Cable Communications Update

To: Moss & Barnett Clients and Interested Parties

From: Brian T. Grogan

Date: January 8, 1996

Ócopyright 1996, Moss & Barnett, A Professional Association

I. The Cities Strike Back

Over the past several years it seems most federal court decisions regarding cable television franchise renewals have been decided in favor of cable television operators. Fortunately, a recently decided case has broken that trend and municipalities have gained a significant victory in Union CATV, Inc. v. City of Sturgis, et al., No. 4:94-CV-72-M (U.S. Dist. Ct., W. Dist. of Ky. at Owensboro, Dec. 29, 1995). This decision represents the first known federal court case in the country upholding a city’s final decision denying a cable operator’s franchise renewal request because the operator’s proposal was not reasonable to meet the future cable-related community needs and interests. Union, however, is appealing the case to the Sixth Circuit Court of Appeals.

By way of background, the City of Sturgis, Kentucky (population 2,184) and Union CATV, Inc. began franchise renewal negotiations in late 1991. Union and the City were unable to conclude renewal negotiations in a timely manner, and Union brought suit against the City in early 1995 claiming violations of the franchise renewal procedural requirements of the Cable Act. A preliminary injunction hearing was held on April 25, 1995, at which time the parties agreed to expedite the renewal process. Thereafter, the City completed its needs assessment and Union submitted its proposal to the City. The City concluded that Union’s proposal failed to meet the future cable-related community needs and interests, and therefore the City denied Union’s franchise renewal request. Union waived its right to an administrative proceeding and filed an Amended Complaint in Federal District Court against the City and each of the City Council members individually, alleging that the City’s denial was not supported by a “preponderance of evidence” and was therefore in violation of the Cable Act.

In his decision, Judge McKinley found that when a court is called upon to review a denial based solely on whether the operator’s proposal is reasonable to meet the future cable-related community needs and interests, the court must give “deference to the judgment of the franchising authority, particularly with respect to the identification of the community’s cable-related needs and interests.” He further stated that the “Court has no business substituting its ‘own notions’ of policy . . . [regarding] the assessment of a community’s cable-related needs and interests.”

Judge McKinley went on to conclude that the City’s finding that Union’s proposal was not reasonable to meet the future cable-related community needs and interests was supported by a preponderance of the evidence. In particular, the Judge cited specific findings of the City which identified how Union’s proposal was deficient. These deficiencies included Union’s failure to adhere to the City’s definition of “gross revenues” on which franchise fee payments are based as well as the length of the franchise term which the City concluded should not exceed five years while Union had proposed a 20 year term.

Judge McKinley also ruled against Union in its claim for damages against each individual City Council member. He concluded that the decision to grant or deny a franchise renewal request is purely a legislative function and individual city council members are entitled to absolute immunity in the exercise of that function. Further, the Cable Act limits relief to a cable operator in this type of action to injunctive or declaratory relief.

I served as the City’s legal counsel, together with Mr. Frederic J. Cowan, Esq. of Louisville, Kentucky, and can answer any questions you may have regarding this decision.

II. Telecommunications Act Of 1995

As of January 4, 1996 Congress had not yet taken action on the pending Telecommunications Act of 1995. As you may recall, the Senate and House had adopted versions of the Telecommunications Act in the summer of 1995. Throughout the fall of 1995 a Conference Committee was appointed to work out the differences between the two bills. Congressional leaders focused most of their attention at year end on the budget battle and foreign policy issues, and therefore no action was taken on the proposed Telecommunications Act. As of this date, the following provisions appear within the Conference Committee draft, many of which may have an adverse impact on municipal regulation of cable television operators.

1. Cable programming service tier (expanded basic tier) rate regulation will sunset in 1999.

2. Small system rate relief will be expanded to systems serving up to 50,000 subscribers with gross annual income of less than $250 million.

3. No state or franchising authority may prohibit, condition, or restrict a cable system’s use of any type of subscriber equipment or any type of transmission technology.

4. A cable operator may provide notice of service and rate changes to subscribers using any reasonable written means at its sole discretion (i.e. no more 30 day notice requirement).

5. The cable operator shall not be required to provide prior notice of any rate change that is the result of a regulatory fee, franchise fee, or any other fee, tax, assessment or charge of any kind imposed by any federal agency, state or franchising authority on the transaction between the operator and the subscriber.

6. The FCC must allow cable operators to aggregate on a franchise, system, regional or company level, their equipment costs into broad categories, such as converter boxes, regardless of varying levels of functionality of the equipment within each such broad category.

7. “Open video systems” -- the Conference Committee created a new type of cable television system not included in either the House or Senate bill, which would allow both telephone companies and cable operators to provide video programming without obtaining a local franchise. An open video system requires simply that two-thirds of the operator’s programming be obtained from unaffiliated companies.

8. Control over local public rights of way has also been significantly weakened in the Conference Committee draft which is surprising given the fairly strong language which appeared in both the House and Senate versions.

By far the most troubling provision to emerge in the Conference draft is the concept of an “open video system.” The concept is of particular concern since existing cable television operators would no longer be forced to obtain a local franchise so long as they did not have an interest in more than 33% of the programming offered on their system. Further, to the extent alternative video programming providers, such as telephone companies, could utilize the open video system to compete with existing franchised cable operators, it appears likely legal action would be immediately brought by franchised cable operators based on equal protection arguments.

III. Rate Regulation Slowly Disappearing

On August 1, 1995 the Federal Communications Commission gave final approval to its first social contract for Continental Cablevision. Subsequent social contracts have been approved for Time Warner and other large, multiple system operators. These social contracts essentially resolve hundreds of rate regulation complaints which were pending at the FCC and provide blanket refunds/credits to affected cable television subscribers. The contracts typically extend for five or more years and for all practical purposes eliminate any true regulation of rates over the affected cable operators.

Cities across the country have voiced opposition to these so-called social contracts not only for the generous relief which the FCC afforded cable operators, but also because cities were essentially excluded from the negotiation process. In most cases the cable operators and FCC staff spent months negotiating the terms of the social contracts and once the contract was near completion provided a mere 30 day comment period for affected municipalities. After receiving comments from municipalities only minor modifications were made to the Continental Cablevision Social Contract and subsequent social contracts have been approved with very minimal modifications.

Given the language presently contained in the proposed Telecommunications Act of 1995, rate regulation may soon disappear for all cable operators with respect to the cable programming service (expanded basic) tier which will essentially render regulation of the basic service tier moot. In other words, the operator will be free to charge what the market bears on the expanded tier of service, so costly municipal regulation efforts with respect to the basic service tier may no longer benefit any meaningful segment of the subscriber base.

IV. Consolidation Continues

If the cable system serving your community has not recently been transferred to a different cable operator, consider your community unique. Small cable operators are rapidly exiting the industry and large operators continue to trade systems seeking larger “clusters” of subscribers so they can compete with telephone companies to provide local exchange telephone services. Consider that currently the top five multiple system operators (MSOs), TCI, Time Warner, Continental, Comcast and Cox now provide service to almost 70% of all cable television subscribers. In just one year these five MSO’s have collectively acquired an additional 10 million subscribers.

If your community is facing a proposed transfer of ownership pay close attention to FCC Form 394 which will be submitted by your operator for your review. A step by step process has been developed by Moss & Barnett to assist communities in responding to requests for transfer approval. Please contact Brian Grogan for a free copy of this paper.

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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Please send me a free copy of the following:

Protecting Your Cities Rights During Franchise Renewal
(addresses key substantive issues to consider when redrafting franchise)

Important Considerations if your Cable System is Transferred

Decision in Union CATV, Inc. v. City of Sturgis, et al.

Summary of Telecommunications Act of 1995
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Send to Brian Grogan, Moss & Barnett, 4800 Norwest Center, 90 South Seventh Street, Minneapolis, MN 55402-4129, or fax to 612-339-6686. Please feel free to call with questions at 612-347-0340.