidated Opposition at 8-9.

65 GTE Mar. 1995 Supplemental at 10.

46 Dover Order at para. 14 (100% digital: 64 channels initially, expanded to 384 within six months); Ameritech Order at para. 14 (390 total initial channels: 70 analog, 240 digital and 80 switched digital); NYNEX Order at para. 22 (21 analog and between 400 and 800 digital, depending on compression rates).

67 t^IYNEX Order at para. 22.

68 In the Third Further Notice of Proposed Rule Making, the Commission asked parties to comment on the technical, economic, and operational feasibility of digital equipment and facilities. Video Dialtone Reconsideration Order at para. 270.

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set-top converters.0 Moreover, there is substantial evidence that the price of digital converters will drop significantly in the near future, as they move into mass production. 70 GTE asserts that vendors are expected to be able to deliver digital-capable set-top boxes in sufficient quantities in the fourth quarter of 1995 such that programmers may deploy digital broadcast, video-on- demand, and other interactive services. 71 GTE projects total digital services revenues within four years of over $ 6 million in Virginia, over $ 27 million in Florida, over $ 8 million in California, and over $ 17 million in Hawaii. 72 Thus, we are convinced that GTE's applications present a sufficient basis for determining that digital capacity is both technically and economically available for purposes of meeting the requirements of the Video Dialtone Order. Nonetheless, we grant this authorization subject to the condition that digital set-top boxes be available for use by subscribers when GTE begins to offer video dialtone service over its proposed systems.

20. A related capacity issue is whether GTE's initial plan provides for sufficient analog capacity. GTE stated in its applications that it would expand capacity to meet demands. 73 In subsequent filings, GTE indicated that capacity will be expanded through digital channel expansion and sharing of analog channels, but did not commit to expanding analog capacity.74 We note that in the NYNE3£ Order, the Commission concluded that a video dialtone system proposing initial analog capacity of only 21 channels, with significantly more digital capacity, was primarily a digital platform and, therefore, met the sufficient capacity requirements despite

69 See, e.g.. Comments of Bell Atlantic in CC Docket NO. 87-266, Third Further Notice of Proposed Rulemaking 4-5 (filed Dec. 16, 1994).

70 See Implementation of Section 19 of the Cable Television Consumer Protection and Competition Act of 1992 at para. 66 & n.158, 9 FCC Red 7442 (1994) (CS Docket No. 94-48).

71 GTE Mar. 1995 Supplemental at 7-8. See also GTE May 1994 Applications at 6-7; GTE Dec. 1994 Amendments at 2; GTE Mar. 1995 Supplemental at 8-13.

72 Staff calculations are based on GTE's Mar. 1995 Supplemental, Attach. B-l. The figures represent the sum of discounted yearly revenues, including entertainment and non-entertainment digital on demand and digital gateway services. The discount rate was 11.25%.

73 GTE May 1994 Applications at 13; GTE Jul. 1994 Consolidated Opposition at 8-9.

74 GTE Feb. 1995 Consolidated Reply at 29, 32; GTE Mar. 1995 Supplemental at 12, 14. GTE states that it anticipates "increased capacity demands will coincide with the increased availability of digital-capable set top equipment and corresponding declining costs, so that if analog capacity nears exhaustion, overall channel capacity may be easily expanded through digital compression to sufficiently meet the needs of video programmers." GTE Feb. 1995 Consolidated Reply at 29.

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the fact that NYNEX did not plan to increase the number of analog channels offered. 75 In the Ameritech Order, however, where initial capacity included 70 analog channels, in addition to significantly more digital channels, the Commission considered separately the question whether Ameritech offered sufficient analog capacity.76 The Commission imposed a condition on Ameritech that to the extent it offered analog capacity, it was required to expand analog capacity to meet demand to the extent technically feasible and economically reasonable. 77 We impose a similar condition on GTE.

21. Given GTE's commitment to expand capacity to meet demand and assurance that digital capacity currently is available, and subject to the conditions contained herein, the Bureau concludes that GTE's proposal provides sufficient initial video dialtone capacity. Consistent with the Commission's decision in the Ameritech Order, we require as a condition for this authorization that any video dialtone service offered by GTE in the four areas specified in its applications provide at least the proposed 248 channels. And, as noted above, should demand exceed capacity, it is incumbent upon GTE to expand its platform to meet such demand, to the extent technically feasible and economically reasonable. Thus, consistent with the Commission's ruling in the Video Dialtone Reconsideration Order, we will require GTE to report to the Chief of the Common Carrier Bureau, within thirty days after it becomes aware of an anticipated shortfall with respect to digital or analog capacity, or within five days of denying a programmer- customer access to digital or analog channels due to limited capacity, whichever occurs first.78 In that report, GTE shall describe the steps taken to accommodate the programmer-customer denied access to the platform. To the extent that GTE believes that channel expansion is not technically feasible or economically reasonable at that time, it must explain in detail the basis for that determination and indicate when it anticipates expansion would be technically feasible and economically reasonable.79

2. Non-Discriminatory Access

22. In addition to requiring LECs to provide sufficient capacity, we require LECs to make video dialtone capacity available on nondiscriminatory terms to multiple video programmers. In implementing this requirement in specific applications, each LEC's proposed allocation of analog and digital capacity is scrutinized to ensure that it is consistent with Commission riles and policies.

75 NYNEX Order at para. 22.

76 Ameritech Order at paras. 14-15.

77 Id, at 15.

78 See Video Dialtone Reconsideration Order at para. 38.79 Id,

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». Pleadings

23. Several petitioners claim that GTE's proposed channel allocation plan is unacceptable, not only because it fails to provide sufficient capacity to serve multiple programmers, but also because it will result in unreasonable discrimination in violation of the common carrier policy of video dialtone. Petitioners contend that by setting aside approximately 13 shared channels, allocating 60% of the remaining analog capacity to one customer- programmer, and allowing that same customer-programmer to obtain additional capacity after the first six months, GTE would permit one programmer to control a substantial portion of the analog capacity in violation of the Commission's ban on anchor programmers. 80 Several petitioners argue that GTE's proposal to allocate 60% of its capacity to one programmer is functionally equivalent to the anchor programmer mechanism that was rejected in the Video Dialtone Reconsideration Order. 81 In addition, petitioners contend that 60% is inconsistent with the Commission's Ameritech Order, which allowed a maximum allocation of 50% to one programmer. 42

24. Petitioners further object to GTE's proposal to allocate all of its shared channels to broadcasters and local government entities. 83 They contend that allowing GTE to grant these programmers preferential access to its platform is contrary to its common carrier obligation to treat all programmers in a non-discriminatory manner. 84 They argue that such an arrangement involves GTE in the kind of programming decisions prohibited in the Video Dialtone Reconsideration Order." Petitioners argue that there is no evidence in the record indicating that granting preferential treatment to broadcasters or public, educational or government (PEG) programmers would be in the public interest. 86 In addition, petitioners argue that GTE has an obligation to provide service indifferently and that its proposal will impennissibly disadvantage satellite-transmitted channels because they would not be offered nondiscriminatory access to

80 FCTA Jul. 1994 Petition to Deny at 20-21; CCTA Jul. 1994 Petition to Deny at 20.

81 Sjsg NCTA Aug. Reply at 3-4; CCTA Jan. 1995 Comments at 20; HCTA Jan. 1995 Comments at 20-21.

\.

82 FCTA Jan. 1995 Comments at 20-21 (citing Ameritech OrderV

83 But see Liberty Jan. 1995 Comments at 2 (supporting GTE's channel sharing proposal).

84 FCTA Jul. 1994 Petition to Deny at 18-19; HCTA Jul. 1994 Petition to Deny at 18-19.

85 FCTA Jul. 1994 Petition to Deny at 18-19; HCTA Jan. Comments at 18-20; VCTA Jan. 1995 Comments at 7-9; NCTA Jan. 1995 Comments at 25-28.

86 VCTA Jan. 1995 Comments at 7-9.

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shared analog channels. 17 Consequently, petitioners assert, exclusion of nonbroadcast satellite programming from the shared channel category would undercut the Commission's goals of promoting competition and diversity.'8

25. In addition, petitioners argue that GTE's proposal for a one-year minimum service commitment for customer-programmers is a discriminatory practice that the_Commission has already rejected. 89 According to petitioners, such a provision would be contrary to the video diaJtone goal of promoting diversity, because it would disadvantage small programmers. 90 NCTA claims that GTE's proposed channel discount rate structure for customer-programmers purchasing 25 or more channels is also unreasonably discriminatory. It asserts that, like the one- year minimum, the multi-channel rate structure would deter part-time and smaller programmers from acquiring capacity, thereby undercutting diversity.91

26. CFA/CME assert that GTE's applications raise significant issues of "electronic redlining," and that GTE is ambiguous with respect to whether its proposals for broadband facilities include minority and low-income neighborhoods. 92 In addition, the City of Manassas objects to the GTE Virginia application because it fails to demonstrate that all members of the Manassas community will be served. 93

27. CFA/CME argue that GTE fails, despite the proposed significant changes to its basic networks, to make available the technical information needed to permit interconnection with the network by enhanced service providers. They assert that absent, such network disclosure, GTE will be able to manipulate the market for video decoding equipment. In addition, CFA/CME

87 NCTA Jan. 1995 Comments at 25-28.

88 FCTA Jul. 1994 Petition to Deny at 19-20, HCTA Jul. 1994 Petition to Deny at _.

89 NCTA Jul. 1994 Petition to Deny at 7, CCTA Jul. 1994 Petition to Deny at 21-22, Vision Cable Jul. 1994 Petition to Deny at 5.

90 Vision^Cable Jul. 1994 Petition to Deny at 5; NCTA Jul. 1994 Petition to Deny at 7.


92 CFA/CME Jul. 1994 Petition to Deny at 12-13.

93 City of Manassas Jul. 1994 Comments on Virginia Application at 1-2. [These issues have also been raised in two petitions filed by a coalition of consumer and civil rights organizations in May, 1994. See Petition for Relief from Unjust and Unreasonable Discrimination in the Deployment of Video Dialtone Facilities (filed May 23, 1994); Petition for Rulemaking to Adapt the Section 214 Process to the Construction of Video Dialtone Facilities (filed May 23, 1994). The Commission is currently reviewing the issues raised in these petitions].

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asserts that the GTE applications violate the Commission's Open Network Architecture (ONA) safeguards policy, the goal of which is to ensure that basic network elements are made available at tariffed, nondiscriminatory rates. 94

28. GTE asserts that its channel sharing and allocation proposals comply with Commission rules and policies. 95 With respect to arguments that its one-year minimum service period and subscriber minimum proposals are unreasonable, GTE asserts that, these provisions will in fact promote the availability of diverse programming. 96 According to GTE, service and subscriber minimums will encourage large programmers to acquire dedicated channels for leasing to niche or short-term programmers, thereby allowing smaller programmers access to video dialtone without requiring them to make the same large investment in a dedicated channel. 97

29. GTE denies that any discriminatory intent underlies its video dialtone network deployment proposal. GTE states that the demographic data that it submitted in this proceeding refute the allegations of electronic redlining because they reveal "very little difference between the race and income demographics of GTE's proposed VDT offerings and that of existing telephony customers."98 GTE states that it will comply with all applicable ONA safeguards. GTE asserts that Section 63.01 of the Commission's rules does not require disclosure of technical network interface specifications in the Section 214 applications, but that when industry standards become available, it will design its network to meet those interface specifications and provide the interface specifications to programmer customers.99

b. Discussion

30. In the Video Dialtone Order, the Commission concluded that LECs are required to provide video dialtone service on a common carrier basis. 100 The Commission unequivocally affirmed that requirement in the Video rtiqltone Reconsideration Order. 101 An essential element

94 CFA/CME Jul. 1994 Petition to Deny at 9-12.

95 GTE Dec. 1994 Response at 18-19; GTE Feb. 199S Consolidated Reply at 30-34; GTE Mar. 1995 Supplemental at 12-16.

96 GTE Feb. 1995 Consolidated Reply at 34.97 Id,

98 GTE Jul. 1994 Consolidated Opposition at 26-27, Exh. B.

99 ijL at 28-30.


101 Video Dialtone Reconsideration Order at para. 32.

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of the common carrier nature of video dialtone is nondiscrimination with regard to both customer-programmers and end-users. 102 We conclude that, with appropriate conditions and modifications, GTE's applications satisfy the requirements for nondiscriminatory access set forth in the Video Dialtone Ordey and the Video Dialtone Reconsideration Order.

31. Petitioners assert that GTE's shared channel proposal offers preferential access to analog channel capacity to local commercial television stations and qualified noncommercial educational television stations. In the Video Dialtone Reconsideration Order the Commission concluded that "channel sharing mechanisms, if properly structured, can offer significant benefits to consumers, programmer-customers, and video dialtone providers, while remaining consistent with the provisions of the 1984 Cable Act." 103 The Commission recognized, however, that implementation of a shared channel plan raises significant legal and policy issues, such as the possibility of unreasonable discrimination. 104 Consequently, the Commission sought comment on a number of issues related to whether channel sharing should be permitted and, if so, what rules and policies are required to ensure that any such arrangement will further the public interest and remain consistent with the 1984 Cable Act. 105 During the pendency of the rulemaking proceeding addressing shared channels issues, the Bureau will not determine the merits of GTE's specific proposal in the context of these applications. 106 GTE may proceed with its video dialtone construction, but it may not implement its channel sharing plan. Given the Commission's expedited schedule for the rulemaking, we do not anticipate that GTE will complete construction before the rulemaking is concluded.

32. We note, however, that upon review of the record, we find that GTE has not provided an adequate explanation of how its channel sharing plan will work. For example, it is not clear whether GTE is proposing to require channel sharing whenever two or more customers offer the same broadcast or PEG channel, or whether carriage of a signal by two or more customer-programmers automatically converts the carriage of that signal channel into a shared channel situation. After the Commission completes the rulemaking proceeding, GTE will have to amend its application to provide a more complete description of that mechanism, and to conform it to then-applicable rules regarding channel sharing.

33. The Bureau finds that GTE's proposal to allow one customer-programmer to acquire 60% of available analog capacity, exclusive of shared channels, is inconsistent with the

Ameritech Order at para. 22.

Video Dialtone Reconsideration Order at para. 274; Ameritech Order at para. 23.



The Commission similarly declined to approve a specific channel sharing plan in the NYNEX Order at para. 26.

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Commission's underlying policy that the platform provider not allocate all or substantially all analog capacity to a single programmer. We acknowledge the concerns expressed by GTE and Liberty that a customer-programmer requires a minimum number of analog channels to compete with incumbent cable operators. As mentioned above, however, the policy that capacity must be available on a nondiscriminatory basis applies to analog capacity if the platform provider chooses to offer analog capacity. The Bureau concludes that allowing a single provider to occupy over half of the available channels does not comport with that fundamental prerequisite.

34. In the Ameritech Order, the Commission found that a proposal to allow one programmer to lease up to half of the available non-shared analog channels, when tied to commitments to expand analog capacity and implement a shared channel mechanism, did not constitute impermissible discrimination. 107 Consistent with that precedent, we reject GTE's channel allocation scheme to the extent it allows a single customer-programmer to use more than 50% of non-shared analog capacity. We condition our grant of GTE's application upon GTE's limiting any single video programmer to 50% of non-shared analog capacity. 108

35. The Bureau rejects, in part, petitioners' challenge to GTE's proposal to allow customer-programmers to acquire additional unused analog channels after six months, upon condition that such channels be relinquished upon request. Initially, we find it unlikely that the analog capacity GTE proposes to provide on its video dialtone platform will not be filled relatively quickly. To the extent a subscription shortfall does occur, however, the Bureau recognizes that it may be economically wasteful to leave channels unused. In the Ameritech Order the Commission rejected the carrier's proposal to allow any customer-programmer to acquire additional unused capacity after one year, but stated that it would entertain a waiver request in the event a large number of channels went unused over an extended period of time. 109 Because Ameritech had not proposed any means for reclaiming the additional channels, it was possible that, after the first year of operations, a single programmer could have come to permanently dominate the analog portion of the platform. By contrast, GTE's proposal, if properly implemented, can preserve capacity for future customers even if demand develops more slowly than anticipated. If GTE can promptly reallocate channels to satisfy demand, then there is no need for the Commission to review the circumstances under which GTE might temporarily assign unused channels to an existing customer, and thus no need to require GTE to apply for a Vaiver. However, we require GTE to wait a year before it allows any customer-

107 Ameritech Order at para. 28.

108 We will not, at this time, also limit GTE's ability to lease digital capacity. However, we note that GTE is obligated pursuant to the reporting requirements established above, to notify the Commission of any capacity shortfalls, and if such occurs, we will not hesitate to fully examine concerns regarding nondiscriminatory access to digital capacity if a single customer-programmer has all or substantially all of the digital capacity of any of the systems.

109 Ameritech Order at para 30.

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programmer to" exceed the 50% capacity limit. Given that video dialtone is an entirely new service, we believe that new customer-programmers should have access to unused capacity during the first year without possibly having to invoke the relinquishment procedure and that the cost of having unused capacity for that period would be minimal. Consequently, the Bureau will permit GTE to make available to any customer, any analog channel capacity that remains unsubscribed after one year, hut only pursuant to express conditions and safeguards that the customer-programmer relinquish such channels if another customer-programmer requests analog channels and insufficient analog capacity remains on the platform to satisfy that customer- programmer's request.

36. Thus the Bureau conditions these authorizations upon GTE ensuring that any lessee of analog capacity in excess of the limits established here, i.e.. 50% of analog channel capacity to any one customer-programmer, irrevocably covenant that it will timely relinquish any such channels if other customer-programmers request access and insufficient analog capacity remains. No customer-programmer leasing analog capacity in excess of the limit has any rights whatsoever in any of those channels - no contractual, legal, use, or holdover rights - and any use of such channels is at risk of loss of use. The Bureau expects GTE's tariff filings to contain clear and concise terms, conditions and notification procedures that are consistent with this paragraph.

37. Finally, for guidance in advance of the tariff review process, we note, as has the Commission in several prior orders, our view that proposed one-year programming commitments do not appear to be reasonable. 110 As the Commission stated in the Ameritech Order, one of the goals of the video dialtone policy is to increase diversity of video programming, and the ability of programmer-customers to provide programming on a less than full-time basis or for less than a year is an essential means of achieving that diversity goal. 111 We will consider the reasonableness of any specific rate proposals or regulations for part-time programmers, such as requiring purchase of minimum time blocks, in the tariff review process.

38. The Bureau also rejects claims regarding the scope of GTE's deployment of video dialtone service. We note that in the Video Dialtone Order, the Commission found that market forces should determine how and when the technology is deployed and services are offered to the public. 112 xln the Ameritech Order, the Commission recognized that deployment of video dialtone will occur gradually, so that for a time it may reflect economic differences between communities. As with other common carrier services, the Commission has not required that

110 Video Dialtone Order at para. 1; Ameritech Order at para. 30; Bell South Telecommunications. Inc.. DA 95-181 (rel. Feb. 8, 1995) at para. 28.



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entire communities be wired before anyone can receive service. 113 We also note that as with many other video dialtone related issues, the Commission is currently reviewing issues relating to allegations of discriminatory deployment of video dialtone in a separate proceeding."4 We find that petitioner's allegations concerning GTE's deployment offer no substantive evidence of any discriminatory intent or effects in GTE's choice of areas for its initial deployment, and GTE has stated that the initial deployment areas include an economically diverse population and has announced its commitment to deploy broadband services more widely in the future. 113 The Bureau does, however, condition this authorization on GTE's compliance with any requirements subsequently adopted by the Commission in the video dialtone proceeding or any related proceeding. 116

39. The Bureau declines to address general claims that GTE's proposal violates our ONA tariffing requirements. We are currently reviewing GTE's initial ONA plan, and will address specific issues concerning GTE's compliance with the Commission's ONA network unbundling requirements in that context and in our review of GTE's ONA tariffs. The Bureau clarifies, as did the Commission in the NYNEX Order, that GTE may offer nonregulated services and CPE, including set-top devices, on an unbundled basis and subject to existing safeguards, including the network disclosure requirements. 117 We agree with GTE that Section 63.01 of the Commission's rules does not require disclosure of network interface specification in a Section 214 application. We caution GTE, however, that its obligation to comply with the Commission's network disclosure requirements is not contingent on the existence of industry- standard interlace specifications.

3. GTE Provision of Video Programming

40. GTE Virginia's applications expressly proposes provision of video programming either by GTE Virginia directly or indirectly by an affiliated customer-programmer. GTE reserves the right to offer platform service to an affiliated customer-programmer in its other three applications and, in an ex pane filing, notes that it seeks authority to offer video dialtone

113 See, e.g.. Investigation of Access and Divestiture Related Tariffs. 101 FCC 2d 911, modified. 101 FCC 2d 935, modified on recon. 102 FCC 2d 503 (1985).

114 SfiS Petition for Rulemaking to Adapt the Section 214 Process to the Construction of Video Dialtone Facilities and Petition for Relief of the Center for Media Education, Consumer Federation of America, Office of Communications of the United Church of Christ, National Association for the Advancement of Colored People, National CouncU of La Raza, RM-8491, Public Notice. DA 94-777 (rel. Jul. 14, 1994).

115 GTE Jul. 1994 Consolidated Opposition at 26-27.

116 See Ameritech Order at para. 27.


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service to both-affiliated and unaffiliated customer-programmers in all four proposed service areas. 11 ' GTE was granted general relief from the provisions of the telephone company-cable television cross-ownership statutory restriction in GTEv. US. 119 GTE recently submitted an ex pane letter, however, asking that the Bureau exclude from consideration the portions of its applications that request authority to provide video dialtone service to affiliated programmers, if considering those requests would delay Bureau action on the applications. 12.0 .

41. The Commission has not yet determined what conditions should apply, pending action in the Fourth Further Notice of Proposed Rulemakine. to a carrier that provides video programming directly to subscribers, by itself or through an affiliate, over its own commercial video dialtone facility. 121 We therefore grant GTE's request and defer consideration of the portions of the instant applications that propose provision of video dialtone service to any GTE affiliate.

B. Section 214 Issues

1. Section 214 Legal Standard

42. In the Video Dialtone Order, the Commission determined that telephone companies must seek authority under Section 214 of the Communications Act to construct video dialtone facilities. 122 To approve an application under Section 214, the Commission must determine that the facilities will serve the "public convenience and necessity." 123 Courts have found that this statutory standard "is to be construed so as to secure for the public the broad aims of the Communications Act," including the purposes expressed in Section 1 of the Communications Act. Administration of this standard is generally left to the Commission's discretion: "[I]t is entirely within the Commission's discretion to accept even a minimal showing of financial

118 See GTE VA May 1994 Application at 2; GTE CA, HA, FL May 1994 Applications at 3 n. 4; GTE Mar. 1995 Supplemental at 16.

Y

119 GTE v. US. No. 94-1599-A (E.D.Va., Jan. 13, 1995).

120 GTE Apr. 25, 1995 ex paite.

121 See Telephone Company-Cable Television Cross-Ownership Rules. Sections 63.54- 63.58. Fourth Further Notice of Proposed Rulemaking. CC Docket 87-266, FCC 95- 20 (rel. Jan. 20, 1995) (Fourth Further Notice of Proposed Rulemakingl.

122 Video Dialtone Order at para. 72; see also Video Dialtone Reconsideration Order at paras. 136-140.

123 47 U.S.C. § 214(a).

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justification" for approval of a Section 214 application. 124

43. Traditionally, the focus of the Section 214 review has been "to ensure that carriers prudently invest in equipment so as to avoid waste and unreasonably high rates" for telephone ratepayers. 125 The rules specifying the contents of Section 214 applications require an "[e]conomic justification for the proposed project including . . . estimated added revenues and costs and the basis thereof." 126 The Commission has usually focused on the "added" or "incremental" costs and revenues of the proposed facilities for which authorization is sought. The Commission has generally required some showing that the revenues expected from the proposed facility will at least cover these costs within some reasonable period of time. 127 The Commission orders interpreting the Section 214 rules also stress an examination of added costs. 128 The Commission has found, for example, that "estimates of additional . . . costs . . . are the relevant costs to be considered," and that we will not take into consideration "sunk costs" or "embedded costs" already invested in existing facilities. 129

44. Nor is the Commission's review of a Section 214 application restricted to the application's financial aspects. As stated above, the range of inquiry into the "public convenience and necessity" is at least as broad as the purposes described in Section 1 of the

124 Century Federal. Inc. v. FCC. 846 F.2d 1479, 1481 (D.C. Cir. 1988) (Century Federal)i see also General Telephone Company of the Southwest v. U.S.. 449 F.2d 846, 846 (5th Cir. 1971)fGeneral Telephone Co. of the Southwest). In FCC v. RCA Communications. Inc.. 346 U.S. 86 (1953), the Supreme Court stated that the Commission need not "make specific findings of tangible benefit" or find "a demonstration of ... immediate benefit to the public." The court, however, continued and stated that, "the Commission must at least warrant. . . that competition [resulting from the grant] would serve some beneficial purpose." Id. at 96-97.

125 American Telephone and Telegraph. FCC 86-87 (id. Mar. 10, 1986VAT&T Authorization), citing Statement of Senator Dill, 78 Cong. Rec. 8824 (1934).

126 47 C.FvR. § 63.01(m).

127 See, e.g.. TRT Telecommunications Corporation. 46 FCC 2d 1042, 1052 (1974).

128 Section 63.01(m) of the Commission's rules expressly asks an applicant to state the added costs and revenues generated by the proposed project. 47 C.F.R. § 63.01(m). Further, as noted in the Ameritech Order. Section 63.01, which specifies the contents of a Section 214 application, repeatedly speaks in terms of an accounting of the "additional" facilities, costs, and revenues generated by the proposed construction. Ameritech Order at para. 39 n. 117.

129 Policy to be Followed in Future Licensing of Facilities for Overseas Communications, 67 FCC 2d 358, 394 (1977), recon. granted in part. 70 FCC 2d 1348 (1978).

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Communications Act. Where the applicant proposes a new service and, thus, must necessarily rely on uncertain predictions of demand and revenues, the Commission may nonetheless grant the application based on the public interest benefits. 130 Thus, in AT&T, where the applicant proposed supplementing existing facilities with a fiber cable, the Commission stated that "[t]his experience is necessary to foster the technological developments that will lead to 'learning curve' decreases in cost. Without experience in the early stages of development we may never see some of the advances that fiber technology promises to bring to telecommunications users." 131 In Washington Utilities, the Commission considered the "public need and demand for the proposed facilities and services and for new and diverse sources of supply." 132 On appeal the Ninth Circuit stated: "The crucial question is whether the Commission acted within its statutory authority in adopting a general policy favoring entry of new carriers rather than considering the costs and benefits of the specific proposal in each application. We hold that the Commission did act within its authority." 133

a. Pleadings

45. Petitioners initially argue that GTE failed to provide even a minimal showing showing sufficient to allow the Commission to make a public convenience and necessity determination. 134 In particular, they argue that the scant data that GTE submitted lacks essential underlying input, is unsupported by descriptions of formulas and methodologies, and is

130 See AT&T. 84 FCC 2d 303, 311 (1981).

131 IdL at 312.

132 Establishment of Policies and Procedures for Consideration of ApplicationCarrier Services in the Domestic Public Point-to-Point

Microwave Radio Service and Proposed Amendments to Parts 21. 43. and 61 of the Commission's Rules,, First Report and Order. 29 FCC 2d 870, 920 (1971), pets, for recon. denied. 31 FCC 2d 1106 (1971), affd. Washington Utilities. 513 F.2d at 1158.

133 IdL at 1161.

134 NCTA July 1994 Petition to Deny at 2; VCTA July 1994 Petition to Deny at 11-23; VCTA Aug. 1994 Reply at 17-19; CA PUC July 1994 Comments at 14-16; CCTA July 1994 Petition to Deny at 17-25; CCTA Aug. 1994 Reply at 6-8; FCTA July 1994 Petition to Deny at 8-11; HCTA July 1994 Petition to Deny at 8-11. See also Declaration of Leland Johnson and Declaration of Patricia Kravtin, appended to CCTA Aug. 1994 Reply.

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insufficient to support GTE's position. 13S They assert that GTE has failed to provide a prima fade showing that revenues exceed costs. 136 Petitioners further assert that GTE does not meet the standards applied in the Dover Order or the Ameritech Order. 137 Finally, petitioners argue that the Commission, in its Video Dialtone Reconsideration Order, adopted a higher standard than that applied in the Dover Order.

b. Discussion

46. Contrary to petitioners' arguments, we find, as discussed herein, that GTE has provided detailed revenue and cost estimates, and the assumptions and methodologies underlying those estimates, and has demonstrated to our satisfaction that its projected revenues will recover its projected costs withing a reasonable period of time. The Bureau concludes that GTE has provided sufficient information in its economic justification to find that the public convenience and necessity will be served by granting its applications.

47. We specifically find that GTE has met the standards of the Dover Order and Ameritech Order. We reject assertions that the Video Dialtone Reconsideration Order changed the standard for Section 214 video dialtone applications. As the Commission explained in the Ameritech Order, discussion of the information required for video dialtone tariffs in the Video Dialtone Reconsideration Order in no way alters the standard used in Section 214 proceedings. 13S As stated by the Commission in the NYNEX Order, the consideration of costs in a Section 214

proceeding is distinct from the examination of costs and rates in the tariff review process. 139 In the Video PiflltPflP Reconsideration Order, the Commission stated that in the tariff review

133 NCTA July 1994 Petition to Deny at 2; VCTA July 1994 Petition to Deny at 11-23; VCTA Aug. 1994 Reply at 17-19; CA PUC July 1994 Comments at 14-16; CCTA July 1994 Petition to Deny at 17-25; CCTA Aug. 1994 Reply at 6-8; FCTA July 1994 Petition to Deny at 8-11; HCTA July 1994 Petition to Deny at 8-11. See also Declaration of Leland Johnson and Declaration of Patricia Kravtin, appended to CCTA Aug. 1994 Reply.

136 CFA/dME July 1994 Petition to Deny at 4-5; CCTA July 1994 Petition to Deny at 6- 8; CCTA Aug. 1994 Reply at 13; Vision Cable of Pinellas July 1994 Petition to Deny (FL Application) at 2-3; FCTA July 1994 Petition to Deny at 8; FCTA Aug. 1994 Reply at 10; State of Hawaii July 1994 Comments at 1-2; State of Hawaii Aug. 1994 Reply at 1-2; VCTA July 1994 Petition to Deny at 10-11; VCTA Aug. 1994 Reply at 12, 19-22; HCTA July 1994 Petition to Deny at 9-10; HCTA Jan. 1995 Comments at 4-5.

137 See Ameritech Order.

138 Id, at para. 68.


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process it would examine in depth each application and would determine both the "incremental costs associated with plant dedicated to video dialtone service" and a "reasonable allocation of other costs associated with shared plant ... and overheads." 140 The Commission added that "during this analysis [it would] consider among other things the effects of price changes on video dialtone demand." 141

48. We note that, as did the Commission in its Ameritech Order. Section 214 authorizations do not require the level of detail or the degree of certainty demanded by petitioners. 142 For instance, in the AT&T Authorization the Commission stated that "[generally the Section 214 proceeding examines cost only insofar as it is necessary to determine, on a prima facie basis, whether costs are so substantial relative to benefits that the public interest would not be served by construction of the project." 143 The Commission has only required a finding that the estimates "do not appear unreasonable." 144 In Wisconsin Bell, the Bureau concluded that the basis of the applicant's revenue estimate was not "so suspect that it requires further investigation," and that the projections "do not appear unreasonable." 145 Similarly, in American Satellite Corp.. decided in the early stages of the domestic satellite market, the Commission stated that "[i]f a carrier waited Until it was sure of a large demand for traffic, few stations would ever be built, while initial service demands go unsatisfied." 146

49. Finally, the Bureau finds that the proposed investment in advanced communications infrastructure will contribute to economic growth and to the nation's leadership in technology. The systems will promote competition in the local video distribution market, diversity of

140 Video Dialtone Reconsideration Order at paras. 217-18.

141 Id, at para. 220.

142 Ameritech Order at para. 40-41.143 AT&T Authorization at para. 7.

144 In Pacific Bell, which involved common carrier construction of broadbandtransmission facilities for the holder of a non-exclusive cable franchise, the Common Carrier Bureau found that "[t]hese estimates do not appear unreasonable .... Century has not presented evidence warranting a finding that Pacific's request is prima facie unjustified or that a hearing is necessary." 60 RR 2d 1175, 1180 (Com. Car. Bur., released July 22, 1986), recon. denied. 2 FCC Red 265 (1987), aff d sub nom. Century Federal. See Dover Order at para. 41, 9 FCC Red at 3685.

145 Wisconsin Bell. 56 RR 2d 1262, 1267 (Com. Car. Bur. 1984) (Wisconsin), app. for review denied. FCC 84-618 (rel. Dec. 13, 1984), recon. denied. FCC 85-348 (released July 11, 1985).

146 American Satellite Com.. 65 FCC 2d at 288.

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distribution sources and information, access to networks and new services, program supplier access to consumers, and consumer access to additional information services. These potential benefits will increase commercial opportunities and the flow of ideas. The Bureau concludes that the public interest will be served by grant of the application, subject to the conditions specified below.

2. Economic Justification

a. Pleadings

50. Revenue Estimates. Petitioners argue that GTE's revenue estimates are unreasonable, unrealistic, overly optimistic and unsupported. 147 Petitioners assert that GTE failed to provide required and essential information on the basis, assumptions and methodologies used to arrive at its revenue estimates, and that this effectively precludes analysis and evaluation of the estimates. 148 For example, petitioners assert that GTE failed to identify demand estimates or to disaggregate total yearly revenues. 149 Petitioners argue that cable revenues are not a reasonable benchmark for video dialtone revenues because they represent a payment for both programming and delivery, whereas video dialtone revenues represent payment for delivery only. 150 Petitioners also fault GTE's revenue estimates for neglecting to account for the impact of competition and cable rate regulation. 151 Petitioners contend that GTE's estimated average 33 % market penetration estimates are also unrealistically high. 152 . Petitioners assert that the high penetration rates ignore price or quality competition from other multichannel video programming

147 FCTA July 1994 Petition to Deny at 11; CCTA July 1994 Petition to Deny at 23; CCTA Aug. 1994 Reply at 9, 11; HCTA July 1994 Petition to Deny at 11; Declaration of Leland Johnson.

us JSJCTA July 1994 Petition to Deny at 2-4; FCTA July 1994 Petition to Deny at 10-11; VCTA July 1994 Petition to Deny at 18-23; Declaration of Patricia Kravtin at 4-6; CA PUC July 1994 Comments at 14, 16; CCTA July 1994 Petition to Deny at 14-25; HCTA July 1994 Petition to Deny at 10-11.

149 VCTA July 1994 Petition to Deny at 18-23; VCTA Aug. 1994 Reply at 17-18; Declaration of Patricia Kravtin at 5; CFA/CME July 1994 Petition to Deny at 6-7; CCTA July 1994 Petition to Deny at 17-25; FCTA July 1994 Petition to Deny at 8; HCTA July 1994 Petition to Deny at 8.

150 Declaration of Patricia Kravtin at 20-23.

151 Io\ at 6, 24.

152 CCTA July 1994 Petition to Deny at 22-24; CCTA Aug. 1994 Reply at 8; VCTA July 1994 Petition to Deny at 19; Declaration of Patricia Kravtin at 19, 27-29.

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providers. 113 They contend that GTE's projected penetration rates are higher than projections submitted in other video dialtone applications. 154

51. In a letter to GTE dated December 9, 1994, the Common Carrier Bureau requested additional economic data. With regard to GTE's revenue estimates, the Bureau asked for: descriptions of the revenue components; explanations of the methodologies, assumptions and identification of the research underlying the revenue, market penetration and market share projections; data on homes passed, estimated homes subscribing, and projected revenues from customer-programmer charges, transport service and other sources, by service category and by year. 155

52. On December 16, 1994, GTE filed a response to the Data Request and conforming amendments to each of its four applications. 156 GTE provided, for each service area, 15-year projections of revenue from three video dialtone transport services (Cable-Like, On-Demand and Interactive) and two other sources (End-User Connections and Advertising Support Services). 157 GTE also provided 15-year projections of number of homes passed, number of homes subscribing, market penetration rates, and estimates of the video dialtone platform's market share. 158 GTE described how these estimates were calculated. 159

53. Petitioners assert that GTE's data submission failed to respond to the Bureau's requests, provided incomplete and insufficient information, and failed adequately to detail the underlying assumptions or data sources. 160 Petitioners again argue that GTE's per-subscriber

153 CCTA July 1994 Petition to Deny at 22-24; VCTA July 1994 Petition to Deny at 19; Declaration of Patricia Kravtin at 30.

154 Id, at 6.

155 Letter from Kathleen M.H. Wallman, Chief, Common Carrier Bureau, to Edwin J. Shimizu, Director-Regulatory Matters, GTE Service Corporation, December 9, 1994 ("DatavRequest").

156 Letter from Gail L. Polivy, Senior Attorney, GTE Service Corp. to William C. Caton* Acting Secretary, Federal Communications Commission (Dec. 16, 1994) ("GTE Dec. 1994 Response").

157 GTE Dec. 1994 Response at Attach. 1.

158 Io\ at 2-3, Attach. 1.

159 JA at Attach. 1.

IM NCTA Jan. 1995 Comments at 6, 13-14; MCI Jan. 1995 Petition to Reject at 1; VCTA Jan. 1995 Comments at 14-16; HCTA Jan. Comments at 17; FCTA Jan.

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revenue estimates are unrealistically high, do not comport with other LEG estimates, accelerate at unexplained variable rates, and are internally inconsistent. 161 Petitioners reiterate arguments that GTE's estimated penetration rate rises too fast and too high. 162 Finally, petitioners contend that advertising support services are not a level 1 offering and that its associated revenues should be excluded. 163

54. On March 10, 1995, the Common Carrier Bureau released a Public Notice that provided guidance on video dialtone 214 applications and clarified the types of information the Commission seeks from video dialtone applicants. 164 GTE responded by submitting an ex pane supplement on March 31, 1995, that "substantiates, complements and clarifies a number of factors" in its prior economic justifications but makes "no fundamental changes in the economic modeling." 165

55. Petitioners reiterate prior objections that GTE's residential penetration and revenue projections are unreasonably high, fault GTE for combining its residential digital revenue projections and doubt GTE's revised predictions on the availbility of hybrid digital-analog converter boxes. 166 Petitioners question GTE's new commercial revenue penetration and growth

Comments at 17.

161 VCTA Jan. 1995 Comments at 15-16; CCTA Jan. Comments at 13-16; HCTA Jan. 1995 Comments at 15-17; FCTA Jan. 1995 Comments at 3, 15-17; NCTA Jan. 1995 Comments at 13-14, 16-17; Jan. 1995 Declaration of Kravtin at 27-29, 34.


163 VCTA Jan. 1995 Comments at 16; Jan. 1995 Declaration of Patricia Kravtin at SI- 33; NCTA Jan. 1995 Comments at 17; CCTA Jan. 1995 Comments at 15-16; HCTA Jan. 1995 Comments at 15-16; FCTA Jan. 1995 Comments at 15-16.

i«4 News Release, Common Carrier Bureau Provides Guidance on Video Dialtone Applications, Report No. CC 95-18, rel. Mar. 10, 1995. The Bureau delineated 22 separate types of information in the following four categories: (1) architecture and capacity; (2) provision of video programming; (3) summary of cost estimates by plant account; and (4) economic justification. Within the economic justification category, the Bureau delineated information requirements pertaining to revenue estimates, investment estimates, expense estimates, cash flow analysis and state regulation.

165 J-etter from Gail C. Polivy, Senior Attorney, GTE Service Corp. to William C. Caton, Acting Secretary, Federal Communications Commission (Mar. 31, 1995) (GTE Mar. 1995 Supplemental).

la NCTA Apr. 1995 Comments at 7-11; VCTA Apr. 1995 Comments at 3; CCTA Apr. 1995 Comments at 4; Kravtin Apr. 1995 Declaration at 10-13.

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assumptions, arguing that GTE's deployment plan is for a residential service. 167 In addition, petitioners continue to argue that GTE's failure to submit underlying studies and model inputs prevents both petitioners and the Commission from substantiating GTE's assumptions and adjustments. 161

56. Cost Estimates. Petitioners assert that GTE's cost information is inadequate, incomplete and inadequately justified, and that its investment estimates contain unexplained inconsistencies between applications. 169 Petitioners also argue that it is unclear how much common investment and operating expense has been assigned to video dialtone. 170

57. In the December 9, 1994 Data Request, the Bureau asked GTE to explain differences in per-unit equipment costs and the bases for its volume discount assumptions. The Bureau also asked for GTE's cost assumptions and methodology for allocating common investment and common expense. In addition, the Bureau asked GTE to: identify projected cash flows for six specific investment categories and six specific expense categories and to identify on a yearly basis the direct and common video dialtone investment in each category; provide estimates of the facilities' useful life; explain why operating expenses as a portion of revenue are lower than for telephony and why estimated construction costs are lower than traditional coaxial cable construction costs. 171 GTE responded on December 16, 1994. m

58. In response to GTE's submission, petitioners reiterate their assertion that GTE's cost estimates are unrealistically low and contend that GTE did not fully and completely respond to

167 NCTA Apr. 1995 Comments at 5-7; CCTA Apr. 1995 Comments at 4-5; Kravtin Apr. 1995 Declaration at 13-15. In addition, NCTA asserts that by adding commercial services, the impact of cross-elasticities on telephony must be considered. NCTA Apr. Comments at 6-7.

168 Apr. Comments at 4; Kravtin Apr. 1995 Declaration at 3, 10-13, 16-18.

169 VCTA^July 1994 Petition to Deny at 11-12, 20-23; VCTA Aug. 1994 Reply at 19-20; CA PUC July 1994 Comments at 14-16; CCTA July 1994 Petition to Deny at 14-16; HCTA July 1994 Petition to Deny at 8-11; State of Hawaii July 1994 Comments at 3; Declaration of Johnson at 3-4; FCTA July 1994 Petition to Deny at 11.

170 NCTA July 1994 Petition to Deny at 4-5; VCTA July 1994 Petition to Deny at 7-11, 12-16; CCTA July 1994 Petition to Deny at 17-27; FCTA July 1994 Petition to Deny at 8-9, 11; HCTA July 1994 Petition to Deny at 10-11; Declaration of Kravtin at 8- 11; Declaration of Johnson at 5-8.

171 Wallman Letter at 2-3.

172 GTE Dec. 1994 Response.

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the Bureau's requests for specific information, explanations or methodological descriptions. 173 Petitioners argue that GTE's cost estimates exclude marketing, maintenance and taxes; underestimate per-subscriber expenses; and are lower than those found in other applications. 174 They assert that GTE has failed to explain why its estimated operating cost is lower than the historical embedded operating cost of telephony. 17J Petitioners also assert that GTE's investment estimates do not include replacement costs for facilities and equipment with projected economic lives of less than 15 years, or the cost of shared facilities such as land, buildings, operating systems and power systems. 176 Petitioners argue that there are unexplained discrepancies in the cost showings: GTE allocates 50% of trenching costs to telephony but makes no similar allocation of the associated "spare" fiber stands; and GTE's estimates of the component costs of its hybrid fiber-coaxial cable system are lower than costs for conventional coaxial cable systems. 177 Petitioners fault GTE for failing to answer the Bureau's question regarding virtual loop and for its cost estimates for cable drop. 178 Finally, petitioners contend that virtually any of the numerous cost adjustments necessary to render GTE's economic justification internally consistent would result in the network being unprofitable within the 15 year time frame. 179

173 NCTA Jan. 1995 Comments at 6-7, 12, 18; CCTA Jan. 1995 Comments at 4, 9-10; HCTA Jan. 1995 Comments at 14; VCTA Jan. 1995 Comments at 15; MCI Jan. 1995 Petition to Reject at 2-4.

174 CCTA Jan. 1995 Comments at 4, 10; Kravtin Declaration at 10-11; MCI Jan. 1995 Petition to reject at 4-5.

175 CCTA Jan. 1995 Comments at 10; HCTA Jan. 1995 Comments at 7-8; NCTA Jan. 1995 Comments at 20.

176 CCTA Jan. 1995 Comments at 6-8; HCTA Jan. 1995 Comments at 8-9, 14; VCTA Jan. 1995 Comments at 15; Kravtin Declaration at 12, 14-15; NCTA Jan. 1995 Comments at 10-11, 24-25; MCI Jan. 1995 Petition to Reject at 5-6.

177 CCTA^Jan. 1995 Comments at 5-6, 12-13; HCTA Jan. 1995 Comments at 10, 14; Kravtin Declaration at 17-18, 25-26; FCTA Jan. 1994 Comments at 12-15; NCTA Jan. 1994 Comments at 24. Petitioners also question whether GTE is proposing a true stand-alone system. CCTA Jan. 1995 Comments at 10-11; FCTA Jan. 1995 Comments at 12-13; NCTA Jan. 1995 Comments at 19-20; VCTA Jan. 1995 Comments at 13; HCTA Jan. 1995 Comments at 13-15.

178 CCTA Jan. 1995 Comments at 8-9, 11-12; Kravtin Declaration at 19, 21-24; FCTA Jan. 1995 Comments at 11-12, 15; HCTA Jan. 1995 Comments at 11-12; NCTA Jan. 1995 Comments at 10, 19-20; MCI Jan. 1995 Petition to Reject at 3.

179 CCTA Jan. 1995 Comments at 8, 11-12; Kravtin Declaration at 20; FCTA Jan. 1995 Comments at 15.

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59. In its March 31, 1995 ex pane submission, GTE provided additional information on its estimated costs, assumptions, methodologies and sources. In particular, GTE revised its economic justification to include necessary ongoing investment expenses beyond the build-out period, replacement of assets with lives less than 15 years, and investment to support added commercial and interactive services; reduced the allocation of trenching costs to telephony from 50% to 30%; adjusted for technology and volume discounts and for property and income taxes; and reiterated that the entire cost of the six strand fiber cable and associated expenses are attributed to video dialtone. 180

60. Petitioners continue to question GTE's technology and volume discounts, assert that there are significant, undisclosed common costs associated with GTE's stand-alone system, and contend that GTE's projected investment per-home passed is low compared to Bell Atlantic's proposed facilites in Dover. 181 Petitioners assert that GTE's failure to account for any commercial marketing costs renders its commercial estimates unreasonable. 182

61. Cash Flow. In initial objections to GTE's applications, petitioners generally argue that GTE fails to make a credible showing that revenues would exceed costs in the proposed time period, provides insufficient information to allow a determination to be made on the systems' viability, and neglects to disclose its discount factor. 183

62. In the December 9,1994 Data Request, the Bureau asked GTE to provide discounted present values for its estimated revenues, direct costs, and common costs, and to identify its discount rate. 184 In its December 16, 1994 response, GTE stated that it employed an 11.25% discount rate. GTE also provided 15-year cash flow projections that include revenue, direct

ISO GTE Mar. 1995 Supplemental at 17-18, 34-41.

181 VCTA Apr. 1995 Comments at 6-8; CCTA Apr. 1995 Comments at 2-4; Kravtin Apr. 1$95 Declaration at 6-9. NCTA accepts GTE's revised allocation of trenching costs as reasonable, but asserts that underlying cost studies remain essential to ascertaining accuracy of GTE's representations. NCTA Apr. 1995 Comments at 12.

1S2 CCTA Apr. 1995 Declaration at 5-6; Kravtin Apr. 1995 Declaration at 15.

183 VCTA July 1994 Petition to Deny at 11, 16, 21; CCTA July 1994 Petition to Deny at 25; CCTA Aug. 1994 Reply at 6; HCTA July 1994 Petition to Deny at 12-13; FCTA July 1994 Petition to Deny at 10-11; July 1994 Declaration of Kravtin at 9-11, 35; July 1994 Declaration of Johnson at 10.

184 Wallman Letter at 3.

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operating expenses and direct initial investment. 1M GTE estimates that the four proposed video dialtone systems will achieve a positive cash flow by the fourth year (third year for the Virginia system). 186 GTE also projects that the California and Virginia systems will reach the break-even point in year 15, Florida in year 14 and Hawaii in year 13. 187

63. The petitioners argue that GTE's projections of negative net present values in year 10, and of break-even points beyond those projected by other applicants, demonstrate that the project is not economically feasible. 188 Petitioners contend that GTE's failure to include any investment expenses beyond the third year ignores the ten-year lives of essential assets, and that its failure to include common expenses and common investment ignores its own conclusions that at least common trenching costs are partly attributable to video dialtone. According to petitioners, inclusion of either of these costs pushes the break-even point beyond year 15. 189 Petitioners also contend that there are unexplained discrepancies between the investment and expense data and the data in the cash flow analysis, that an 11.25 % discount rate is inappropriate for a 15-year payback period, and that the 15-year period itself is unreasonable. 190

64. In its March 31, 1995 ex pane submission, GTE submitted a revised cash flow analysis based upon its revised revenue and cost estimates, including continued investment expenses through year 15. 191 GTE defends its use of a direct, incremental cash flow analysis

183 GTE Dec. 1994 Response at 13 and Attach. 6. GTE's cash flow projection only includes direct investment for the first three years of the project.

186 Id at Attach. 6.

187 Id at Attach. 6.

188 CCTA Jan. 1995 Comments at 16-17; Kravtin Jan. 1995 Declaration at 3-4; MCI Jan. 1995 Petition to Reject at 6-7; NCTA Jan. 1995 Comments at 12; HCTA Jan. 1995 Comments at 3.

189 HCTA Jan. 1995 Comments at 7; Kravtin Jan. 1995 Declaration at 7; MCI Jan. 1995 Petition to Reject at 5-7; NCTA Jan. 1995 Comments at 12; CCTA Jan. 1995 Comments at 7, 18-19.

190 Id at 16-19; Kravtin Jan. 1995 Declaration at 5-6; FCTA Jan. 1995 Comments at 7; HCTA Jan. 1995 Comments.

191 GTE Mar. 1995 Supplemental at Attach A. Attachments C-2 and C-3 contains GTE's tax calculations and tax based incremental changes; Attachments D-2 and D-3 reflect the direct and common investment expenses, the increases associated with the revised direct investment estimates for replacement and initial build-out costs, and the incremental changes as a result of the revised cost estimates.

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as appropriate for its proposed stand-alone video dialtone network. 192 GTE's revised cash flow analysis projects positive cash flow in year 3 in Virginia and in year 4 in Hawaii, Florida and California, and a break-even point in year 11 for Hawaii and Florida, year 12 for California and year 14 for Virginia. 193 After 15 years, GTE estimates the net present value of the cash flows to exceed $100 million. 194 Petitioners continue to contend that even minor adjustments in GTE's estimates would result in negative net present values beyond 15 years, warranting denial of the applications on public interest grounds. 195

b. Discussion

65. The Bureau finds that a conditioned grant of the GTE applications will serve the public convenience and necessity and thus satisfy the requirements of Section 214. The Bureau finds that GTE's cumulative showing of economic justification satisfies the requirements of the statute and the Commission's rules. This finding is premised as well on the public interest benefits found in the construction of these video dialtone systems and on the imposition of conditions in this authorization for a separate accounting of the costs of these video dialtone systems. As discussed below, the Bureau has examined theadequacy of the safeguards as applied to these specific Section 214 applications, and concludes that the existing safeguards, in conjunction with the conditions imposed on this authorization, will be sufficient to protect against possible anticompetitive conduct by GTE.

66. Based on its submissions, we conclude that GTE has provided a reasoned basis for its estimated video dialtone revenues and costs. As explained below, the Bureau finds that GTE has also provided a reasoned basis for its determination that projected revenues produced by its stand-alone video dialtone system will cover the projected cost of deployment within a reasonable time period and that rate payers will not be adversely affected by these proposed facilities.

67. After considering all of GTE's data submissions, we find that GTE has provided sufficiently detailed and adequately supported revenue and cost data for the Bureau to grant the applications. GTE has submitted revenue estimates broken down by year and by category of service, projected penetration rates, estimates of monthly subscriber revenues by year and service category and has provided a reasonable explanation of the assumptions and methods it

192 Id at 41.

193 Id at Attach A.

194 Id, at Attach A1-A4.195 VCTA Apr. 1995 Comments at 3-4; CCTA Apr. 1995 Comments at 6; Kravtin

Apr. 1995 Declaration at 3, 16-18.

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used to generate'these estimates. 196 GTE has also submitted estimates of year-by-year dedicated and common expenses and investment, projected economic lives of facilities, calculations of incremental changes in cost estimates from earlier submissions and explanations of the assumptions and methods used to generate its estimates. 197 GTE has restated its costs in cash flow terms. 198 Investment has been disaggregated into network components, and expense has been broken down into Uniform System of Accounts 199 (USOA) categories. 200

68. Revenue Estimates. The Bureau finds that GTE has proffered a reasoned basis for its revenue estimates. Projected revenues fall into two main transport revenue categories -- residential services and commercial applications, -- with minor revenues from charges for service connections. Over the course of the 15 year study, GTE estimates that residential revenues (including service connections) will account for between 90% and 94% of total revenues, depending on the geographic location, with commercial revenues accounting for the remaining 6% to 10% of total revenues. 201 GTE's residential and commerical transport revenues

196 GTE Mar. 1995 Supplemental at 18-34, Attach. B; GTE Dec. 1994 Response at Attach. 1.

197 GTE Mar. 1995 Supplemental at 17-18, 35-41, Attachs. C, D; GTE Feb. 1995 Consolidated Reply at 12-19; GTE Dec. 1994 Response at 5-12.

198 GTE Mar. 1995 Supplemental at 41-42, Attach. A; GTE Feb. 1995 Consolidated Reply at 13-14, 19-22. A cash flow analysis adjusts for the timing of investment, expense and revenue by discounting the data by the opportunity cost of capital (discount rate) and restating them in net present value terms. This adjusts for the fact that cash flows in the present are more valuable than those in future periods because they can be invested at positive interest rates. Expressing cash flows in net present value terms is especially important where large investments must be made before revenues can be realized. See generally R. Brealey & S. Myers, Principles of Corporate Finance 12-13, 93-98 (3d ed. 1988); H. Bierman, Jr. & S. Schmidt, The Capital Budgeting Decision: Economic Analysis of Investment Projects (8th ed. 1993) at chapter 2.

199 See generally 47 C.F.R. § 32.

200 GTE Mar. 1995 Supplemental at 17-18, Attach D; GTE Dec. 1994 Response at Attach 2 and GTE Dec. 1994 Amendments at Attach 2; GTE July 1994 Consolidated Opposition at Exh. A.

201 Staff calculation based GTE's Mar. 1995 Supplemental, Attachment B-l. The percentage of total revenues attributable to residential services was calculated by dividing total residential revenues by total revenues. A similar calculation was made for commercial revenues. The revenue figures were determined by suming the present values of the annual revenues for the fifteen year study period. The present

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are derived from both analog and digital broadcast services and three types of digital interactive services — video-on-deraand, interactive and advertising support switched transport services.

69. Generally, GTE states that its forecasts are premised upon primary and secondary market research, market-specific competitive conditions and demographic factors, and proprietary consultancy projects. 202 More specifically, GTE's transport revenues are from tariffed rates — charged to customer-programmers for channel capacity to distribute the video and audio programming - that are based on the number of end-user subscribers and the number of homes passed by the video dialtone facilities. 203 GTE states that the revenue forecasts are driven by, inter alia: "(1) the number of customer-programmers likely to purchase channel capacity; (2) the number and type of channels which these programmers are likely to purchase; (3) the total market size for video services; (4) homes passed as based upon construction schedules; (5) the estimated number of subscribers to packages offered by customer- programmers; and (6) estimates of transport and connection prices." 204

70. GTE estimates that customer-programmer demand for broadcast channel capacity will begin with only one full-service customer-programmer offering approximately 55 channels, and that, within ten years, multiple niche programmers will be added that offer programming on a total of between 180 and 210 channels. GTE also states that its pricing and revenue projections reflect its expectation that customer-programmer demand will initially be primarily for analog channels, with demand for digital channels growing over time. GTE also assumes a 30% drop in transport pricing on a per-channel/per-subscriber basis due to network efficiencies. 205 GTE identifies sources for the competitive information underlying its estimates of customer-programmer demand, and tests conducted on its assumptions. 206

71. GTE estimates that the overall penetration rate of multichannel video services will rise to 85 %, and projects the penetration rate for its video dialtone platform will peak at 30%

values were determined using an 11.25% discount rate.

202 GTE Mar. 1995 Supplemental at 19, Attach. F.

203 Id, at 20.204 Id

205 Id at 21-22.

206 GTE identified Warren Cable Fact Book, rate cards from cable multiple system operators in the targeted markets, Paul Kagan Associates, Inc's The Coming Age as sources; primary research and preliminary sales discussions with programmers as initial tests; and comparisons of probable transport charges to current programming retail rates as a "reasonableness" check. GTE Mar. 1995 Supplemental at 20-22.

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to 37%.207 We note that GTE's overall penetration rate for multichannel video services is similar to that of NYNEX in its video dialtone applications. 20' GTE estimates its subscriber demand are based on overall multichannel video penetration, GTE's share of overall penetration, and residential growth rates, with deductions for promotions (to the extent permitted by the Commission), reconnections and churn. 209 In estimating its market share, GTE states that it factored its buildout schedule and a complex competitive matrix that assesses competitive considerations from various sources and proprietary calculations. 210

72. With regard to interactive services, GTE estimates that between 22% and 25% of its residential transport revenue in year 5 will be derived from interactive services, between 42 % and 44% in year 10, and between 50% and 53% in year 15.2n GTE states that its interactive residential revenues are based on charges for usage. 212 For example, GTE states that its revenue estimates for video-on-demand are based on estimates of viewing hours and transport prices. 213 The demand is based on estimates of potential customer base, potential services and usage over

time. 214 The transport prices are based current and projected video rental rates, cost of content, cost of operations, and investment. GTE estimates that 20% to 30% of total subscriber service

207 Id, at 22-23, Attach. B-2.

208 SSS NYNEX Order at paras. 63, 66.

209 GTE Mar. 1995 Supplemental at 22-23.210 W, at 22-23.

211 Staff calculations made by dividing interactive revenues in the respective year by total residential revenues in that same year, as estimated in GTE's March 1995 Supplemental at Attachment B-l.

212 GTE Mar. 1995 Supplemental at 23.

213 Id. at 23-24. GTE states that it used a proprietary study conducted by Link Resources Corp., information provided by Paul Kagan Associates, Inc., and made assumptions based on usage by VCR households. GTE also identified factors on which transport prices were premised and described the formula used to arrive at its video-on-demand revenue projections. Id.

214 Id. at 24-27. GTE identified potential services and sources of information used to ascertain potential services, including an inter-industry proprietary research endeavor aimed at identifying and defining potential interactive services and their demand, pricing, technical and marketing implications. GTE also identified some of the data sources and explained its methodology for calculating the potential interactive customer base; explained certain assumptions underlying estimates of customer monthly usage of interactive services. Id.

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prices are attributable to transport. 215 Finally, GTE states that its estimates for advertising support services are based on estimates of growth trends, assumptions regarding advertiser willingness to pay extra transport fees to deliver targeted advertising, and price assumptions. 216 The growth trend estimates assume availability of two-way digital decoders and growth proportional to general digital service growth trends.

73. With regard to commercial services, GTE acknowledges that cable television penetration among commercial establishments has historically been small, but asserts that commercial-oriented interactive applications such as interactive training and marketing will significantly increase the value and the penetration of video dialtone in the commercial marketplace. 217 GTE's commercial revenue estimates include both broadcast and interactive services. GTE's forecasts segment the business market into several sizes of business based upon number of employees because basic assumptions about services used, employee usage and price depend upon business size. For commercial broadcast, GTE estimates that initially less than 1 % of small to medium businesses will subscribe to the video dialtone network, but that 3 % of large businesses and 5 % of very large businesses are expected to subscribe, with an average of 1.03 % of businesses passed subscribing in the initial year of service. 21* GTE anticipates penetration rates will grow by the year 2000 to 3% of small to medium business passed, 7.5% of large businesses passed and 9 % of very large businesses passed. Based on its market forecasts, GTE estimates commercial broadcast revenues using anticipated transport prices and installation charges. 219

74. For commercial interactive services, GTE uses the same market forecasts and industry reports to estimate business-to-business services delivered through interactive and

215 Id. at 24-27. GTE described its methodology for calculating per-minute rates. Id.

216 Id. at 27-29. GTE describes advertising support services as switched transport purchased by advertisers in order to deliver targeted and interactive marketing communications messages to programmers' subscribers. li. at 27. In its December 1994 Response, GTE separately identified advertising support services with other non- residential revenue categories, GTE Dec. 1994 Response at Attach. 1, but moved the category to its reformulated residential interactive revenue category in its March 1995 Supplemental filing. GTE Mar. 1995 Supplemental at 27, Attach. B-l. GTE identified certain assumptions and data sources used to calculate estimates of available advertising funds, and noted its projections that advertising supported interactive services will potentially capture "25-30% of all spot and cable TV ad spending." Id. at 28.

217 IcL at 29-31.

218 Id, at 30.

219 Id at 21.

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networked multimedia.220 As with broadcast commercial penetration, GTE estimates that commercial interactive penetration will be less than 1 % of small to medium businesses initially and will grow to 3% by the year 2000. GTE anticipates substantial growth and revenue from interactive services purchased by large and very large businesses. 221 GTE also includes estimates of interactive use by the work-at-home business segment. GTE's states that its revenue projections are calculated using these demand forecasts, estimates of session length, and projected transport charges per employee and site. As a reasonableness test, GTE compared its estimates with the monthly interactive service charges estimated by the Information Workstation Group. 222

75. GTE expects that within the next 15 years, its video dialtone system will pass approximately 1.4 million homes, of which 30% to 37% will subscribe to its residential service; and that it will pass over 98,000 businesses, of which approximately 6% will subscribe to commercial video dialtone services. 223 GTE's projected estimates for residential service penetration are not dissimilar from NYNEX's projections for its residential penetration assumptions in Massachusetts. 224 GTE projects monthly residential subscriber revenues of between $28.35 and $33.06 in year 5; between $31.66 and $35.39 in year 10; and between $36.86 and $42.98 in year 15. 225 These estimates are similar to NYNEX's estimates for Massachusetts. ̂ GTE's estimates of average monthly subscriber revenues per commercial site are $238 in year 5, $377 in year 10, and $448 in year 15.m The commercial estimates are similar to those projected by Ameritech and which die Commission accepted as premised on a reasoned basis.228

220 LL at 31-33. GTE credits such industry studies to the Information Workstation Group and Communications Equity Associates, Inc.

221 IoL at 33.

222 I$L at 33-34.

223 Staff calculation based on GTE Mar. 1995 Supplemental at Attach. B-2.


225 GTE Mar. 1995 Supplemental at Attach B-3.

226 Staff calculation based on the NYNEX Order at paras. 63-64. Total residential per- subscriber revenues were calculated by adding per-subscriber broadcast revenue and per-subscriber interactive revenue.

227 GTE Mar. 1995 Supplemental at Attach. B-3. Staff calculation of average monthly commercial revenues per site based on projections for each of the four project areas.


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76. The Bureau finds that GTE's projected transport revenues are based on a systematic effort to quantify the projected demand for existing and widely anticipated future services. The Bureau rejects claims that GTE provided insufficient information about its estimates or the assumptions and methodologies underlying its estimates. The Bureau also rejects claims that GTE's projected penetration rate for video dialtone is unreasonably high or fails to consider competition from other multichannel video programming providers. On the_ contrary, GTE clearly states that all potential competitive providers were considered in calculating estimated penetration rates, and GTE also adequately describes the bases for its projections. 229 Moreover, as previously noted, GTE's estimates are similar to penetration rates previously found supported by reasoned bases. The Bureau also rejects claims that GTE's projected market share is unreasonable and unsupported. GTE described the assumptions, methodologies and factors it considered in its calculations. Petitioners' alternative assumptions regarding future performance are not based on well-documented assumptions and methods, as are GTE's, and we find no basis to accept petitioners' estimates over those provided by GTE. The Bureau believes that GTE has provided a reasoned basis for its penetration estimates and market share estimates.

77. The Bureau finds that GTE has provided a reasoned basis for its residential revenue projections. GTE has provided information concerning its underlying assumptions on several occasions. In its latest submission it has detailed projected revenue by service category; identified and explained incremental changes from prior submissions in certain revenue projections; and described its forecasting methodology, assumptions and sources for both broadcast and interactive services. 230 As petitioners note, GTE did combine three different types of digital interactive service revenues in its residential revenue projections, rendering calculation of the percentage of interactive revenues associated with each of the three types of services impossible to ascertain. Such information is not essential to a finding that GTE has provided a reasoned basis for its estimates. 231 Indeed, GTE elaborates in some detail the assumptions, methodologies, calculations and sources of information used to derive its revenue projections for residential interactive services. Petitioners do not point to any particular aspect of those underlying formulas or factors that fatally impacts GTE's estimates. Consequently, the Bureau rejects claims that GTE has not provided us with sufficient information.

78. The Bureau further rejects petitioners' claims that question revenue estimates related to decoders. In calculating demand projections for advertising support switched transport interactive services, GTE noted that one assumption underlying its projections is that growth of

229 GTE July 1994 Consolidated Opposition at 14-18 and Declaration of Catherine M. Morris at 1; GTE Mar. 1995 Supplemental at 22-23, Attach. B-2.

230 GTE Dec. 1994 Response at 2-3, Attach. 1; GTE Feb. 1995 Consolidated Reply Comments at 5-12; GTE Mar. 1995 Supplemental at 18-34, Attach. B.

231 See NYNEX Order at para. 65-66.

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this service wilt be proportional to the growth and availability of digital decoders. 232 Elsewhere in its submissions, GTE noted that it had commitments for sufficient hybrid decoders to meet its estimated demand for the fourth quarter of 1995 and that it anticipates that customer- programmers will make switched digital interactive services available during 1996. GTE's revenue projections include no revenue for interactive services during year I. 233 Thus, the Bureau sees no inherent inconsistency in GTE's projections and rejects petitioners' unsupported concerns.

79. In its original applications and December amendments, GTE projected revenues from residential services and advertising support services. Commercial revenue projections were not included in GTE's submissions until the March supplemental filing. 234 Therein, GTE provides estimates of commercial penetration rates, commercial revenue projections and potential commercial services, explains its assumptions and methodologies, and identifies source data used in its commercial estimates. The commercial revenues account for between 6% and 10% of GTE's total estimated revenues over the IS year study, and this projection is significantly less than the 30% projection proffered by Ameritech. 233

80. The Bureau acknowledges the concerns expressed by petitioners over GTE's addition of commercial revenues into the calculation late in this proceeding. However, the Bureau accepts GTE's representation that subsequent to its December 1994 amendments, it undertook a comprehensive review of the expected market for video dialtone services and that the decision to include expectations of commercial services resulted from that review. 236 As the Commission has noted in prior video dialtone proceedings, digital video dialtone offers potentially new and innovative services, and that, because it is difficult to find comparable services from which to derive revenue estimates, there is greater uncertainty inherent in these projections.237 As a consequence, the Commission has allowed applicants to continue to develop and revise their proposals pending action on their applications. The petitioners and interested parties have been afforded ample opportunity to comment on the applications and data submissions, and the Bureau has had an opportunity to review the entire record. We find that the petitioners' criticisms are not persuasive. Thus, having examined the underlying assumptions and methodologies, we accept GTE's commercial revenue estimates, and find that GTE has provided a reasoned basis

232 GTE Mar. 1995 Supplemental at 27-29.

233 14 at 7-8.

234 14 at 4, 19.

233 Id. at Attach. B-l; Ameritech Order at n.138 (staff calculation based on commercial revenues divided by total revenue).

234 See GTE Mar. 1995 Supplemental at 19.

237 NYNEX Order at paras. 41,65; Ameritech Order at paras. 40-41.

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for those estimates. However, the Bureau conditions its grant on GTE's amending its applications with revised service maps to the extent any are necessary to reflect the addition of commercial service areas.

81. Accordingly, the Bureau finds that GTE has presented a reasoned basis for its assumptions and its estimated revenues. Petitioners, in contrast, have not presented evidence that persuades us to reject as unreasonable either GTE's projected revenues or underlying assumptions.

82. Cost Estimates. GTE proposes to construct a stand-alone video dialtone system that is an overlay system over the telephone network. GTE treats all video dialtone costs as direct expense or investment, with one exception. The exception is that GTE assigns 30% of the cost of trenching to telephony where construction in new areas permits joint construction of telephony and video dialtone facilities. GTE provides estimates of expense and investment costs in accordance with the Commission's guidelines; estimates facility and plant life and includes replacement investment costs in its cost estimates; and explains the assumptions and methodologies underlying its cost estimates, including detailed explanations of its construction and labor cost estimates. GTE anticipates that over the next 15 years its combined applications will have approximately $365 million in discounted direct video dialtone investment,23* and $ 312 million in discounted direct expense.239

83. Consistent with the Commission's decision in the Ameritech Order, the Bureau approves GTE's proposed stand-alone video dialtone system. Contrary to petitioners' claims, the Bureau finds that GTE has provided sufficiently detailed cost data and a reasoned basis for its cost estimates, and for the methodologies and assumptions underlying its cost estimates.

84. Many of the petitioners' claims were mooted by GTE's supplemental filings in December of 1994 and March of 1995. The Bureau rejects petitioners' assertions that GTE has failed to disclose common costs, requests that we determine the proper allocation of common costs to video dialtone, and contentions that GTE's investment per home passed is low compared to that of Bell Atlantic's Dover system. GTE has certified that it has included all relevant investment and expense costs. 240 Furthermore, petitioners point to no specific investments omitted from GTE's analysis. The determination of the appropriate share of common costs to be recovered in rates for video dialtone services will be determined in the

238 Staff Calculation based on GTE Mar. 1995 Supplemental, Attach. D-l. Direct video investment was discounted at an 11.25% rate to determine the net present value of the investment.

239 Staff Calculation based on GTE Mar. 1995 Supplemental, Attachment C-l. Expenses were discounted at an 11.25% rate to determine the net present value of the expenses.

240 See GTE Dec. 1994 Response, Attachment 5 and GTE Mar. 1995 Supplemental at 35-39.

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Commission's tariffing process. 241 Finally, we find the comparison to the Dover system inapposite because the systems have significantly different architectures.

85. The Bureau also rejects petitioners' claim that GTE has underestimated expenses. Although petitioners disagree with GTE's estimates of volume and technology discounts, they have not presented evidence to establish that GTE's assumptions are unreasonable or incorrect. The Bureau further rejects petitioners' claim that GTE has fatally underestimated expenses because its expense estimates fail to include any costs associated with marketing its commercial service. 242 GTE explained that the commercial customer-programmer creates and provides the services to end-users and that it is those same customer-programmers that will incur marketing expense in selling their products and services to end-users. Consequently, the Bureau finds that petitioners have not demonstrated that GTE revenue estimates are in any measure contingent upon it undertaking a marketing campaign.

86. Cash Flow. The Bureau finds that the cash flows submitted by GTE demonstrate that the proposed stand-alone video dialtone systems can expect to see positive cash flows in four years and recover costs of the combined systems in eleven years. For the 15-year economic study period, the net present value of revenues minus costs is almost $107 million for the four systems combined.

87. The Bureau accepts GTE's 15-year cash flow analysis. In the Video Dialtone Reconsideration, Order, the Commission noted that applicants must merely establish that their proposed investments will be recovered within some reasonable period of time. While the Commission has previously accepted the ten-year projections submitted by NYNEX and Ameritech, it did not establish ten years as the standard study period. The Bureau finds GTE's argument credible that its use of a 15 year study period and use of a discount rate of 11.25%, is reasonable and appropriate for its proposed stand-alone network and is consistent with its revenue forecasts and the expected useful life of deployed plant.243

88. The Bureau rejects petitioners' various criticisms of GTE's adjustments to its cash flow analysis. GTE has submitted the details of its cash flow adjustments and explained its rationale for making such adjustments. The Bureau finds none of its adjustments improper. The Bureau also rejects claims that GTE's applications should be denied because its cash flow analysis would produce negative net present values under alternative assumptions concerning its revenue or cost estimates, and are not persuaded by petitioner's alternative cash flow analyses. The Bureau wffl not engage in second guessing GTE's estimates based upon untested scenarios for different revenues and costs.

241 See supra para. 49.

242 GTE states that its investment costs include investments necessary for provision of commercial and interactive services.

243 GTE Feb. 1995 Consolidated Reply at 19-22; GTE Mar. 1995 Supplemental at 41.

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89. Accordingly, on review of GTE's cumulative economic justification, the Bureau finds that GTE has adequately explained its cash flow analysis, and as noted above, GTE has provided a reasoned basis for its revenue and cost assumptions. Consequently, the Bureau finds that GTE has presented a reasoned basis for its economic justification in support of its video dialtone applications.

3. Cross-Subsidy Issues

a. Pleadings

90. Petitioners argue that the applications, as amended, do not comply with the Commission's video dialtone or BOC safeguard requirements. They contend that GTE's failure to identify cost subaccounts, allocate common and direct expenses and investments, describe its methodology, and state whether it is proposing an integrated video/telephony system or a stand alone video dialtone system creates a high risk of cross-subsidization. 244 Petitioners assert that even with a stand-alone system, cross-subsidization concerns arise through joint use of poles, conduit, marketing, land and buildings, and with the spare fibers in GTE's hybrid HFC design. 245 Petitioners also urge the Commission to defer consideration of GTE's applications pending adoption of specific safeguards246 and specific guidelines on minimally acceptable 214 showings. 247

91. Petitioners repeatedly assert that telephone rate payers must be assured not only that their rates will not rise, but that they are not denied decreases attributable to productivity

244 CFA/CME July 1994 Petition to Deny at 8; HCTA July 1994 Petition to Deny at 13- 15; CCTA July 1994 Petition to Deny at 17; VCTA July 1994 Petition to Deny at 11; FCTA July 1994 Petition to Deny at 20-25; Vision July 1994 Petition to Deny at 6.

245 Declaration of Leland Johnson; HCTA July 1994 Petition to Deny at 15; CCTA July 1994 Petition to Deny at 12-14. Petitioners assert that notwithstanding GTE's characterization of its proposal as a stand alone video dialtone network, cross- subsidization concerns continue because GTE is not accounting for common costs and fails to provide sufficient information to adequately assess actual stand alone costs. NCTA Jan. 1995 Comments at 20-21; VCTA Jan. 1995 Comments at 14.

246 NCTA July 1994 Petition to Deny at 10-14; FCTA July 1994 Petition to Deny at 20- 25; HCTA July 1994 Petition to Deny at 20-25; CFA/CME July 1994 Petition to Deny at 8. See also Vision Cable July 1994 Petition to Deny (FL Application) at 8 (defer consideration until cable operators may provide telephony).

247 CCTA July 1994 Petition to Deny at 26; CCTA Aug. 1994 Reply at 23-26; VCTA Aug. 1994 Reply at 13.

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adjustments under state price cap regulation. 248 Petitioners further assert that reliance on the tariff review process and price caps to reduce cross-subsidization risks is disingenuous. 249 Petitioners argue that unprofitable video dialtone services will result in higher interstate telephone rates: until GTE's video dialtone operations generate positive cash flow, the price cap sharing/low-end adjustment mechanism will result in higher telephone rates. Petitioners assert that in states that have rate-of-retum regulation, higher costs resulting from video dialtone will place upward pressure on intrastate rates, and in states with price cap regulation, the higher costs will result in reduced sharing. 250 In addition, petitioners note that any amount of cross- subsidization between telephony and video dialtone services would give GTE an advantage over competitors. 251

b. Discussion

92. The Bureau notes that the concerns expressed by the petitioners regarding the potential for cross-subsidization in GTE's video dialtone service offerings were generally raised before the Commission released its Video Dialtone Reconsideration Order. In the Video Dialtone Reconsideration Order, the Commission addressed these issues at length and affirmed its commitment to implement video dialtone in a manner that does not subject basic telephone rate payers to unreasonable rate increases or allow improper cross-subsidization. 232 The Bureau finds that the petitioners opposing GTE's applications do not raise arguments or issues concerning video dialtone cross-subsidization that were not addressed by this Commission in the recent video dialtone reconsideration proceeding. Nevertheless, the Bureau will summarize below the relevant findings we made in the video dialtone reconsideration proceeding.

93. In the Video Djajjfflfle Reconsideration Order, the Commission determined that video dialtone service offerings by LECs subject to price cap regulation are subject to existing price cap rules. The Commission stated that these rules, and not the Part 36/Pait 69 cost allocation scheme, are our primary means of protecting telephone customers of price cap LECs from

248 FCTA Aug. 1994 Reply at 9-10; Declaration of Leland Johnson at 13; MCI Jan. 1995 Petition to Revoke at 7 (price caps could allow lower reported earnings to increase telephony rates); CA PUC July 1994 Comments at 18.

249 FCTA July 1994 Petition to Deny at 9; CCTA July 1994 Petition to Deny at 27-29; CCTA Aug. 1994 Reply at 18.

250 NCTA Jul. 1994 Petition to Deny at 13; NCTA Jan. 1995 Reply Comments at 21; MCI Jan. 1995 Petition to Revoke at 7; NCTA Apr. 1995 Comments at 6-7.

231 Declaration of Leland Johnson at 12.

232 Video Dialtone Reconsideration Order at paras. 214-223.

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subsidizing video dialtone service and paying unreasonably high rates. 213 The Commission stated in the Video Diflltnne Reconsideration Order tha* video dialtone service would be classified as a "new service" under its price cap rules, and tentatively concluded that a separate price cap basket for video dialtone service should be established in a further proceeding. Moreover, the Video Dialtone Reconsideration Order details how the tariff review process will protect telephone ratepayers against LEG video dialtone cross-subsidization. ThejJrder makes clear that, in tariffing a new video dialtone service, LECs are required to include in their revenue requirement submissions a reasonable allocation of common costs and overhead expenses. 254

94. In the Video Dialtone Reconsideration Order, the Commission adopted additional mechanisms to prevent cross-subsidization. For example, the Commission required LECs offering video dialtone to establish two sets of subsidiary accounting records"3 to assist the Commission and the states in ensuring that video dialtone costs are not improperly recovered in telephone service rates. 236 In addition, the Commission required LECs to revise their Cost Allocation Manuals (CAMs) for nonregulated services prior to providing nonregulated products or services related to video dialtone directly. 237 The Commission stated that this would assist state regulators and other interested parties in tracking video dialtone-related CAM filings and help prevent cross-subsidization.

95. The Commission declined, however, to amend Parts 32, 36, 64 and 69 of its rules

253 Id. at para. 166.

234 Under the price cap "new services" test for video dialtone, LECS are required to identify (1) all direct costs associated with video dialtone, including plant dedicated to video dialtone service; (2) any incremental costs associated with shared plant used to provide video dialtone and other services; and (3) other costs associated with shared plant used to provide video dialtone and other services. The rates for video dialtone service must also include a reasonable allocation of common costs and overhead expenses. The evolution of the LEC price cap new services test and its application to video dialtone services is discussed in detail in the Video PiaJtppe Reconsideration Order at paras. 209-223.

253 IsL at para. 171.

236 We note that the Commission also authorized the Bureau to issue Responsible Accounting Officer (RAO) letters, if necessary, to ensure uniform accounting treatment of video dialtone costs. Video Dialtone Reconsideration Order at n. 322. Such a letter was issued on April 3, 1995. See RAO Letter 25 From Kenneith P. Moran, Chief, Accounting and Audits Division, Common Carrier Burea (rel. April 3, 1995).

237 Id. at para. 181.

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before authorizing video dialtone services. 23* The Commission found that the Uniform System of Accounts (Part 32) was designed to remain stable in the face of major changes in network technology and service offerings, and we therefore concluded that permanent changes in our accounting system were not required for video dialtone. Similarly, the Commission declared that the Joint Cost Rules (Part 64) were specifically designed so that a variety of new nonregulated services could be introduced without the need to adopt new cost allocation rules. With respect to jurisdictional separations rules (Part 36), the Commission found that current jurisdictional separations rules could be used to separate video dialtone investment between the state and federal jurisdictions and that it was premature to institute Federal-State Joint Board proceedings to amend Part 36 during the initial phase of video dialtone deployment. 259 Finally, the Commission declined to prescribe a new Part 69 rate element for video dialtone at the present time, but rather required that each LEC wishing to offer video dialtone services file a petition for waiver of our Part 69 rules prior to the establishment of a permanent video dialtone rate structure. 260

96. In the Video Dialtone Reconsideration Order, the Commission also affirmed its decision to permit LECs to engage in joint marketing of basic and enhanced video dialtone services, as well as basic video and nonvideo services. 261 The Commission found that joint marketing can increase customer awareness of video dialtone and of enhanced features and functions offered over LEC video dialtone networks. This, the Commission stated, would benefit both consumers and video programmers, and would increase usage of LEC video dialtone systems. Moreover, the Commission stated that the record did dot support a finding that joint marketing of video and telephony services would give LECs an anticompetitive advantage over other providers of video programming to end users.

97. Finally, the Commission affirmed our decision to apply existing customer proprietary network information (CPNI) rules to video dialtone.262 The Commission required, however, that the BOCs and GTE - the carriers to which its CPNI rules currently apply - provide the Commission with additional information about the kinds of CPNI to which they will have access as a result of providing video dialtone service. 263 The Commission explained that this will enable it to obtain a better record to assess whether existing CPNI rules best balance the various interests that are implicated by the use of CPNI in the video dialtone context.

258 !$L at para. 162.

259 Id at paras. 186-92.

260 Id at paras. 195-99.

261 Id at para. 239.262 Id,

263 QTE fygj ^ required information on March 13, 1995.

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98. Thus, for the reasons set forth in the Video Dialtone Reconsideration Order, the Bureau rejects the petitioners' contentions that we adopt video dialtone-specific safeguards to prevent cross-subsidization. The Bureau also rejects suggestions that we initiate a proceeding to amend the existing CPNI rules .

99. Further, the Bureau is not persuaded that it should take action at this time in response to concerns that telephone rates will increase or that under price-cap regulatory schemes, rate payers may experience rate increases as a result of GTE's proposal. The Commission has sought comment on video dialtone price cap questions in a Further Notice of Proposed Rulemaking in the LEG Price Cap Performance Review proceeding. 264 In addition, in the NYNEX Order, the Commission addressed these same concerns and concluded that it is unlikely that LEC's will undertake video dialtone investment if it appeared unprofitable. 265 In particular, the Commission rejected arguments that interstate access rates and intrastate telephone rates will increase due to construction of video dialtone platforms, noting that H [u]nder the LEC price cap plan, LECs have a strong incentive to make profit maximizing and cost minimizing decisions. 266 The Bureau notes, however, that GTE will be required to fully comply with the policies and rules the Commission establishes when it resolves the video dialtone issues contained in the pending LEC price cap rule making.

100. Thus, the Bureau concludes that the petitioners have raised no new issues concerning telephone rates that were not fully addressed by .the Commission in the Video Dialtone Reconsideration Order. Again, as noted in the New England Telephone Order, the Commission stated that state commissions bear primary responsibility for ensuring that intrastate rates are reasonable, and that, in reviewing proposed local telephone service rates, they have the authority to disallow any video dialtone-related costs that do not meet their own standards for inclusion in rates. 267 Finally, the Bureau rejects assertions that telephone rates may rise above the stand-alone cost of a network designed to provide narrowband services. Initial rates established under the LEC Price Cap rules were based on the stand-alone costs of the existing narrowband telephone network. Subsequent changes in rates for these services are based on the price cap rules and are not determined by changes in cost. 26*

264 See Prjffff CflP Performance Review for Local Exchange Caniersi Treatment of Video Dialtone Services under Price Cap Regulation. Further Notice of Proposed Rulemaking. CC Docket 94-1, FCC 95-49 (rel. Feb. 15, 1995).

265 NYNEX Order at para. 86.266 Id,

267 Video Dia,Hone Reconsideration Order at para. 191; NYNEX Order at para. 87.

268 Sss JjL at para. 88.

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C. Accounting Conditions and the Tariffing Process

101. We require GTE to account for all costs associated with its video dialtone service in accordance with Part 32. In order to ensure that these costs are not borne by rate payers of regulated services, and consistent with the requirements established in the Video Dialtone Reconsideration Order, the Bureau conditions this authorization on a requirement that GTE segregate all costs incurred in providing video dialtone service into two sets of subsidiary accounting records. 269 The Bureau requires GTE to create a set of subsidiary accounting records that identify all revenues, investment, and expenses wholly dedicated to video dialtone, and another set of records that capture any revenues, investment, and expenses that are shared between video dialtone and the provision of other services. These subsidiary accounting records shall include the direct costs and overheads associated with video dialtone service. In addition, summaries of the subsidiary accounting records shall be submitted to the Commission on a quarterly basis. If GTE wishes to offer local exchange and exchange access telephone services over this network, it must first submit and obtain approval of an accounting and cost allocation plan that is consistent with our then-existing rules. 270

102. The Bureau also requires GTE to account for the cost of non-common carrier and enhanced services or video customer premises equipment (CPE) in accordance with our rules, to the extent GTE offers such services. The Bureau concludes that GTE's proposed provision of these services and video CPE is consistent with the requirements contained in Section 63.54(d)(2) of our rules. 271 The Bureau conditions this Section 214 authorization by requiring that, to the extent the nonregulated components of the video dialtone service are not already covered by GTE's CAM, GTE must revise its manual to show how it intends to allocate costs of such components between regulated and nonregulated activities. 272 All CAM revisions must be filed within thirty days after release of this Order, and sixty days before providing nonregulated services related to video dialtone. 273 At a minimum, in its submission, the Bureau requires GTE to revise its CAM to include a list of all accounts affected by its provision of nonregulated video dialtone services and a description of each of those services. All CAM revisions related to the service will be subject to public comment and Commission scrutiny. The Bureau emphasizes that bur decision here, and the conditions attached to it, are without prejudice to, and in no,way constrain, any action that the Commission may take in later phases of the video dialtone'proceeding or any other applicable rulemaking proceeding.

269 I<L at para. 173.

270 See, e.g.. US WEST Communications. Inc.. 9 FCC Red 184, 190 (rel. Dec. 22, 1993) at para. 31.

271 47 C.F.R. § 63.54(d)(2).

272 §gg 47 C.F.R. § 64.903(b).

273 See Video Dialtone Reconsideration Order at para. 181.

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103. Our action in this proceeding in no way limits the our ability to ensure, in the subsequent tariff review process, that GTE's tariffed rates, terms, and conditions for video dialtone service are just and reasonable. It is clear that consideration of costs in a Section 214 proceeding is distinct from the examination of rates in the tariff review process.274 As the Commission staff stated in a 1986 decision, "[a] detailed inquiry into tariff related matters . . . would vitiate the distinction between tariff and facilities authorization procedures and would require the Commission to engage in duplicative processes."275 Prior to providing service. GTE must file tariffs, and cost support information, which will be available for review.

•^

104. The Commission has determined that video dialtone service is a "new service" under price cap rules,276 which apply to GTE. 277 In the Part 69/ONA Proceeding, the Commission established pricing standards for new services offered by companies subject to the price cap method of regulation. 278 In setting an upper bound for rates for such services, the Commission adopted a "flexible cost-based approach to pricing new services. ll279 Under this test, the Commission requires LECs introducing new services to submit engineering studies, time and wage studies or other cost accounting studies to identify the direct costs of providing the new service, absent overheads. 280 Recognizing that LECs may have an incentive to understate

274 All American Cables at para. 5; NYNEX Order at para. 91.

775 AT&T Authorization at para. 8.


277 In addition to being under price cap regulation at the federal level, we note that GTE is currently subject to price cap-type regulation in California, earnings sharing incentive regulation in Virginia and rate-of-retum regulation in Florida and Hawaii. See GTE Dec. 1994 Response at 14-15. As stated in the Video Dialtone Reconsideration Order, state price cap regulation can "limit the ability of LECs to raise prices to captive rate payers of local telephone services." See Video Dialtone Reconsideration Order at para. 142.

278 Amendment of Part 69 of the Commission's Rules Relating to the Creation of Access Charge Subelements for Open Network Architecture; Policy and Rules Concerning Rates for Dominant Carriers, Report & Order on Further Reconsideration & Supplemental Notice of Proposed Rulemaking, CC Docket Nos. 89-79 and 87-313, 6 FCC Red 4524 (1991) (Part 69/ONA Order), modified on recon.. 7 FCC Red 5235 (1992) (Part 69/ONA Reconsideration).

279 ran 69/ONA Order at para. 38; Part 69/ONA Reconsideration at paras. 2-3, 6.

280 Part 69/ONA Order at para. 42; Part 69/ONA Order Reconsideration at para. 12. The evolution of the LEC price cap new services test and its application to video dialtone services is discussed in detail in the Video Dialtone Reconsideration Order at

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direct costs and overheads in order to set unreasonably low prices for video dialtone service, in the Video Dialtone Reconsideration Qrder the Commission required a more detailed and complete identification of direct costs, and a stronger justification for allocation of extremely low overheads, than generally required in other new services filings. 211 It is against these standards that the Commission will judge the reasonableness of the tariffed rates GTE proposes for its video dialtone services.

D. Public Interest Benefits of the Proposed Video Dialtone Systems

105. In finding that video dialtone is in the public interest, we concluded that video dialtone service would eliminate unnecessary regulatory barriers to competitive entry into the video marketplace and to investment by telephone companies. 282 The elimination of those barriers will help achieve three important goals: (1) facilitating competition in the provision of video services; (2) promoting private investment in an advanced telecommunications infrastructure; and (3) fostering the availability to the American public of new and diverse sources of video programming. 283 We believe that the projects proposed by GTE will provide these benefits.

106. GTE's proposals also will produce new investment in an advanced telecommunications infrastructure. The proposed analog and digital network capable of providing up to 600 digital video channels would bring advanced technology to over seven million homes and businesses in GTE's combined service areas. Video servers, video administration modules, remote access modules, host digital terminals, multi-subscriber optical network units and associated software are among the advanced infrastructure elements under development. Investment in these components benefits the nation in several important ways. Such investment stimulates manufacturing of high technology products, increases employment opportunities, creates potential export markets, and provides many indirect benefits in other fields, including marketing and training.

107. The proposals also promise to bring additional competition in the distribution of video services. Programmers using the video dialtone platform to distribute their programming will compete with one another as well as with the incumbent cable companies. These new competitors will create new outlets and opportunities for programmers and other users of system capacity. This will result in many of the same kinds of economic benefits that arise from investments in advanced infrastructure. This could include employment opportunities in

paras. 209-223.

281 Video Dialtone Reconsideration Qrder at para. 216. For specific guidance about these requirements, see Id. at paras. 217-220.

282 Video Dialtone Order at paras. 3, 16.

283 Id, at para. 9.

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information services, potential export opportunities, and secondary stimulative effects on supporting services and industries.

108. In the Video Dialtone Reconsideration Order, the Commission stated that the extent to which the states in which the service is proposed authorize competition for local exchange services is one of the factors that we may consider in the Section 214 review _process. 28* GTE indicates that Florida, California and Hawaii permit varying degrees of competition for local exchange services. 285 Hawaii currently has authority to open the local switched market to competition, but to this point , has only granted authorization for competition in non-switched local services. 286 Florida and California, which permit competition in private line services, do not currently permit competition in local loop services, but plan to address switched local service competition in proceedings scheduled in 1995. 287 Moreover, the remaining state in which GTE proposes to deploy its facilities, Virginia, recently passed a statute authorizing competition in local exchange. 28* Arguments that there is not yet actual competition in the provision of local exchange services do not persuade us to deny these applications.289 The Commission has recognized that it will take time for a competitive local exchange marketplace to develop, and supports and encourages the states to take steps or continue their efforts to make the provision of local exchange service competitive. 290

109. Finally, the proposals will give consumers in the affected areas additional choices in video programming and interactive digital services, as well as more facilities-based competition. GTE states the system will offer up to 600 channels. While we can anticipate the likely and potential uses of system capacity, there is no way to know which of these choices end- users will find most attractive, nor what new choices will become available in five or ten years. The systems will offer multiple service providers open access to video dialtone platforms, and consumers access to those providers. This access is consistent with the nation's fundamental commitment to diversity and competition in the flow of ideas, not only with respect to


285 GTE Dec. 1994 Response at 15-17.286 Id

287 Id.

288 Virginia State Senate Bill No. 880 (enacted March 14, 1995).

289 See NYNEX Order at para. 96.290 Id.

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entertainment but also with respect to education, health, and commerce. 291

E. Pole Attachment Issue

110. Several petitioners argue that GTE Hawaii's increase in pole attachment rates subsequent to the filing of its Section 214 application raises significant public interest concerns, including concern that GTE can use its monopoly control over essential poles to engage in anticompetitive conduct, raise prices, impede competition to its proposed video dialtone network, and subsidize the video dialtone project with excessive pole rates. 292 GTE responded and asserts that the embedded pole costs unique to the Hawaii area are not comparable to and cannot be compared with its overall incremental investment projections for the new overlay network. 293

111. A pending pole attachment complaint does not require that the Commission suspend consideration of GTE's application. The Bureau notes, however, that the parties recently settled their dispute and the complaints have been dismissed. 294

IV. NCTA MOTION TO DISMISS

112. On November 21, 1994, NCTA filed a motion to dismiss GTE's applications. NCTA's motion was premised upon the then recently released Video Dialtone Reconsideration Order and raised three principal arguments. First, NCTA claimed that GTE should have revised its cost and revenue estimates because the Video .Piflifrfoe Reconsideration Order recognized the possibility of state jurisdiction over some video dialtone services. Second, NCTA argues that GTE failed to provide enough financial information. Third, NCTA states that GTE has not demonstrated that the proposed systems will provide access to all would-be programmers on an equal basis. 295 NCTA filed similar motions to dismiss against other pending video dialtone Section 214 authorization applications. GTE responded on December 1, 1994. NCTA filed a consolidated reply on December 6, 1994.

113. In the Ameritech Order, the Commission addressed, considered and disposed of

291 See Video DiaJtone Order at para. 1; Video Dialtone Reconsideration Order at para. 3; see also Dover Order at para. 41.

292 Chronicle Publishing Company of Hawaii (Chronicle) Request for Emergency Stay at 3-6; Chronicle Reply at 6-10; Jones Spacelink of Hawaii (Jones) Request for Emergency Stay at 3-6; Jones Reply at 6-10; Chronicle Jan. 1995 Petition to Deny at 3-9.

293 GTE Feb. 1995 Consolidated Reply at 44.

294 Chronicle Publishing Company. DA 95-752 (rel. Apr. 12, 1995).

295 NCTA Motion at 2.

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each of the three issues NCTA raised against Ameritech's then pending applications. 296 The issues NCTA raises against GTE are virtually identical to those raised against Ameritech. Because the Commission fully addressed the matters in the Ameritech Order, and no new issues were raised in the motions against GTE, the Bureau herein summarily denies NCTA's motion.

V. CONCLUSION

114. The Bureau finds that the video dialtone systems GTE has proposed in its applications will serve the public convenience and necessity. GTE has supplied the information necessary to demonstrate that its proposals are consistent with the goals set forth in the Video Dialtone Order and the Commission's rules. A prima facie case has been made for the reasonable long-term viability of the projects and sufficient safeguards have been imposed to protect against unreasonable discrimination. The public interest will be served by expeditious implementation of the projects. Our action here is without prejudice to any subsequent action that might be taken in response to tariffs filed for these projects, or in rulemaking or other proceedings. ,

VI. ORDERING CLAUSES

115. Accordingly, IT IS ORDERED that pursuant to Section 0.291 of the Commission's Rules, 47 C.F.R. § 0.291, and Section 214 of the Communications Act of 1934, as amended, 47 U.S.C. § 214, the applications of GTE (File Nos. W-P-C-6955, W-P-C-6956, W-P-C-6957, and W-P-C-6958) ARE GRANTED to the extent indicated in this order. GTE is authorized to provide video dialtone service, within the geographic areas described in its applications.

116. IT IS FURTHER ORDERED that the petitions to deny filed by the National Cable Television Association, the Hawaii Cable Television Association, the Rorida Cable Television Association, the California Cable Television Association, the Virginia Cable Television Association, Media General, Vision Cable of Pinellas County, and the Consumer Federation of America/Center for Media Education ARE DENIED.

'v

117. It IS FURTHER ORDERED, that grant of these applications IS SUBJECT TO the following CONDITIONS:

a) That GTE file an amended Section 214 application to obtain Commission approval of the structure of any proposed channel sharing plan, before implementing any such mechanism for any of the video dialtone systems authorized in this order.

b) That GTE file amended service area maps to the extent necessary to reflect its proposal to deploy the video dialtone platform to commercial premises in each market.

296 Ameritech Order at paras. 65-68.

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c) That 'GTE file all revisions to its Cost Allocation Manual (CAM) within thirty days after release of this Order, and sixty days before providing non-regulated products or services related to video dialtone. GTE must also list all accounts affected by its provision of non-regulated services associated with its video dialtone service, and must describe those services.

d) That GTE create two sets of subsidiary accounting records: one to capture the revenues, investments, and expenses wholly dedicated to video dialtone, and the other to capture any revenues, investments and expenses that are shared between video dialtone and the provision of other services. GTE must file summaries of those records for public inspection with the Secretary of the Federal Communications Commission on a quarterly basis. Copies of those records must be also served on the Chief, Accounting and Audits Division, Common Carrier Bureau. Consistent with the Commission's prior rulings, the Common Carrier Bureau has the authority to determine the content and format of these subsidiary accounting records as well as the quarterly reports. GTE is further required to keep subsidiary accounting records to identify by each Part 32 account the amount of all plant that is replaced (that is, no longer used and useful) as a result of the deployment of video dialtone plant. In the event that investments made pursuant to this authorization are not deemed used and useful or deemed not to have been prudently incurred in the provision of interstate services, the Commission reserves the right to disallow the recovery of any or all such expenditures from interstate ratepayers.

e) That, pending completion of the Commission's rulemaking on local exchange carrier video programming safeguards, GTE shall not participate in any decisions concerning the selection, packaging, pricing, bundling, or tiering of video programming to end-users in its service area, absent prior Commission Section 214 approval. Thereafter, GTE shall comply with the requirements adopted in the rulemaking. This authorization does not permit GTE, either directly or indirectly through an affiliate, to provide video programming directly to its subscribers.

f) If GTE offers local exchange and exchange access telephone service over the facilities covered by this authorization, GTE must first submit and obtain approval of an accounting and cost allocation plan that is consistent with Commission rules. We delegate to the Chief, Common Carrier Bureau the authority to review and approve the accounting and cost allocation plan submitted by GTE.

g) That GTE provide all video programmers access to the basic platform under the same terms and conditions, and that GTE make all reasonable efforts to expand capacity in order to meet all reasonably foreseeable increases in demand for such channels. Furthermore, GTE shall report to the Chief of the Common Carrier Bureau, within thirty days of an anticipated capacity shortfall or within five days of denying any video programmer access to the platform due to capacity limitations, in whole or in part, and on the steps taken to expand the capacity of the platform so as to accommodate the increased demand for such channels.

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h) Thaf GTE make digital capacity available to customer-programmers, and that digital set-top boxes be available for use by subscribers, when GTE begins to offer video dialtone service over these systems.

i) That GTE comply prospectively with any rules and policies adopted by the Commission with regard to video dialtone in the pending LEG Price Cap rule making proceeding.

j) That GTE comply prospectively with any changes in our rules that result from video dialtone or any other applicable rulemaking proceedings.

k) That no one customer-programmer may occupy more than fifty (50) percent of the systems' non-shared analog capacity, analog channels remain unused after one year of operation of the video dialtone platform, and unless such customer-programmer covenants that any excess channels will be immediately relinquished upon request by another customer-programmer for analog capacity that cannot be fulfilled from available analog capacity.

1) That GTE submit with its tariffs, standardized contractual provisions ensuring that any customer-programmer leasing analog capacity beyond the amount permitted herein, covenants that such excess channels will be immediately relinquished upon request by another customer-programmer for analog capacity that cannot be fulfilled from available analog capacity.

118. IT IS FURTHER ORDERED that the Motion to Dismiss filed by NCTA on November 21, 1994 IS DENIED for the reasons stated herein.

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119. IT IS FURTHER ORDERED, pursuant to Section 214(c) of the Communications Act of 1934, as amended, 47 U.S.C. § 214(c), that the grant of GTE's applications to provide video dialtone service is subject to the conditions provided herein, and is also subject to any Commission rules or orders that result from any existing or future proceeding or proceedings that address video dialtone cost allocations, jurisdictional separations, pricing and other issues. Failure of GTE to decline the authorization as conditioned herein within thirty-one (31) days from the release date will be considered formal acceptance.

COMMUNICATIONS COMMISSION

Kathleen M.H. Wallman Chief, Common Carrier Bureau

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APPENDIX A: RECORD OF FILE NOS. W-P-C-6955, W-P-C-6956, W-P-C-6957, and W-P-C-6958

Application for Manassas, Virginia, Contel of Virginia, doing business as GTE Virginia, May 23, 1994 (GTE Virginia May 1994 Application)

Application for Pinellas County and Pasco County, Florida, GTE Florida Incorporated, May 23, 1994 (GTE Florida May 1994 Application)

Application for Ventura County, California, GTE California Incorporated, May 23, 1994 (GTE California May 1994 Application)

Application for Honolulu, Hawaii, GTE Hawaiian Telephone Company, Inc., May 23, 1994 (GTE Hawaii May 1994 Application)

Amendment to Virginia Application, GTE Virginia, June 15, 1994 (GTE Virginia Jun. 1994 Amendment)

Amendment to Florida Application, GTE Virginia, June IS, 1994 (GTE Florida Jun. 1994 Amendment)

Amendment to California Application, GTE Virginia, June 15, 1994 (GTE California Jun. 1994 Amendment)

Amendment to Hawaii Application, GTE Virginia, June IS, 1994 (GTE Hawaii Jun. 1994 Amendment)

Amendment to Virginia Application, GTE Virginia, October 20, 1994 (GTE Virginia Oct. 1994 Amendment)

Amendment to Virginia Application, GTE Virginia, December 16, 1994 (GTE Virginia Dec. 1994 Amendment)

Amendment to Florida Application, GTE Florida, December 16, 1994 (GTE Florida Dec. 1994 Amendment)

Amendment to California Application, GTE California, December 16, 1994 (GTE California Dec. 1994 Amendment)

Amendment to Hawaii Application, GTE Hawaii, December, 16 1994 (GTE Hawaii Dec. L994 Amendment)

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Petitions to Deny (all applications, unless otherwise noted)

Consumer Federation of America/Center for Media Education (CFA/CME) Petition to Deny (CFA/CME Jul. 1994 Petition to Deny)

National Cable Television Association, Inc. Petition to Deny, July 5, 1994 (NCTA Jul. 1994 Petition to Deny)

Petition to Deny Virginia Application, Virginia Cable Television Association, July 5, 1994 (VCTA Jul. 1994 Petition to Deny)

Media General Petition to Deny, July 5, 1994 (Media General Jul. 1994 Petition to Deny)

Petition to Deny Florida Application, Florida Cable Television Association, July 5, 1994 (FCTA Jul. 1994 Petition to Deny)

Vision Cable of Pinellas County Petition to Deny Florida Application, July 5, 1994 (Vision Jul. 1994 Petition to Deny)

California Public Utility Commission Comments on California Application, July 1, 1994 (CA PUC Jul. 1994 Comments)

Petition to Deny California Application, California Cable Television Association, July 5, 1994 (CCTA Jul. 1994 Petition to Deny)

State of Hawaii Comments on Hawaii Application, July 1, 1994 (State of Hawaii Jul 1994 Comments)

Petition to Deny Hawaii Application, Hawaii Cable Television Association, July 5, 1994 (HCTA Jul. 1994 Petition to Deny)

Opposition to Petitions to Deny

Consolidated Opposition to Petitions to Deny, GTE, July 20, 1994 (GTE Jul. 1994 Consolidated Opposition)

Replies to GTE Opposition to Petitions to Deny

National Cable Television Association, Inc., Reply Comments, August 1, 1994 (NCTA Aug. 1994 Reply)

Virginia Cable Television Association, Reply Comments regarding Virginia Application, August 1, 1994 (VCTA Aug. 1994 Reply)

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Florida Cable Television Association, Reply Comments regarding Florida Application, August 1, 1994 (FCTA Aug. 1994 Reply)

California Cable Television Association, Reply Comments regarding California Application, August 1, 1994 (CCTA Aug. 1994 Reply)

Hawaii Cable Television Association, Reply Comments regarding Hawaii Application, August 1, 1994 (HCTA Aug. 1994 Reply)

Motions and Responsive Pleadings

Motion to Dismiss, National Cable Television Association, Inc., November 21, 1994 (NCTA Nov. 1994 Motion to Dismiss)

Consolidated Opposition to Motion to Dismiss, GTE, December 1, 1994 (GTE Dec. 1994 Opposition to Motion to Dismiss)

Consolidated Reply, National Cable Television Association, Inc. (NCTA Reply to Opposition to Motion)

Information/Data Correspondence

Letter from Farifax County regarding Virginia Application, July 5, 1994

Letter from City of Manassas regarding Virginia Application, July 5, 1994

Letter from National Tire Warehouse regarding Virginia Application, July 5, 1994

Letter from Northern Virginia Community College regarding Virginia Application, July 5, 1994

Letter from Temporary Solutions regarding Virginia Application, July 5, 1994

ExParte Letter from Whhney Hatch, Assistant Vice President, Regulatory Affairs, GTE Service Corporation, to William F. Caton, Acting Secretary, Federal Communications Commission, July 8, 1994

Letter from Jones regarding Hawaii Application, November 14, 1994

Letter to Edwin J. Shimizu, Director, Regulatory Matters, GTE Service Corporation, from Kathleen M.H. Wallman, Chief, Common Carrier Bureau, December 9, 1994 (Wallman Letter)

Ex Parte Letter from Gail L. Polivy, Senior Attorney, GTE, to William F. Caton, Acting

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Secretary, Federal Communications Commission, December 16, 1994

ExPaite Letter from Edwin J. Shimizu, Director - Regulatory Matters, GTE Service Corporation, to Kathleen M.H. Wallman, Chief, Common Carrier Bureau, Federal Communications Commission, April 25, 1995

Comments in Response to GTE's Supplementary Data Submission and Amendments

Liberty Cable Comments, January 17, 1995 (Liberty Jan. 1995 Comments)

National Cable Television Association, Inc., January 18, 1995 (NCTA Jan. 1995 Comments)

MCI Telecommunications Corp. Petition to Reject, January 18, 1995 (MCI Jan. 1995 Comments)

Virginia Cable Television Association Comments in Opposition to Virginia Application, January 18, 1995 (VCTA Jan. 1995 Comments)

Florida Cable Television Association Reply Comments regarding Florida Application, January 18, 1995 (FCTA Jan. 1995 Comments)

California Cable Television Association Reply Comments regarding California Application, January 18, 1995 (CCTA Jan. 1995 Comments)

Hawaii Cable Television Association Reply Comments regarding Hawaii Application, January 18, 1995 (HCTA Jan. 1995 Comments)

Chronicle Publishing Petition to Deny Hawaii Application, January 18, 1995 (Chronicle Data Jan. 1995 Comments)

Opposition to Petitions to Deny

Consolidated Reply Comments and Opposition to Petitions to Deny, GTE, February 2, 1995 (GTE Feb. 1995 Consolidated Reply)

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Appendix B.Site Specific Statistics for GTE's Proposed

Video Dialtone Systems

Table 1. Subscriber Statistics by System,291

Venture County Honolulu Manasses County Pasco-Pinellis County

Homes Passed

(Year 15)145,663 522,124 147,210 554,374

Residential Penetration Rate

(Year 15)30%31% 34% 37%

Commercial Sites Passed (Year 15)

13,267 32,791 8,071

43.977

Commercial Penetration Rate

(Year 15)6.2% 6.2% 6.2% 6.1%

Table 2. Residential Revenue Statistics by System,298

Venture County Honolulu Manasses County Pasco/Pinellis County

Monthly Revenue Per Residential Subscriber (Year 5)$29.13 28.76 33.06 28.35

Monthly Revenue Per Residential Subscriber (Year 10)

$34.19 31.84 35.39 31.66

Monthly Revenue Per Residential Subscriber (Year 15)

$42.50 36.86 42.98 39.03

Residential Revenues as a

Percent of Total Revenues2*

90% 91% 94% 92%

Table 3. Interactive Revenue Statistics by System1,300

Interactive Revenuesas a Percent of

Residential Revenues(Year 5)

Interactive Revenues as aPercent of Residential

Revenues(Year 10)

Interactive Revenuesas a Percent of

Residential Revenues(Year 15)

Venture County HonoluluManasses County Pasco/Pinellis County

25% 23%23% 22%

44% 43%43% 42%

53% 53%53% 50%

3*0

GTE Mar. 1995 Supplemental at Attach. B-2.


Staff Calculation Based on GTE Mar. 1995 Supplemental at Attach. B-3. Annual residential revenue was divided by total revenue and discounted at an 11.25% discount rate over the 15 payback period.

Staff Calculation Based on GTE Mar. 1995 Supplemental at Attach. B-3. Interactive revenue was divided by total residential revenue in the fifth, tenth, and fifteenth year of operation.

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Table 4. Commercial Revenue Statistics by System301

Venture County Honolulu Manasses County Pasco/Pinellis County

Monthly Revenue Per Commercial Subscriber •Year 5)5273.33 244.60 219.98 215.07

Monthly Revenue Per Commercial Subscriber (Year 10)$43 1 .05 389.25 347.38 339.06

Monthly Revenue Per Commercial Subscriber (Year 15)$513.67 461.66 412.31 402.40

Commercial * Revenues as a

Percent of Total Revenues301

10% 9% 6% 8%

Table 5. Investment, Expenses, and Cash Flow Statistics by System303

Venture CountyHonoluluManasses CountyPasco/Pinellis County

TotalDirectVideo

Investment*"

$49,101115.40345,952154,336

TotalDirect

OperatingExpenses303

$43,06198,00832,605138,513

YearPositive

DiscountedCash Flowis Realized

4434

Year PositiveCumulativeDiscounted

Cash Flow isRealized

12111311

CumulativeNet Present

Value(Year 15)

$13,29235,8236,471

51,307

301

302

303

305


Staff Calculation Based on GTE Mar. 1995 Supplemental at Attach. B-3. Annual commercial revenues was divided by total revenue and discounted at an 11.25% discount rate over the 15 payback period.

GTE Mar. 1995 Supplemental at Attach. A.

Total direct video investment for each system is discounted at an 11.25% discount rate over the 15 year payback period.

Total direct operating expenses for each system are discounted at an 11.25% discount rate over the 15 year payback period.

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