Newsletter August 1996

e-mail address

GroganB@mosslaw.com

Municipal Communications Law Update

To: Moss & Barnett Clients and Interested Parties

From: Brian T. Grogan, Esq.

Tim Wuestenhagen, CPA

Paul B. Zisla, Esq.

Date: September 3, 1996

I. Open Video Systems

Section 653 of the Telecommunications Act of 1996 (1996 Act) creates a new opportunity for entities to provide multi-channel video programming services. In the past a similar concept was referred to as “video dial tone” but it has now been renamed under the 1996 Act as an “open video system” or “OVS.” An OVS is a multi-channel video service where any entity, most likely a telephone company, can provide video services similar to those provided by cable television operators. An OVS is subject to limited municipal regulations in exchange for allowing up to two-thirds of its channel capacity to be available to independent programmers.

On June 3, 1996 the FCC issued a 170 page order creating rules for OVS. Petitions for reconsideration were submitted shortly thereafter, and on August 8, 1996 the FCC released its final report and order essentially affirming its June 3 OVS rules. The FCC’s final rules regarding OVS provide in pertinent part:

(1) Franchising authorities cannot require an OVS operator to obtain a traditional cable television franchise (i.e. a Title VI Franchise).

(2) Municipalities can manage their public rights-of-way in a “non-discriminatory and competitively neutral manner” (note: this does not necessarily mean “equal” treatment).

- the FCC cited as an example that a municipality could impose higher insurance requirements based on the number of street cuts an entity planned to make, even though such a regulation would not treat all entities “equally.”

(3) OVS operators must negotiate local PEG access obligations with the franchising authority. If a mutually acceptable agreement is not reached, the OVS operator will be required to “match” annual PEG access financial contributions of the local cable operator.

(4) Franchising authorities cannot require OVS operators to provide institutional networks.

(5) OVS operators can be required to remit a fee similar to a “franchise fee,” but only on revenue received directly by the OVS operator, not on revenue a subscriber may remit directly to a unaffiliated programmer. Revenue related to advertising would be included in the gross revenues on which the fee is calculated.

While several Bell Operating Companies (BOC) have chosen to enter the cable television business by seeking traditional cable television franchises in competition with incumbent cable operators, several other BOCs are seriously considering the OVS platform. One of the key issues remaining is the debate between the cable television industry and the telephone industry regarding cross-subsidization. The cable industry argues that telephone companies will finance and subsidize OVS operations with revenue from telephone ratepayers. The FCC’s rules on this issue will have a large impact on the viability of OVS for telephone companies.

II. Cellular And PCS Towers - Not In My Backyard

Currently over 80 million Americans use wireless communications. The wireless communications industry expects that number to double by the end of 1998. The demand corresponds with the increasing number of cellular tower sites across the country. For example, in 1983 only 350 cell sites were present in the United States. By 1996 this number had increased to 19,000, and by the year 2006 over 35,000 cell sites are likely to be needed to keep up with demand. In addition, the personal communications services (PCS) industry (a wireless service using different frequencies than cellular providers) is expected to need approximately 100,000 cell sites across the country to create a seamless architecture.

As wireless providers continue to request conditional use permits from cities around the country to install towers in specific locations, individuals are seeking to prevent tower proliferation in their community, all of which is creating headaches for city councils and city attorneys. In Medina, Washington, for example, the City Council, uncertain how best to address these problems and in need of time to analyze the issues, declared a six (6) month moratorium on building new wireless communications towers within its boundaries. The City’s ordinance was challenged by Sprint but a federal judge in Seattle upheld Medina’s six (6) month moratorium.

The 1996 Act imposes five (5) specific conditions on municipal zoning authority with respect to wireless communications tower sites:

(1) Local zoning requirements cannot unreasonably discriminate among wireless telecommunications providers.

(2) Local zoning requirements cannot prohibit or have the affect of prohibiting the provision of wireless telecommunications service.

(3) Municipalities must act on a request to place or construct a wireless telecommunication facility within a reasonable period of time.

(4) Any denial must be in writing and supported by reasonable evidence in a written record before the municipality.

(5) Municipalities cannot deny requests for tower sites based on health concerns regarding radio frequency emissions.

The Conference Committee Report of the 1996 Act also provides, however, that municipalities have “flexibility to treat facilities that create different visual, aesthetic, or safety concerns differently.” Therefore, under generally applicable zoning requirements, different standards may apply in different zoning districts. However, since a municipality cannot prohibit the provision of wireless telecommunications service, an appropriate place and appropriate conditions must be found for a wireless provider.

One of the many issues cities are grappling with is colocation of facilities on a single tower. The industry is concerned with colocation problems resulting from passive intermodulation interference and adjacent band interference due to the close proximity of the facilities on the same tower. The problem is further exacerbated by the fact that the entities which cities may be requiring to colocate are competing for the same subscribers and are therefore are far less willing to cooperate with one another despite the likely time and cost savings which may result.

Many cities around the country are also encouraging these wireless providers to lease space on municipal facilities such as water towers, clock towers, and other similar infrastructure. The lease fees for these facilities can range as high as $12,000 - $16,000 per year and can serve to reduce aesthetic concerns of individuals who may appreciate wireless communication services but refuse to have the tower located in their backyard.

III. Zoning Of Satellite Dishes

Unlike the zoning of wireless communications towers, the 1996 Act directed the FCC to adopt rules essentially removing restrictions on viewers ability to receive video programming signals from:

(1) direct broadcast satellites (DBS);

(2) multi-channel multi-point distribution providers (MMDS); and

(3) television broadcast stations (TVBS).

In order to receive any of the above-described services a viewer must use an antennae mounted on the outside of their residence. Local governments have traditionally imposed certain requirements for the installation, maintenance and use of these antennas. The FCC’s new rules, however, prohibit restrictions that “impair the installation, maintenance or use of antennas used to receive video programming.”

The FCC’s new regulations pertain to antennas including DBS satellite dishes that are less than one meter in diameter, TV antennas, and antennas used to receive MMDS. The FCC’s rules prohibit restrictions that (1) unreasonably delay or prevent installation, maintenance or use, (2) unreasonably increase the cost of installation, maintenance or use, or (3) preclude reception of an acceptable quality signal. Therefore, under the FCC’s rules, viewers will be able to install, use and maintain an antennae on their property if they directly own the property on which the antennae will be located.

Local restrictions that impair the installation, maintenance or use of such antennas are permitted only if: (1) it is necessary to accomplish a clearly defined safety objective; (2) it is necessary to preserve an historic district listed or eligible for listing in the National Register of Historic Places; and (3) it is no more burdensome to affected antennae users than is necessary to achieve the stated objectives.

IV. How Far Can Cities Go To Control Their Rights-Of-Way

Recent estimates suggest that local governments throughout the United States invest approximately $28 billion per year to construct and maintain their rights-of-way. Section 253 of the 1996 Act allows local governments to manage their rights-of-way but also requires that they must do so without prohibiting the ability of any entity to provide telecommunications service. In the exercise of managing their rights-of-way, local governments can require fair and reasonable compensation but it must be on a “competitively neutral and non-discriminatory basis.” In pertinent part Section 253 provides:

(a) No State or local statute or regulation, or other State or local legal requirement, may prohibit or have the effect of prohibiting the ability of any entity to provide an interstate or intrastate telecommunications service.

(c) Nothing in this section affects the authority of a State or local government to manage the public rights-of-way or to require fair and reasonable compensation from telecommunications providers, on a competitively neutral and non-discriminatory basis, for use of public rights-of-way on a nondiscriminatory basis, if the compensation required is publicly disclosed by such government.

Cities across the country are exploring opportunities to control their public rights-of-way in an effort to establish a clear local policy concerning telecommunications providers and services and to assure that current and ongoing costs for granting and regulating access to the rights-of-way are compensated for.

Cities analyzing these issues must first establish a list of goals and priorities with respect to the management of their public rights-of-way. For example, policy decisions must be made regarding whether to seek compensation from all providers for the use of public rights-of-way or whether a level playing field approach is desired which will treat wired providers and wireless providers in a competitively neutral and non-discriminatory manner. In drafting local regulations regarding right-of-way management, input from numerous municipal offices is required to solicit necessary information on which local regulations will be based. With this in mind, the following offices should be contacted:

1. City Manager’s Office/Administration

2. Fire Department/Police Department

- 911 System and Computer Assisted Dispatch System

- Emergency Operation Center

3. Finance Department

4. Economic Development

5. Public Works

- Utility Division

- Solid Waste

- Water

6. Community Development

Based on input from all of these sources, a draft Telecommunications Regulatory Ordinance can be prepared and circulated to appropriate City departments for review and comment. The ordinance can then be circulated to various telecommunications providers for input and comment. Final revisions could then be incorporated and the Ordinance can be adopted to govern the provision of service by telecommunications providers within the city. Based on the foregoing, the following phased approach can be used to create the Telecommunications Regulatory Ordinance described above:

Phase I - Information Gathering. Meet with representatives from the above-referenced departments to gather information necessary for document drafting. This would include information regarding existing laws and regulations with respect to the use of public rights-of-way as well as all other issues regarding the provision of telecommunication service. As part of this process a detailed summary would be prepared which would serve as a foundation for drafting the ordinance.

Phase II - Analysis of Local, State and Federal Law. Analysis of existing local ordinances, state statutes and federal laws and regulations to assess the legal parameters for drafting the Ordinance and any limitations on the City regarding powers over its rights-of-way. Assess the appropriate level of compensation to be paid to the city for use of the public rights-of-way as well as issues regarding placement and facility location.

Phase III - Document Drafting. Prepare an initial draft of a comprehensive Telecommunications Regulatory Ordinance which would include definitions, registration and application procedures, procedures for obtaining a telecommunications license, procedures for obtaining a telecommunications franchise, appropriate level of fees and compensation to be paid for the use of the public rights-of-way, conditions to be imposed on the grant of authority, appropriate construction standards and other relevant provisions.

Phase IV-Input from Providers. Respond to comments received from various providers who are asked to give input regarding the terms of the ordinance. These comments can be reviewed and discussed and appropriate changes can be made to the ordinance in an attempt to structure regulations acceptable to all parties.

Phase V - Adoption. Finalize the Telecommunications Regulatory Ordinance as necessary and appropriate prior to adoption.

IV. Rate Regulation Update

As a result of the 1996 Act and subsequent FCC regulations, total deregulation of cable television rates is rapidly approaching. As discussed in our last update, cable subscribers no longer have the right to file complaints with the FCC regarding cable programming services tier (expanded basic) rates. Rather, only franchising authorities can file complaints on the basis of more than one (1) subscriber complaint received within ninety (90) days of a rate increase. Further, rate relief for small cable companies has been greatly expanded to cable operators having up to 617,000 subscribers with systems serving as many as 50,000 in a franchise area. Small systems with one (1) tier of programming were completely deregulated and small systems with two (2) tiers had the upper tier completely deregulated.

Recently large cable operators around the country have also benefited from rate deregulation as a result of a new element of the FCC’s effective competition test. In the past the FCC has deemed effective competition present when any one (1) of the following conditions was met:

1. Fewer than thirty percent (30%) of the households in the franchise area subscribe to the cable service of a cable system;

2. The franchise area is:

a) served by at least two (2) unaffiliated multichannel video programming distributors each of which offers comparable programming to at least fifty percent (50%) of the households in the franchise area; and

b) the number of households subscribing to multichannel video programming other than the largest multichannel video programming distributor exceeds fifteen percent (15%) of the households in the franchise area.

3. A multichannel video programming distributor, operated by a franchising authority for that franchise area offers video programming to at least fifty percent (50%) of the households in the franchise area.

Under this test, very few cable television operators were subject to effective competition particularly given the fifteen percent (15%) penetration level as described above. Under the 1996 Act, however, a fourth element was added to the test providing that if a local exchange carrier (i.e. local telephone company) or its affiliate offers video programming services to subscribers in the franchise area of an unaffiliated cable operator and if those video programming services are “comparable,” then effective competition will be deemed present. The FCC modified its regulations at Section 76.905 to include this new fourth element to the test for effective competition.

The theory is that the telephone company has such substantial capital and ability to cross-subsidize its video programming operations that it is not appropriate to wait until the telephone company has penetrated fifteen percent (15%) of the market. Rather, the cable operator should be immediately relieved from rate regulations so that it may compete freely for subscribers before the telephone company establishes a foothold and drives the cable operator out of the market.

Many large cable operators are submitting petitions to the FCC seeking relief from rate regulations on the grounds that a local wireless provider of multichannel video services is owned in whole or in part by a local exchange telephone company. If the facts of these petitions are accurate, there is little a municipality can do to prevent deregulation of the rates charged by the incumbent cable television operator.

V. Franchise Fee Audit

Many municipalities around the country routinely perform audits of franchise fee payments made by their cable television operator. The purpose of the audit is to verify that the operator is remitting the appropriate percentage of its gross revenues as required under the local franchise. Franchise fee audits typically consist of two (2) distinct phases. First, the municipality must determine the base on which the franchise fee is calculated. This will depend on the definition of “gross revenues” found in the local franchise. Often the municipality and cable operator will disagree regarding the interpretation of the “gross revenues” definition and exactly what revenue should be included. The second part of the audit consists of reviewing the supporting financial information verifying the accuracy of past franchise fee payments typically over the previous three (3) years.

Recently a significant issue has surfaced in franchise fee audits which should be carefully watched by franchising authorities. As you may recall, in April of 1995 the FCC Cable Services Bureau issued an order In The Matter of United Artists Cable of Baltimore (DA 95-737). In this Order the Bureau concluded that the cable operator was not responsible to pay franchise fees on the franchise fee revenue collected from subscribers. In other words, if a cable bill is $20.00, the Bureau concluded that the franchise fee paid to the City should be $1.00 as opposed to $1.05 because the franchise fee should be calculated on gross revenues of $20.00 as opposed to $21.00 (the $20.00 bill plus the $1.00 franchise fee) which has typically been the case.

The decision of the Cable Services Bureau was reconsidered by the full Commission (FCC) and a Memorandum Opinion and Order was released on April 24, 1996 affirming the initial decision that local franchising authorities cannot include franchise fees collected from subscribers in a cable operator’s gross revenues when calculating the operator’s franchise fee obligation. The FCC reasoned that Congress did not view franchise fees as part of an operator’s gross revenues derived from the operation of the cable system, but instead as a separately collected sum for which either operators or subscribers could be liable.

Many cable operators around the country, in particular TCI, have unilaterally reduced their franchise fee payments as a result of this decision without providing any notice whatsoever to franchising authorities. In some cases the reduction can be traced back to May of 1995, shortly after the initial decision was reached. This amounts to substantial franchise fees in most jurisdictions and should be carefully monitored by franchising authorities during franchise fee audits to ensure all appropriate fees are paid by the operator.

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Brian T. Grogan is an attorney with the Minneapolis law firm of Moss & Barnett. specializes in cable television, telephone and communications law. Mr. Grogan represents municipalities throughout the country on franchise renewals, transfers of ownership, telecommunications planning, rate regulation, zoning and tower site issues, 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. This fall he will be speaking on municipal telecommunications franchising issues at the National Association of Telecommunications Officers and Advisors Annual Conference in Palm Beach, Florida on September 10, 1996 and the International Municipal Lawyers Association Annual Conference in Little Rock, Arkansas on October 7, 1996.

The materials in this Municipal Communications Law 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 Municipal Cable Communications Law Update.

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