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 4,
2004
1.
FCC
ISSUES TENTH REPORT ON COMPETITION
On January 28, 2004, the FCC
released its 10th Annual Report on Competition in Video Markets. Among the key findings, the FCC concluded
that subscribership to multichannel video programming distributors (MVPDs)
increased by 4.74% to just over 94 million.
Of those 94 million subscribers, 70.5 million are subscribers to
traditional cable television systems (CATV) while over 20.4 million subscribe
to direct broadcast satellite (DBS) services.
CATV subscribership was up 2.46% over the past year reversing a trend of
near flat subscriber growth in recent years.
In contrast, DBS subscribership increased audience by over 2 million subscribers
(11.6%) in 2003.
Overall, the audience share
of viewership for cable channels increased while the audience share for
broadcast networks decreased. In 2003,
broadcast television enjoyed a prime time audience share of 49% compared with a
74% share in 1993. Satellite delivered
programming also increased in 2003 with 339 channels now available up from 308
in 2002. From 1993 to 2003 the Consumer
Price Index increased by 25.5%. During
that same time period cable rates increased 53.1% (5.1% increase in cable rates
in 2003).
The
concentration and consolidation of subscribers among the top cable operators also
continues. The four largest MVPDs now
control nearly 56% of all subscribers in the country while the top 10 MVPDs
control 82% of subscribers. 51.3 million
subscribers are served by 109 large regional clusters which serve 100,000 or
more subscribers each. There are now 29
regional clusters in the United States with more than 500,000 subscribers
serving a total of more than 31 million subscribers. In communities where two wired cable
companies compete head to head prices are on average 15% lower than in
communities with a single cable provider and satellite competition.
On September 11, 2003, the
Minnesota Public Utilities Commission (“MPUC”) issued a nine- page order
requiring Vonage Holdings Corporation (“Vonage”) to comply with Minnesota
statutes and rules regarding the offering of telephone service. See In the Matter of the Complaint
of the Minnesota Department of Commerce against Vonage Holdings Corporation
regarding Lack of Authority to Operate in Minnesota, Docket No.
P-6214/C-03-108 (Minn. Pub. Utils. Comm’n Sept. 11, 2003).
On October 16, 2003, the U.S.
District Court in Minnesota released a decision enjoining the MPUC from
regulating Vonage concluding that state regulation of Vonage’s services is not
permissible because of the recognizable congressional intent to the leave the
Internet and “information services” largely unregulated. Vonage Holdings
Corporation v. The Minnesota Public Utilities Commission, 290 F. Supp. 2d 993 (8th Cir. 2003).
Vonage markets and sells the
service that permits voice communication via a high-speed (“broadband”)
Internet connection. The broadband connection
can be accessed via cable or DSL service.
Vonage’s services use a technology called Voice Over Internet Protocol
(“VoIP”) which allows customers to place and receive voice transmissions routed
over the Internet. Traditional phone
companies use circuit-switch technology which uses the public switched
telephone network. VoIP does not utilize
circuit switching, but rather “packet switching” a process of breaking down
data into packets of digital bits and transmitting them over the Internet. Vonage utilizes a third party Internet
Service Provider (“ISP”) and does not serve as an ISP for its customers.
The Minnesota Department of
Commerce initially filed a complaint with the MPUC alleging that Vonage had
failed to 1) obtain a proper certificate of authority required to provide
telephone service in Minnesota; 2) submit a required 911 service plan; 3) pay
911 fees; and 4) file a tariff. The
MPUC, in its September 11, 2003 order, required Vonage to comply with Minnesota
statutes and rules regarding the offering of telephone service. Vonage filed a complaint in U.S. District
Court where the court considered whether Vonage may be regulated by Minnesota
law that requires telephone companies to obtain certification authorizing them
to provide telephone service. Vonage
argued that federal law preempts state authority and that its services are
“information services,” which are not subject to regulation, rather than
“telecommunications services” which may be regulated.
The District Court concluded
that Congress had distinguished telecommunications services from information
services and Congress had clearly stated that it did not intend to regulate the
Internet and information services.
Because the court concluded that the VoIP service provided by Vonage was
an information service, attempts by the MPUC to regulate Vonage’s service
offerings were in conflict with federal law and therefore preempted.
Why is VoIP Important
to Cities?
This issue is important to
local units of government not only due to the public safety issues but also the
advanced services which may be provided by local cable operators in their
communities.
Many large cable operators
have announced plans to introduce VoIP telephone service utilizing their
high-speed cable modem products. Some operators
are pursuing certificates of need and convenience from state public utilities
commissions, others are awaiting the outcome of the FCC proceedings and others
are simply moving to offer the service.
Since local units of government in Minnesota do not regulate any
telecommunications service offerings the issue is not one of potential lost
revenue from franchise fees to be paid to a city. Rather, the concern arises if a cable
operator were to bundle voice, video and data services for one price to a consumer.
If, for example, the operator
were to offer unlimited high-speed cable modem service, unlimited VoIP
telephone service and 80 channels of video programming all for $120. What amount of that price is subject to the local
cable television franchise fee? What if
the operator argues that it is discounting or giving away for free the video
services and allocating $60 to the cable modem and $60 to the VoIP
service? Under that scenario, the
operator may argue that it is not required to remit any franchise fee to the
local jurisdiction under its cable service franchise. Cities no doubt would view this issue
differently and would likely impute the fair market rate for the cable services
and expect that a franchise fee would be remitted for that amount.
Over the past several years,
cable franchises have been transferred numerous times. Many cities throughout the State of Minnesota
have had as many as three different cable operators during the last six
years. During these transfers hundreds
of franchises trade hands and the new cable operator then attempts to comply
with numerous new obligations, including the proper payment of franchise fees
to each community served. It is not
uncommon, however, for cable operators to handle franchise fee payments in a
generic “one-size fits all” manner regardless of the language contained within
a given franchise. This occurs despite
the fact that each franchise typically contains a slightly different definition
for “gross revenues” on which franchise fee payments are based.
For years, cities have
routinely conducted franchise fee audits of cable operators to determine
whether the operator is paying the appropriate fees under the franchise. However, recent franchise fee reviews have
discovered more errors than historically have been present, even from large
cable operators. This is due in part to
the complexity of cable operations and the numerous revenue sources which are
now available to cable operators.
Further, several new court decisions have changed the manner in which
cable operators can collect franchise fee revenue. Below is a description of a recent Fifth
Circuit decision which impacts the collection of franchise fees by cable
operators.
Pasadena Case
In
October of 2001, the Federal Communications Commission (FCC) issued an order
involving the City of Pasadena, California (“Pasadena Order”) which permitted
cable operators to pass-through franchise fees to subscribers on cable
television bills based on gross revenues that encompass “non-subscriber”
revenue. Specifically, this
non-subscriber revenue included income generated by advertising sales and home
shopping commissions. As a result of the
Pasadena Order many cable operators around the country increased franchise fees
on subscribers’ bills by .25% or more.
A number of local franchising
authorities (LFAs) around the country, including a group of Texas franchising
authorities and the National Association of Telecommunications Officers and
Advisers petitioned the Fifth Circuit for review of the Pasadena Order. On March 27, 2003, the Fifth Circuit denied
the LFAs’ petition for review on the grounds that the FCC had acted within its
broad discretion and not in a manner that was arbitrary, capricious or
manifestly contrary to the statute in question. See Texas Coalition of
Cities for Utility Issues v. FCC, 324 F. 3d 802 (5th Cir. March
27, 2003).
The practical result for
franchising authorities across the country is that cable operators can pass-through
as a separate line item on subscribers’ bills all franchise fees due and owing
the franchising authority. These
franchise fees may include non-subscriber revenues, including home shopping and
advertising revenues. In other words,
cable operators will be permitted to reap the benefits of growth in
non-subscription revenue while subscribers must bear the financial burden of
increased franchise fees.
By
way of example, if a cable operator sells $100 worth of advertising to a local
business to provide commercial spots on the cable system; many franchises
require the cable operator to pay a 5% franchise fee on that revenue. Prior to the Pasadena Order in 2001 cable
operators paid the applicable $5 franchise fee on the $100 of revenue and/or
assessed the $5 fee to the advertiser.
Under the Pasadena Order this $5 franchise fee is now spread over all subscribers in that
jurisdiction resulting in a minimum .25% increase per month in the total
franchise fee paid by a subscriber. In
essence, the more advertising a subscriber watches, the higher the franchise
fee on their bill.
The
Fifth Circuit decision has not resulted in any reduction in franchise fee
payments to LFAs although subscribers must now bear the burden of additional
franchise fee payments even as cable operators increase non-subscription
revenue. If a city chooses to conduct a
franchise fee audit, the city staff should pay particular attention to the
franchise language which may include mandatory reimbursement of any audit fees
incurred by the city should the city discover an underpayment of franchise
fees.
4.
SUPREME
COURT DENIES CERT. IN LANDMARK TRANSFER CASE
Santa Cruz Case
On
Monday, January 12, 2004, the Supreme Court denied the Cert. Petition in Charter
Communications, Inc. v. County of Santa Cruz, 2004 WL 47372. As a result, the Ninth Circuit’s decision in
this cable franchise transfer case will stand.
Below is a description of the case.
On September 20, 2002, a
three judge panel of the Ninth Circuit Court of Appeals overturned the leading
case regarding cable television transfers of ownership. Charter Communications, Inc. v. County of
Santa Cruz, 304 F.3d 927 (9th Cir. 2002).
The Ninth Circuit decision vacates the district court opinion, Charter
Comms. Inc. v. County of Santa Cruz, 133 F.Supp.2d 1184, 1187-1200 (N.D.
Cal. 2001), which had been widely cited by the entire cable industry for the
proposition that transfer approval cannot be unreasonably conditioned by a
franchising authority.
The Ninth Circuit panel
focused on one key issue in reviewing the district court decision. Was the County’s denial of consent
unreasonable? The court held that
“when reviewing disputes emerging from [a] franchise agreement, a court must
determine whether the county could have deemed it reasonable to deny consent;
this is a much more forgiving standard than whether the district court judge
would have denied consent himself if he were acting as the County’s agent.”
The Ninth Circuit held that
it was reviewing a discretionary decision of the County Board of Supervisors, a
legislative body. The court noted that
review of a transfer of control is a “legislative act” entitled to deferential
treatment by the court. Thus, whether
the County denied consent reasonably is a question “governed not by a preponderance
of evidence standard, but rather a substantial evidence test.” Under such a deferential standard, the
“County’s denial of consent should be upheld as long as there is substantial
evidence for any one sufficient reason for denial.”
The Ninth Circuit found that
the ability of the cable operator to adequately service the franchise
throughout its term is a legitimate concern.
It was not unreasonable for the County to be concerned about Paul
Allen’s (the key individual behind Charter) true net worth and about the
relationship of that wealth to the viability of the enterprise. The court also held that district court erred
by failing to give deference to the County’s articulated concern for keeping
stable the subscriber rates in the future.
It was not unreasonable for the County to be worried about the long-term
viability of the Allen purchase and its effects on the County’s responsibility
to assure a stable cable franchise for its citizens.
The Court also held that
“even if we thought the County had acted unreasonably, our view would be
deferential not only because precedent so commands, but also because methods
exist to promote self-correction in the future: citizens can vote out their
local representatives and cable operators can refuse to enter into franchise
agreements with notoriously difficult local franchising authorities.”
Therefore, the Ninth Circuit
held that “since the County’s judgment was reasonable, it necessarily follows
that its decision to deny the transfer on the basis of that judgment was
supported by a legitimate governmental interest.” Charter voluntarily entered into an agreement
under which the County had to approve any transfer of the franchise and thus,
to that extent, waived its right to claim that a denial of the transfer
violated its First Amendment rights. The
Ninth Circuit cited multiple decisions arguing that First Amendment rights may
be waived upon clear and convincing evidence that the waiver is “knowing,
voluntary and intelligent.”
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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, rate regulation and effective competition proceedings,
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.