Brian T. Grogan

(612) 347-0340

E-Mail:  GroganB@moss-barnett.com

Web site:  www.municipalcommunicationslaw.com

COMMUNICATIONS LAW UPDATE

To:                  Moss & Barnett Clients and Interested Parties

From:              Brian T. Grogan, Esq.

Date:               February 26, 2003

 

1.                  BANKRUPTCY IN THE CABLE TELEVISION INDUSTRY

In the past year the telecommunications industry has experienced a rash of bankruptcy filings which did not seem possible until recently.  In the wake of bankruptcy filings by WorldCom and Adelphia, franchising authorities across the country have begun asking questions about the enforceability of their franchise should their operator file for bankruptcy.

 

There are two main types of bankruptcy filings for businesses.  One is known as a Chapter 7 liquidation in which the bankruptcy court appoints a trustee to sell off the company’s assets and liquidate the business.  The proceeds from such sale are used to pay secured creditors first and unsecured creditors on a pro rata basis.  Generally speaking, however, there is little cash left in a Chapter 7 liquidation to pay unsecured creditors.  The more common form of bankruptcy filing in the telecommunications industry is a Chapter 11 reorganization which is designed to allow a company to reorganize and reduce debt.  While the company is developing its plan of reorganization an automatic stay is implemented which protects the company from attempts by creditors to collect on unpaid debts. 

 

On January 30, 2003, Moss & Barnett held a seminar for franchising authorities regarding concerns over bankruptcy in the cable television industry.  We have outlined below answers to the key questions which were raised during that seminar.

a.                   Will franchise fee and PEG support payments to the city continue?  If the operator wishes to maintain the franchise, franchise fees coming due after the bankruptcy filing (post petition) will most likely continue to be paid if funds are available, but the payments may be delayed.  If not paid, the city can seek relief from the bankruptcy court.  Generally, in bankruptcy proceedings an entity is not permitted to continue to take advantage of the benefits of an executory contract like a cable TV franchise without satisfying its obligations there under.  If the operator does not make the payments voluntarily, the bankruptcy court may compel payments pursuant to the city’s “police and regulatory power,” but the court has discretion to determine the amount and timing of the payments.

b.                  Will the city be able to collect fines/penalties from a performance bond/security fund/letter of credit?  Prior to a bankruptcy petition nothing prevents the city from enforcing the franchise in accordance with its terms.  Following a bankruptcy petition an automatic stay will be imposed by the bankruptcy court and the city will in all likelihood be prohibited from imposing or collecting penalties directly from an operator under the terms of the franchise.  Enforcement matters under the franchise will likely need to be heard by the bankruptcy court.  Whether the city can enforce a bond or letter of credit posted by a third party without relief from the automatic stay will depend on the particular circumstances.  However, the enforceability of a bond or letter of credit is far more likely than a cash security deposit because they are held by a third party and will likely not be considered property of the estate.

c.                   Can a city deny renewal of a franchise solely because an operator is in bankruptcy?   No.  Denying an operator franchise renewal simply because it is in bankruptcy would likely not be upheld by a bankruptcy court and the city would have to show some other reason for such denial.  For example, the reasons for denial outlined in 47 U.S.C. § 546 remain viable grounds on which to base denial of a request for renewal.

d.                  What if an operator in bankruptcy begins to provide poor customer service, how can a city enforce franchise compliance?  Enforcement proceedings under the city’s police and regulatory powers are not subject to the automatic stay.  Whether the activity contemplated by the city is within this exception will need to be analyzed at the time.  The city can likely enforce the franchise and issue default notices but cannot impose monetary penalties against the operator or draw from a cash security fund.

e.                   What if an operator in bankruptcy chooses to stop all of its capital expenditures particularly system upgrades which may be required under a franchise.  It certainly would not be unusual for an operator to curtail capital expenditures after filing for bankruptcy protection.  The bankruptcy court may need to decide whether any capital expenses required by a franchise must be made during the time the operator is in the period of bankruptcy administration.  Those communities that do not have franchise requirements for a system upgrade and where the system has not already been upgraded will likely find any upgrade plans delayed during the pendency of the bankruptcy proceedings.  However, enforcement of existing franchise obligations remains feasible, albeit without the benefit of monetary penalties to compel compliance.

2.                  FCC ISSUES NINTH REPORT ON COMPETITION

On December 31, 2002, the FCC released its 9th Annual Report on Competition in Video Markets.  Among the key findings, the FCC concluded that subscribership to multichannel video programming distributors (MVPDs) increased by 1.8% to just under 90 million.  Of those 90 million subscribers, 69 million are subscribers to traditional cable television systems (CATV) while over 18 million subscribe to direct broadcast satellite (DBS) services.  CATV subscribership was virtually flat rising a mere .04% in 2002.  In contrast, DBS subscribership increased audience by over 2 million subscribers (14%) in 2002.  Overall, the audience share of viewership for cable channels increased 4% while the audience share for broadcast networks decreased 4%.  This is consistent with the trend over the past several years where the audience share for broadcast television has steadily declined.

 

Satellite delivered programming also increased in 2002 with 308 channels now available up from 287 in 2001.  Of the 1,300 commercial television stations in the United States, 90% have been granted digital television construction permits and 643 are now on air with digital television operations.  From June 2001 to June 2002 the Consumer Price Index increased by 1.1%.  During that same time period, cable rates increased 6.3%.

 

The concentration and consolidation of subscribers among the top cable operators continues.  The four largest MVPDs now control 50.5% of all subscribers in the country while the top 10 MVPDs control 84.4% of subscribers.  52.3 million subscribers are served by 107 large regional clusters which serve 100,000 or more subscribers each.  There are now 32 regional clusters in the United States with more than 500,000 subscribers serving a total of more than 33.3 million subscribers.  Hardwired competition in the cable industry remains elusive, however, of the 33,246 community units registered by the FCC (local units of government which franchise cable operators), only 617 (2%) have effective competition based on the presence of a second wired cable operator.

3.                  TRANSFER APPROVAL MAY BE WON OR LOST DURING RENEWAL

On September 20, 2002, the County of Santa Cruz (“County”) prevailed in a long legal battle with Charter Communications over the County’s ability to deny a proposed transfer.  See Charter Communications, Inc. v. County of Santa Cruz, 304 F. 3d 927 (9th Cir. 2002).

 

As a result of the Santa Cruz decision, cable operators are no longer able to rely on prior case law for the proposition that 1) a local franchising authority (“LFA”) is not entitled to request additional information regarding a proposed transferee or 2) an LFA has limited authority to review a proposed transfer.  In Santa Cruz, the Ninth Circuit emphatically held that “the County’s denial of consent should be upheld as long as there is substantial evidence for any one sufficient reason for denial.”  The court found that the County’s concerns regarding Charter’s financial capabilities as well as the stability of subscriber rates following the transfer were not unreasonable.  See www.municipalcommunicationslaw.com for further analysis of this case.

 

The reaction of the cable industry to the Santa Cruz decision has been swift.  In some cases, state cable associations are approaching state legislatures seeking clarification regarding the scope of authority for LFA review of a proposed transfer.  In all cases cable operators are approaching renewal negotiations with an eye toward clarifying the scope of transfer review.  Cable operators are now attempting to obtain “pre-approval” for certain transfers thereby excluding LFA review.  Cable operators have often sought a franchise exemption from a transfer review if the franchise was pledged as collateral for financing or in cases of internal restructuring where no change of control takes place.  As a result of Santa Cruz, however, LFAs should be on guard with respect to the language proposed by cable operators in draft renewal franchises.

 

In addition, LFAs should be leery of imposing any burdensome procedural requirements on their review.  Many cable operators seek to limit municipal review to “legal, technical and financial” qualifications despite the fact that there is no such statutory limitation on the issues which an LFA may consider at the time of a transfer review.  Further, LFAs should not include any limitation on the applicable timeframe for review.  Cable operators argue that the federal one hundred twenty (120) day time limit is applicable and this should be set forth in the local franchise.  However, this one hundred twenty (120) day time limit may not be final depending upon the cable operator’s responsiveness to information requests which may be submitted by the LFA.  See 47 C.F.R. § 76.502 and 47 U.S.C. § 537.

4.                  STILL NO DECISION FROM FCC IN CABLE MODEM PROCEEDING

All comments and reply comments have long since been submitted to the FCC in its proceeding regarding the appropriate regulatory treatment for high-speed data delivered over cable modems.  In the spring of 2002, the FCC issued a Declaratory Ruling that cable modem service is a “interstate information service” as opposed to a “cable service.”  As a result of that decision cable operators immediately ceased paying franchise fees on high-speed cable service revenues and altered their franchise renewal negotiations to attempt to draft out any regulatory oversight of cable modem service.

 

The Declaratory Ruling was appealed by a number of parties and is before the 9th Circuit Court of Appeals.  The FCC also issued a Rulemaking Proceeding seeking comments on the Declaratory Ruling and a number of ancillary issues. So far, no decision from the FCC has been rendered.

 

Last week, however, the FCC issued a decision which frees the Bell operating companies from unbundling rules for new high-speed networks.  This decision known as the UNE-P decision may provide insight regarding the FCC’s likely direction in the cable modem proceeding.  One aspect of the UNE-P decision is intended to promote investment by the Bell operating companies in their DSL products without forcing the Bell’s to make such facilities available on an unbundled basis to competitors.  As a result of the FCC’s UNE-P decision, many believe the FCC will not seek any new regulations over high-speed Internet service offered over a cable modem.  Moreover, it appears unlikely that the FCC will force cable operators to provide open access (a/k/a forced access) to competing ISPs to the operators’ high-speed Internet access platform.

 

The net result for franchising authorities is that the FCC does not appear inclined to provide any further local regulation of high-speed Internet access over a cable modem.  Thus the 9th Circuit Court of Appeals in San Francisco may be the best hope for franchising authorities seeking regulatory authority over cable modem service including the ability to impose a franchise fee on such service.   

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Brian T. Grogan is a shareholder with the Minneapolis law firm of Moss & Barnett practicing in the areas of telecommunications and cable television law.  Brian represents entities throughout the country on franchise renewals, transfers of ownership, competitive franchising, telecommunications planning, right-of-way management, first amendment issues, tower siting, leasing and zoning, litigation and other related communication matters.  He is a frequent presenter at state and national conferences regarding communications law and he is a member of the American Bar Association (Forum Committee on Communications Law), National Association of Telecommunications Officers and Advisors, International Municipal Lawyers Association (Contracts, Franchises and Technology Section), and is past chair of the Communications Law Section of the Minnesota State Bar Association.

 

Brian Grogan at Moss & Barnett, 4800 Wells Fargo Center, 90 South Seventh Street, Minneapolis, MN 55402, phone:  (612) 347-0340 or via email at groganb@moss-barnett.com. 

 

Web site:  Please visit www.municipalcommunicationslaw.com for additional updates on communications law issues of interest to municipalities.

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The materials in this 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 that may apply to your situation.  You should consult with legal counsel before taking any action on matters covered by this Communications Law Update.