To: Moss & Barnett Clients and
Interested Parties
From: Brian
T. Grogan, Esq.
“…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. 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 your city? If
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 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 LFAs 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).
What does this mean for your city? 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.
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 your city? 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 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. 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 are due 30 days from the date the Order is published in
the Federal Register which is likely to happen within the next 7-30 days. Moss & Barnett will post on our website (www.municipalcommunicationslaw.com)
when the Order is published in the Federal Register and the applicable
deadlines for initial comments and reply comments. To the extent your community is now facing or
will soon face franchise renewal it is imperative that comments be sent to the
FCC emphasizing the impact which the Order will have on your community. In particular, the impact on franchise fee
revenue and PEG funding should be emphasized in comments to the FCC.
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.
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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
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 that may apply to your situation. You should consult with legal counsel before
taking any action on matters covered by this Municipal Communications Law
Update.