Proposal for Legal Services Prepared for

…Today the majority simply accepts in every case that the big phone companies are right and the local governments are wrong. This [Order] is breathtaking in its disrespect of our local and state government partners.

-FCC Commissioner Jonathan Adelstein

On December 20, 2006, the Federal Communications Commission (“FCC”) voted 3-2 to adopt an Order in Docket No. 05-311 which will purportedly speed competition in the cable television industry (“Order”). The text of the Order was finally released on March 5, 2007. The Order became effective on August 6, 2007. In the Order the FCC finds that the local franchising process in many jurisdictions constitutes an unreasonable barrier to entry that impedes the achievement of the inter-related federal goals of enhancement of cable competition and accelerated broadband deployment. To eliminate the “unreasonable barriers” to entry into the cable market, the FCC Order addresses issues which are described in further detail below. NOTE: The Order only impacts “local” franchising decisions and does not preempt state statutory franchise requirements (see further discussion on page 6 herein).

A. Time Frame for Franchise Negotiations.

The Order establishes a maximum time frame of ninety (90) days for entities with existing authority to access public rights-of-way and one hundred eighty (180) days for entities that do not have authority to access public rights-of-way. This new “shot clock” starts on the date an applicant files an application or other writing including certain minimum information which is now set forth in 47 C.F.R. § 76.41 as follows:

1. The applicant’s name.

2. The names of the applicant’s officers and directors.

3. The business address of the applicant.

4. The name and contact information of a designated contact for the applicant.

5. A description of a geographic area that the applicant proposes to serve.

6. The PEG channel capacity and capital support proposed by the applicant.

7. The term of the agreement proposed by the applicant.

8. Whether the applicant holds an existing authorization to access the public rights-of-way in the subject franchise service area.

9. The amount of franchise fee the applicant offers to pay.

10. Any additional information required by applicable state or local laws.

A local franchising authority (“LFA”) and an applicant may agree, in writing, to extend the 90/180 day time period for negotiations.

Interim franchise v. negotiated franchise. If the 90/180 day shot clock elapses without action by the LFA, the applicant is automatically granted a “interim franchise” based on the application submitted. Thereafter the LFA and applicant may continue to negotiate the terms of a franchise in an attempt to reach a “negotiated franchise.” The 90/180 day shot clock may be “tolled” by an LFA if it has requested and not received information from the applicant. It is not clear whether this missing information is relevant only to the FCC’s ten (10) point application checklist or can include other relevant information related to an applicant’s qualifications or state and local requirements. The difficulty for an LFA is that once an interim franchise has been automatically granted, the LFA may find it difficult to achieve a negotiated franchise if the LFAs only alternative is to deny the application thereby potentially eliminating a service option for consumers.

What does this mean for Minnesota Cities ?

Minnesota Statutes section 238.081 outlines the franchise procedure which must be followed by all Minnesota cities when granting a franchise to a “Cable communications system.”[1] The section 238.081 procedure generally requires that an LFA publish once each week for two (2) successive weeks in a newspaper of general circulation a notice of intent to consider an application for a franchise.[2] The notice of intent to franchise must include eight (8) specific information items.[3] A proposal by an applicant must be notarized and must contain information required by Minn. Stat. § 238.081, Subd. 4.

The LFA must allow at least 20 days from the date of first publishing notice of intent to franchise to the closing date for the submission of applications. In addition, the LFA must hold a public hearing upon receipt of a valid application and this public hearing must be completed at least seven (7) days before the LFA adopts a franchise ordinance to a cable communications system operator.

Given that the FCC Order does not pre-empt state statutory franchise requirements it is likely that the 90/180 day time period for processing a franchise request would not commence until an applicant has submitted information required by Minn. Stat. § 238.081. At a minimum, the 90/180 day period could not commence until the LFA had complied with the publication requirements and the minimum 20 day time period from the date of first publication. In addition, any local LFA franchise application requirements must also be met by an applicant in order to trigger the commencement of the 90/180 day time period set forth in the FCC Order.

Once an application is received, negotiations should commence immediately. Assuming a minimum of 30 days to obtain approval from elected officials, LFAs could have fewer than 60 days from receipt of a valid application to reach agreement. LFAs should consider preparing a template franchise in advance which can be provided as soon as an application is received. LFAs should also revisit the local code to verify that appropriate permitting, insurance, indemnification, restoration and related issues are covered. Finally, LFAs may wish to add cable franchise application requirements to the local code to address “additional information” requirements permitted by the FCC Order.

B. Build-out.

The Order references 47 U.S.C. § 541(a)(4)(A) which provides that “a franchising authority… shall allow the applicant’s cable system a reasonable period of time to become capable of providing cable service to all households in the franchise area.” The FCC views this provision not as a grant of authority but a limitation on an LFA’s authority with respect to build-out. The Order does not specifically prescribe build-out criteria, but rather provides a set of examples for reasonable and unreasonable build-out mandates.

Unreasonable build-out mandates under the FCC Order are as follows:

1. Require a new competitive entrant to serve everyone in a franchise area before it has begun providing service to anyone.

2. Require a facilities-based entrant, such as incumbent LECs, to build-out beyond the footprint of their existing facilities before they have even begun providing cable service.

3. Require more of a new entrant than an incumbent cable operator by, for instance, requiring the new entrant to build-out its facilities in a shorter period of time than that originally afforded to the incumbent cable operator.

4. Requiring the new entrant to build-out and provide service to areas of lower density than those that the incumbent cable operator is required to build-out to and serve.

5. Requiring the new entrant to build-out and provide service to buildings or developments to which the new entrant cannot obtain access on reasonable terms.

6. Requiring the new entrant to build-out to certain areas or customers that the entrant cannot reach using standard technical solutions.

7. Requiring the new entrant to build-out and provide service to areas where it cannot obtain reasonable access to, and use of, the public rights-of-way.

Reasonable build-out mandates under the FCC Order are as follows:

1. Consider the new entrant’s market penetration.

2. Consider benchmarks requiring the new entrant to increase its build-out after a reasonable period of time has passed after initiating service and taking into account the applicant’s market success.

Redlining. The FCC noted that the Order is not intended to limit an LFA’s authority to ensure that constituents are protected against discrimination. The Order also emphasizes that access to cable service may not be denied to any group of potential residential cable subscribers because of the income of the residents of the local area in which such group resides (citing 47 U.S.C. § 541). It is unclear whether a city would have standing to raise this issue in many states under new state franchising laws.

What does this mean for Minnesota Cities?

Absent state mandated build-out criteria the FCC Order does little to clarify the build-out debate. The Order does not go so far as to prohibit any build-out criteria within a franchise, but rather provides a list of unreasonable build-out mandates. Presumably, build-out criteria which provides a period of years over which build-out should be accomplished throughout a given jurisdiction would not be an unreasonable build-out mandate, although the FCC leaves open this question. It appears clear the FCC struggled attempting to provide an Order which would prohibit an LFA from addressing build-out issues yet not run afoul of the statutory language of 47 U.S.C. § 541.

The answer to how each LFA will deal with build-out still remains open for discussion. When negotiating build-out requirements, an LFA must consider the impact of state law, the existing franchise of the incumbent, the time period over which the incumbent was originally allowed to construct its system and other relevant factors based on the FCC’s “unreasonable mandate” list.

In Minnesota, Minn. Stat. § 238.084, Subd. 1 includes a checklist of requirements that are applicable to all cable communication systems. An LFA granting a franchise in Minnesota must ensure that the franchise document contains all 27 items on the checklist set forth in Section 238.084, Subd. 1. In particular, Section 238.084, Subd. 1 (m) provides the following:

(m) a provision in initial franchises identifying the system capacity and technical design and a schedule showing:

(1) that construction of the cable communications system must commence no later than 240 days after the granting of the franchise;

(2) that construction of the cable communications system must proceed at a reasonable rate of not less than 50 plant miles constructed per year of the franchise term;

(3) that construction throughout the authorized franchise area must be substantially completed within five years of the granting of the franchise; and

(4) that the requirement of this section be waived by the franchising authority only upon occurrence of unforeseen events or acts of God.

The FCC Order does not proscribe any specific build-out criteria which an LFA must include in any competitive cable franchise. Moreover, the FCC Order does not preempt state statutory franchise requirements. Therefore, the above reference build-out criteria would appear to remain mandatory for inclusion in any competitive franchise granted within the state of Minnesota. In addition, Minnesota’s level playing field statute[4] appears to mandate that a competitive cable operator match the “service area” of the incumbent operator.[5]

C. Franchise Fees.

The FCC Order addresses four (4) issues regarding franchise fee payments.

1. Franchise fee revenue base. The Order reiterates the FCC’s prior position that cable operators are not required to pay franchise fees on revenues from non-cable services, such as Internet access services and broadband data services.

2. Charges incidental to the award of a franchise. The Order attempts to limit “incidental charges” to the list prescribed at 47 U.S.C. § 542(g)(2)(D). This list includes payments for bonds, security funds, letters of credit, insurance, indemnification, penalties or liquidated damages. These “incidental” requirements may be assessed by an LFA without counting toward the five percent (5%) franchise fee cap. The FCC goes on to provide examples of fees which are not incidental including: a) application or processing fees that exceed the reasonable cost of processing an application; b) acceptance fees; c) free or discounted services provided to an LFA; d) requirements to lease or purchase equipment from an LFA at prices higher than market value, and; e) in-kind payments.

3. Classification of in-kind payments. In-kind payments are not clarified in the Order, although examples of impermissible in-kind payments include municipal programs for libraries, recreation departments, detention centers or other payments not related to PEG access.

4. Contributions in support of PEG services and equipment. The Order attempts to distinguish between “capital” and “operational” costs as specified in 47 U.S.C. § 542 (g)(2)(C). Generally, LFAs have understood that capital costs may be negotiated in a franchise above the five percent (5%) franchise fee cap. However, operational costs such as salaries for employees are generally not excluded from the five percent (5%) cap. Within the Order the FCC references capital costs as payments collected “only for the cost of building PEG facilities.” The Order also provides that “capital costs refer to those costs incurred in or associated with the construction of PEG access facilities.” It is possible the industry may attempt to construe this statement as a limit on the ability of a municipality to seek capital support for PEG equipment as opposed to simply the construction of a PEG facility.

What does this mean for Minnesota Cities? This provision of the Order is potentially the most harmful to LFAs. While the Order only applies to applicants for new competitive franchises the language in this section appears to make broad statements with respect to the FCC’s interpretation of the Cable Act. Since March of 2002, the FCC has made clear that LFAs cannot impose a franchise fee on non-cable services such as Internet access and broadband data services. Thus the Order presents no new information on this issue. However, the statements regarding charges “incidental” to the award of a franchise may impact cities that have provisions in franchises obligating the cable operator to reimburse for outside consulting fees. In cases where a city is collecting the full five percent (5%) franchise fee, the Order could be argued to prohibit the imposition of additional reimbursement costs to an LFA even if those costs are prescribed under local law. These issues will vary depending upon the precise franchise language in question.

Another troubling aspect of this section of the Order concerns “free or discounted services” provided to an LFA. Most franchises around the country contain provisions obligating a cable operator to provide free basic and expanded basic service to schools and public buildings. It is unclear what “free services” the FCC is referring to but cable operators may seek to use the Order to argue that costs associated with such free services should be offset against franchise fees. Careful review of individual franchises and/or state law will be required on this issue.

The FCC’s attempt to clarify PEG support contributions is potentially the most harmful aspect of the Order. The FCC attempts to clarify the distinction between capital and operating costs. However, in its discussion of capital costs it refers only to the costs “incurred or associated with the construction of PEG facilities.” Cable operators may argue that unless an LFA is seeking to “construct” a PEG facility other costs must be deducted from franchise fees. An equally viable interpretation of this language, however, is that capital costs include any asset which has a depreciable life span such as PEG equipment including cameras, edit decks, lights, microphones, playback equipment and other costs “incurred or associated with” PEG facilities. This provision of the Order may prove to be a source of contention between LFAs and cable operators.

D. PEG/Institutional Networks.

The Order concludes that it is unreasonable for an LFA to impose on a new entrant more burdensome PEG carriage obligations than it has imposed on the incumbent cable operator. The FCC also concludes that a “pro rata cost-sharing approach is a reasonable means of meeting the provision of adequate PEG facilities.” It is not clear, however, whether a pro rata cost-sharing approach includes only per subscriber amounts paid by an incumbent operator or all in-kind PEG obligations including periodic capital grants, cable operator owned and operated facilities and related expenditures.

The Order is not particularly harmful with respect to institutional network (“I-Net”) requirements and provides that an I-Net requirement is not duplicative if it would provide additional capability or functionality beyond that provided by existing I-Net facilities. However, the Order encourages LFAs to consider whether a competitive franchisee can provide such additional functionality by providing financial support or actual equipment to supplement existing I-Net facilities, rather than by constructing new I-Net facilities.

E. Regulation of Mixed-Use Networks.

The Order finds that it is unreasonable for an LFA to refuse to grant a cable franchise to an applicant for resisting an LFAs demands for regulatory control over non-cable services or facilities. The Order states that an LFA has no authority to insist on an entity obtaining a separate cable franchise in order to upgrade non-cable facilities. So long as there is a non-cable purpose associated with the network upgrade, a local exchange carrier is not required to obtain a franchise until and unless it proposes to offer cable services. The FCC goes on to provide that “the same is true for boxes housing infrastructure to be used for cable and non-cable services.”

This portion of the Order appears to be a direct reaction to AT&T’s efforts to upgrade its facilities by installing large 5X6X4 foot pedestals on city boulevards throughout the country purportedly to upgrade their telephone and broadband network. Many jurisdictions around the country have aggressively resisted AT&T’s efforts insisting that the company first obtain a cable franchise since the primary purpose for the pedestals is to facilitate the delivery of video programming. The FCC Order may call in to question the ability of cities to mandate a cable franchise prior to such a network upgrade. However, nothing in the Order impacts the LFA’s control over the right-of-way or its permitting authority.

The Order also concludes that LFAs may not impose customer service regulations on non-cable services. Thus customer service regulations impacting non-cable services, such as Internet access or broadband data services are deemed “preempted” by the Order.

The Order also specifically provides that it does not address the regulatory classification of video services being offered and does not address whether video services provided over Internet protocol are or are not “cable services.”

F. Preemption of Local Laws Versus State Laws.

The Order goes to great length to clarify that “local laws” are preempted to the extent they conflict with the Order. However, the FCC states that it does not have sufficient information to make determinations with respect to franchising decisions where a “state” is involved either by issuing franchises at the state level or enacting laws governing specific aspects of the franchising process. The Order only applies to actions or inactions at the local level where a state has not specifically circumscribed the LFAs authority.

By way of example, the Order references that many states have enacted comprehensive franchise reform laws designed to facilitate competitive entry. Some of these laws allow competitive entrants to obtain state-wide franchises while others establish a comprehensive set of state-wide parameters that “cabin the discretion of LFAs.” Thus, the Order “does not address any aspect of an LFA’s decision-making to the extent that such aspect is specifically addressed by state law.” Therefore, careful review of applicable state law for each LFA will be required to determine the overall impact of the Order. Clearly, states such as Texas, California, Virginia, Michigan, Indiana, South Carolina, Connecticut, Hawaii, and others which have state franchising laws may experience minimal impact under the Order. The question is less clear in states such as Minnesota that prescribe certain franchising boundaries but leave others open to LFA discretion.

G. Level Playing Field Requirements.

State level playing field requirements appear to still be enforceable under the Order. This includes Minnesota’s level playing field requirement found at Minn. Stat. § 238.08, Subd. 1 (b) which provides:

(b) No municipality shall grant an additional franchise for cable service for an area included in an existing franchise on terms and conditions more favorable or less burdensome than those in the existing franchise pertaining to: (1) the area served; (2) public, educational, or governmental access requirements; or (3) franchise fees. The provisions of this paragraph shall not apply when the area in which the additional franchise is being sought is not actually being served by any existing cable communications system holding a franchise for the area. Nothing in this paragraph prevents a municipality from imposing additional terms and conditions on any additional franchises.

All local level playing field requirements are preempted. In franchises where an LFA has agreed to “most favored nation” clauses requiring that the city will impose the same terms and conditions upon any other cable service provider seeking a franchise in the city, it remains unclear how those provisions will be impacted by the Order. Careful review of the language of each franchise will be required to determine the precise impact. However, many local franchises contain provisions which contractually relieve the incumbent cable operator of certain obligations should a new competitor not be held to the same requirements by the LFA. The Order may not preempt contractual provisions which provide relief to incumbent cable operators. This is an issue which the FCC will address in the next six (6) months (see Section H. below).

H. Further FCC Rulemaking.

The Order also includes a further Notice of Proposed Rulemaking (“NPRM”) regarding whether the Order should apply to cable operators that have existing franchise agreements as they negotiate renewal of those agreements with LFAs. On this issue the FCC tentatively concludes that the Order should apply at the time of renewal. The FCC also seeks comment on what effect, if any, the Order has on “most favored nation” clauses that may be included in existing franchises. Finally, the FCC seeks comment on whether it has authority to preempt state or local customer service laws that exceed the FCC’s customer service standards. On this issue the FCC tentatively concludes that it does not have authority. Initial comments on the NPRM were due April 20, 2007, reply comments were due May 7, 2007.

- End of Paper -

Brian T. Grogan is a shareholder with the Minneapolis law firm of Moss & Barnett practicing in the firm’s communications law and energy practice group. Brian represents local units of government throughout the country on a variety of communications issues including cable and telecommunications franchising, right-of-way management, municipal wireless communications, tower leasing, pole attachment negotiations, public safety communications and litigation. 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 T. Grogan, Esq.

Moss & Barnett, A Professional Association

4800 Wells Fargo Center, 90 South Seventh Street

Minneapolis, MN 55402-4129

Telephone: (612) 877-5340 Facsimile: (612) 877-5999

Email: groganb@moss-barnett.com

Web site: www.municipalcommunicationslaw.com

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[1] Cable communications system is defined at Minn. Stat. § 238.02, Subd. 3.as follows:

(a) “Cable communications system” means a system that (1) provides the service of receiving and amplifying (i) programs broadcast by one or more television or radio stations and (ii) other programs originated by a person operating a cable communications system or by another person, and (2) distributes those programs by wire, cable, microwave, or other means, regardless of whether the means are owned or leased, to person who subscribe to the service.

(b) This definition does not include:

(1) a system that serves fewer than 50 subscribers or a system that serves more than 50 but fewer than 1,000 subscribers if the governing bodies of all political subdivisions served by the system, vote, by resolution, to remove the system from the provisions of this chapter; provided that:

(i) no part of a system, nor any area within the municipality served by the system, may be removed from the provisions of this chapter if more than 1,000 subscribers are served by the system; and

(ii) any system serving more than 50 but fewer than 1,000 subscribers that has been removed from the provisions of this chapter becomes subject to the provisions of this chapter if the governing bodies of 50 percent or more of the political subdivisions served by the system vote, by resolution, in favor of the return;

(2) a master antenna television system;

(3) a specialized closed-circuit system that does not use the public right-of-way for the construction of its physical plant; and

(4) a translator system that receives and rebroadcasts over-the-air signals.

[5] See section G of this paper at page 9 for further discussion of the Minnesota level playing field provision.