Cable Communications Update

To: Moss & Barnett Clients and Interested Parties

From: Brian T. Grogan

Date: April 23, 1996

Ócopyright 1996, Moss & Barnett, A Professional Association

I. System Transfers Sweep the Nation

In 1995 over $20 billion changed hands as a result of deals involving cable television systems. In 1996, this figure is sure to rise due in large part to the announcement by U.S. West of its acquisition of Continental Cablevision. Continental Cablevision has approximately 4.2 million cable subscribers in the United States and the deal, valued at close to $11 billion, pays a hefty $2,190 per cable subscriber or 11 times estimated 1996 cash flow. As a result of the acquisition, the U.S. West Media Group will pass 26 million homes and serve over 16 million cable and telephone customers in 60 of the top 100 U.S. markets. This mega deal is just one of many mergers and/or outright transfers of cable properties to have already been announced in 1996.

These system transfers are occurring at the same time many cities across the country are facing franchise renewal requests from their cable television operators. In the case of cities served by Continental Cablevision, never before have these cities faced the challenge of approving a transfer of ownership. Now they have the difficult task of understanding the qualifications and philosophy of the newly formed U.S. West/Continental Cablevision entity, while at the same time attempting to address requirements for franchise renewal.

In recent transfers a trend has developed where the incumbent cable operator (seller) will suggest a consent resolution to be adopted by the franchising authority to approve the proposed transfer. Typically, these resolutions include broad recitals indicating that “the franchise is in full force and effect without default thereunder” or that the seller has “complied with each and every term and condition as set forth in the franchise and that no breach or default has occurred or is continuing under the franchise.” These consent resolutions will often also include a stipulation that the City give prior approval to the proposed transferee (buyer) to “assign or transfer or otherwise convey one or more liens or security interests in its assets, including its rights, obligations and benefits in and to the franchise.” While this language works to the benefit of the cable operators, it presents significant problems for cities. Resolutions offered by the cable operator should be carefully reviewed to ensure the city is not waiving its rights under the franchise or to approve of a subsequent transfer.

When reviewing a proposed transfer, the buyer and seller must provide the franchising authority with FCC Form 394 and with supporting documentation evidencing the buyer’s legal, technical and financial qualifications to own and operate the system. Typically this process need not be overly complex; however, any resolution approving such a transfer must be precisely drafted to ensure the franchising authority retains all of its rights. In particular, the city should pay close attention to provisions in the resolution which may allow the proposed transferee to start with a “clean slate” with respect to compliance with the existing franchise.

II. FCC Begins Implementation of New Telecommunications Act

On March 21, 1996, the FCC began the daunting task of implementing the requirements of the Telecommunications Act of 1996. Among the more significant actions taken by the FCC were the following:

1. Amending the cable television cross ownership rules regarding the provision of telephone and cable television services within the same market;

2. Elimination of cable system anti-trafficking rules which previously required a cable operator hold a cable system a minimum of 36 months before reselling;

3. Beginning a rulemaking proceeding to determine how an open video system (i.e., a quasi common-carrier system operated presumably by a telephone company to provide cable television services) is to be regulated;

4. Beginning a rulemaking proceeding regarding commercial leased access channels and the prices to be charged on such channels; and

5. Amending the Commission’s rate regulation rules to allow cable television operators to “aggregate” equipment costs into broad categories on a franchise, system, regional or company level.

In early April the FCC also issued its “cable reform” ruling by addressing issues ranging from effective competition to how individuals can complain about excessive cable television rates. In particular, the FCC found that if a telephone company provides video services in a market, it does not necessarily result in complete deregulation of the incumbent cable television operator. Rather, only “when the level of competition provided by a LEC [local exchange (telephone) company] or its affiliate is sufficient to have a restraining effect on cable rates,” will the cable operator’s rates be deregulated. To further clarify this issue the FCC released a notice of proposed rulemaking seeking comments.

The FCC also expanded its rate relief to small cable television operators with respect to the cable programming services tier (expanded basic) by increasing the number of subscribers to 617,000 total subscribers for an operator to qualify as a “small system.” Finally, the FCC found that local franchising authorities cannot “prohibit, condition or restrict” a cable television operator’s use of equipment and transmission technology consistent with the Telecommunications Act of 1996. This final issue will have an impact on cities involved in franchise renewal proceedings when negotiating and drafting provisions regarding system upgrade/rebuild and technical compliance.

III. Local Control Over Public Rights-of-Way

Section 253 of the Telecommunications Act of 1996 confirms that states and local governments have authority to “manage the public rights-of-way or to require fair and reasonable compensation from telecommunications providers, on a competitively neutral and nondiscriminatory basis.” While this provision was initially considered a major victory to cities across the country, cities are now finding implementation of this provision difficult. This is particularly true for cities with an existing regulatory scheme with respect to voice, video and data communications services.

The requirement that any local regulations must be implemented on a “competitively neutral and nondiscriminatory basis” presents cities with the difficult task of regulating new competitive providers fairly in light of existing franchises and/or agreements with long-standing incumbent providers. For example, to the extent an incumbent telephone company has authority to use the public rights-of-way while paying nominal compensation for such use, it will be difficult for a city to implement a regulatory scheme which requires new competitors to pay fees for the use of those same public rights-of-way, which are higher than the fees paid by the incumbent operator.

Many cities across the country are assessing their entire regulatory scheme regarding voice, video and data services and are implementing new “Telecommunications Plans” which, over a period of years, will phase in new regulations governing the use of the public rights-of-way and address necessary public health, safety and welfare issues regarding communications companies.

IV. Cable Industry Reacts to Landmark Federal Court Decision

Union CATV, Inc. the cable operator in the tiny City of Sturgis, Kentucky (population 2,220), has appealed a federal court decision which upheld the City’s denial of Union’s franchise renewal request. The City (represented by Moss & Barnett as co-counsel) had denied Union’s renewal request on the grounds that Union’s proposal was not reasonable to meet the future cable related community needs and interests. In its decision, the federal district court found that the City’s determination of its cable related needs and interests should not be reviewed by the federal court. Rather, only the operator’s proposal need be reviewed by the court to determine whether it meets the already identified needs and interests of the City. Union has appealed this aspect of the case claiming that a city’s determination of needs and interests must be supported by a “preponderance of the evidence.”

Union’s argument suggests that a federal court judge must step into the shoes of elected city council members and attempt to determine the importance of issues unique to that community, such as whether to provide cable television service to the local school, what type of customer service obligations to impose, the type of insurance and indemnification provisions to require and the appropriate level of public, educational and governmental access support. Union argues that the City’s decisions on each of these matters must be supported by a preponderance of the evidence.

We have argued on behalf of the City that such a scenario is not only inconsistent with federal law but would be frankly impossible to implement. For example, such a scenario would mean that local elected officials could never take into account the needs of minorities since there would never be a “preponderance” of the evidence to support a particular minority need. Further, how could a city identify evidence to support the appropriate language for an indemnification provision? The City argues that only the individuals qualified to make these determinations are the local elected officials, and that sufficient due process protection still exists for the cable operator since the district court must review the reasonableness of the operator’s proposal in light of the costs associated with meeting the needs and interests identified by the City. Oral arguments are expected in this case in the summer of 1996, but a final decision may be as much as a year away.

V. Survey Results

During our last newsletter mailing we asked individuals to respond to a brief survey regarding the content of the Cable Communications Update provided by Moss & Barnett. We received a strong 20% rate of return on our survey evidencing the following results:

1. How would you rate the length of the newsletter?

90% satisfaction with current format.

2. Is the newsletter the right frequency or would you like to see shorter articles more often?

Over 80% preferred the current quarterly distribution of the newsletter.

3. Are the topics relevant to the work you do?

99% indicate the topics are relevant to their work.

4. Is the content thorough enough or is it too technical?

75% preferred the level of detail contained in the Update; however, many indicated that the acronyms and content has become more confusing as the cable and telephone industries have begun to merge.

5. How do you like the current memo format of the newsletter?

88% indicated they preferred the current memo format as opposed to a more glossy graphical layout found in other newsletters.

We also had an overwhelming response to the supplemental information available in our last newsletter. Individuals were given the opportunity to request complimentary copies of the following materials:

1. Protecting Your City’s Rights During Franchise Renewal

2. A copy of the Decision in Union CATV, Inc. v. City of Sturgis, et al.

3. Important Considerations if Your Cable System is Transferred

4. Summary of Telecommunications Act of 1996 for Municipal Authorities

If you should desire a copy of any of the above referenced materials please feel free to contact Susan Olson (612/347-0390) at Moss & Barnett for further information.

In summary, we were pleased to hear that you like the format and context of our current newsletter. We will continue to work to provide you with better explanations of the acronyms we use.

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Brian T. Grogan is an attorney with the Minneapolis law firm of Moss & Barnett specializing in cable television and telephone regulation. Mr. Grogan represents municipalities throughout the country on franchise renewals, transfers of ownership, rate regulation, First Amendment issues, right-of-way regulation, litigation and other related communications matters. Mr. Grogan is a frequent presenter at state and national conferences regarding cable and telecommunications. Mr. Grogan is a member of the American Bar Association (Forum Committee on Communications Law), National Association of Telecommunications Officers and Advisors, the Alliance for Community Media, International Municipal Lawyers Association, and the Communications Law Section of the Minnesota State Bar Association.

The materials in this Cable Communications Update have been complied from a variety of sources and address only a portion of the relevant issues contained within hundreds of pages of regulations and decisions. We have not addressed many important points which may apply to your situation. You should consult with legal counsel before taking any action on matters covered by this Cable Communications Update.

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