On March 5, 2007 the Federal Communications Commission (FCC) released the text of the Report And Order and Further Notice Of Proposed Rulemaking (“Report & Order” and “Further Notice”) in its docket addressing cable franchising. The Report & Order was originally “adopted” at the FCC’s Dec. 21, 2006 meeting (see DWT Dec. 21, 2006 Update). In general, the Report & Order follows our understanding of the FCC’s new rules as discussed at the December 21st meeting. The following summarizes the primary discussion points in the Report & Order, then the issues raised in the Further Notice.
The Report & Order
With the Report & Order, the FCC adopts rules and provides guidance addressing what constitutes an unreasonable refusal to grant an additional competitive franchise under Section 621(a)(1) of the Cable Act, 47 U.S.C. § 541(a)(1). Critically, however, the FCC explains that its new rules do not apply where the state is the local franchising authority (LFA) (e.g., Connecticut) or in states that have adopted new franchising reform statutes (California, Indiana, Kansas, Michigan, New Jersey, North Carolina, South Carolina, Texas and Virginia). Thus, the application of the FCC’s new rules could be muted, perhaps significantly, if the number of states adopting franchise reform legislation continues to grow (with as many as 20 or more states expected to consider reform legislation this year).
The Commission concludes that local laws and requirements that are inconsistent with the Report & Order and the Commission’s new rules are preempted and unenforceable. In particular, the Commission notes that local “level playing field” laws or franchise provisions are preempted. However, it does not appear that “most favored nation” (MFN) clauses in existing franchises are preempted by the Report & Order. In the Further Notice, the FCC asks what effect, it any, its findings have on existing MFN clauses. Thus, for now, incumbent cable operators should be able to use such MFNs in existing franchise agreements to reduce franchise obligations commensurate with the reduction in franchise obligations for the newly franchised competitor.
The Commission’s discussion of level playing field laws addresses “locally-mandated” level playing field requirements, and does not affect state level playing field statutes. Indeed, the Commission states that the Report & Order “does not address any aspect of an LFA’s decision-making to the extent that such aspect is specifically addressed by state law.” This is a significant exception, as it leaves many LFAs subject to state level playing field statutes that would otherwise be inconsistent with the FCC’s rules.1
As reported after the December 21st meeting, the FCC addresses four specific areas of “unreasonable” demands or behavior by local franchising authorities (LFAs).
- Negotiation Delay/Shot Clock—Under the FCC’s new rules, LFAs must grant or deny a franchise within 90 days for those applicants with existing right-of-way authority (e.g., ILECs). For applicants without existing authority to use the right of way, this “shot clock” is set at 180 days. If the negotiation shot clock expires and the LFA has taken no action, then the ILEC is deemed to have “interim authority” to offer cable service based on the terms of the ILEC’s franchise application. However, if the LFA denies the franchise either by the 90 th day or after interim authority commences, then the ILEC must seek redress in court. The interim authority will terminate at such time as the LFA denies an application, at which time the new entrant must stop providing service unless the LFA agrees to allow it to continue.
The shot clock is triggered by the written submission of certain requisite information to the LFA. In particular, the FCC requires new entrants to provide nine items, at a minimum. However, the Commission states that the application also must meet any applicable state or local requirements, and the LFA may toll the running of the shot clock if it has requested information from the applicant and is waiting for such information. It is unstated whether the LFA could toll the clock by requesting information not required by the FCC’s list or specific state or local law.
The Commission states that the Report & Order does not address the timing of LFA decision-making to the extent specifically addressed by state law. For example, Massachusetts provides LFAs with 12 months to approve or deny a franchise application. That limit would not be preempted.
- Build Out—As expected, the FCC concludes that LFAs cannot establish unreasonable build out requirements, which would include:
- Requiring construction of an entire market before any cable service can be offered anywhere in the market;
- Requiring a competitor to build out a market more quickly than the incumbent was required to build out;
- Requiring a new entrant to serve lower density areas than required of the incumbent;
- Requiring a telephone company to build out beyond its telephone service area;
- Requiring service of buildings or developments to which the competitor cannot obtain access on reasonable terms; or
- Requiring build-out to areas or customers that cannot be reached using standard technical solutions.
The Report & Order clarifies, however, that “reasonable” build out requirements that commence after the new entrant has begun providing service can be imposed. Given that most LFAs have not attempted to impose the types of “unreasonable” build out requirements identified by the FCC, it does not appear that the FCC’s “guidance” on this issue will have any significant impact.
- Franchise Fees—The Report & Order spends considerable time addressing LFA demands that may or may not appropriately be considered franchise fees and thus counted against the 5 percent cap set by Section 622 of the Communications Act. Of note, the FCC concludes:
- A “cable operator is not required to pay franchise fees on revenues from non-cable services.”
- Charges “incidental” to the awarding or enforcing of a franchise are clarified. “Incidental” charges that LFAs may not require without counting against the 5 percent cap include:
- Free or discounted services provided to the LFA;
- Any requirement to lease or purchase equipment from the LFA at above market prices;
- In-kind requirements unrelated to the provision of cable service.
- In-Kind Payments—The Report & Order clarifies that LFAs cannot require payments of fees, costs or other assessments or benefits “unrelated” to the provision of cable without such costs being subject to the 5 percent franchise fee cap.Unfortunately, the Report & Order provides little guidance on what is “unrelated” to the provision of cable service. Indeed, the FCC notes that the ILECs provided little details, but nonetheless, the FCC cites as examples a request for a video hookup for a Christmas celebration, money for wildflower seeds, and a request for fiber on traffic lights to monitor traffic.The FCC also cites Cable Act legislative history references to demands for lump sum grants for programs, like libraries, recreation departments, and detention centers as items that constitute franchise fees. Such demands are apparently not flatly prohibited, but must be counted as franchise fees under the 5 percent cap.
- PEG Support Payments—The Report & Order clarifies that certain payments related to public, educational and governmental access programming (PEG) may be excluded from franchise fee calculations, while others count against the 5 percent cap. Of particular note, the FCC states that “capital costs” refer to those costs “incurred in or associated with the construction of PEG access facilities.” Such “capital costs” are not franchise fees that must be counted against the 5 percent cap. However, “support” payments, which may include PEG salaries and training, are franchise fees and must be counted against the 5 percent cap.
- PEG and I-Nets—The FCC concludes that it is not unreasonable for an LFA to require assurance that the new entrant will provide adequate PEG access channel capacity, facilities or financial support, as set forth in Section 621(a)(1). The FCC then discusses what is “adequate” of “sufficient” versus what is excessive. It rejects AT&T’s assertion that it should adopt standard terms for PEG channels, and clarifies that LFAs are free to establish their own requirements for PEG, but that the non-capital costs must be offset from the operator’s franchise fee payments.
- Channel Capacity —The FCC concludes that it is unreasonable to require the competitor to agree to more PEG channel carriage than the incumbent. However, it does not set a specific number of channels that would be reasonable or otherwise provide guidance on what would be an unreasonable number of PEG channels.
- PEG Support —The FCC addresses at length proposals for pro rata PEG support sharing. It concludes that pro rata cost sharing is “one reasonable means” of meeting the statutory requirement of “adequate” assurance. If a new entrant agrees to share pro rata costs with the incumbent cable operator, such an arrangement is per se reasonable.
According to the Report & Order, the “pro rata” cost is to be calculated based on the incumbent’s per subscriber payment at the time of the new entrant’s application, as applied to the new entrant’s subscriber base. The FCC does not address how this calculation would apply if the incumbent’s support is not “per subscriber” or how to treat past investments, such as PEG studio construction. Moreover, the FCC does not clarify whether the incumbent’s payment would decrease.However, the use of the terms “sharing” and “pro rata” strongly suggests that the incumbent’s support payments should decrease if it loses market share.
The FCC further clarifies that if the new entrant agrees to pro rata cost sharing, it must be allowed to interconnect with existing PEG feeds. However, the cost of interconnection is wholly on the new entrant.
- Duplicative I-Net and PEG—The FCC generally concludes that completely duplicative PEG and I-Net requirements would be unreasonable, unless required to address an LFA’s particular concern regarding redundancy for public safety.However, the FCC clarifies that an I-Net is not duplicative if it would provide additional functionality. Requiring a new entrant to pay the face value of an I-Net that will not be constructed is unreasonable.
The Report & Order also addresses the treatment of “mixed-use” networks. The Commission clarifies that “LFAs’ jurisdiction applies only to the provision of cable services over cable systems,” and an LFA may not use its video franchising authority to attempt to regulate a LEC’s entire network beyond the provision of cable services. The Commission concludes that it would be unreasonable for an LFA to refuse to award a franchise based on issues related to non-cable services, and that an ILEC can upgrade its system without a cable franchise, so long as there is a non-cable purpose associated with the network upgrade.
The Commission explicitly states that it is not addressing whether video services provided using Internet Protocol are “cable services.”
The Further Notice
The Further Notice raises only a handful of discreet issues, but they are important for existing cable operators. In particular, the FCC recognizes that some of the decisions in the Report & Order appear germane to existing franchisees. However, it tentatively concludes that the findings and rules should apply to existing cable operators only as they negotiate renewal of existing franchise agreements. Perhaps recognizing that its tentative conclusion is inconsistent with the plain language of the Cable Act, the Commission notes that the Cable Act’s provisions regarding PEG support and franchise fees do not distinguish between incumbents and new entrants.
On this primary issue, the Further Notice raises key legal and competitive issues. As the Commission notes, the plain language of the Cable Act does not differentiate between franchises granted to incumbents versus new entrants. Yet, the Commission is purporting to interpret key provisions of the Cable Act only as applied to new entrants. If existing operators do not receive the benefit of the Commission’s new rules and statutory interpretations until renewal, they could be at a competitive disadvantage for many years. Under the Commission’s tentative conclusion, the incumbent operator might be required to pay certain franchise fees or provide certain PEG payments that are not equally applicable to its competitor, the ILEC.
Responding to complaints by AT&T and Verizon regarding local customer service regulations (for example, that AT&T submit call data on a community-specific basis), the Commission also asks for comments on its ability to preempt local customer service regulations. Citing Section 632(d)(2) of the Cable Act, the Commission tentatively concludes that it cannot preempt local customer service regulations, but asks for comments.
Comments on the Further Notice will be due 30 days after the Further Notice is published in the Federal Register, which can sometimes take a few weeks. Nonetheless, the Commission reiterates that it will conclude the Further Notice and release an order no later than six months after the release of the Report & Order.
1 States that currently have some form of a level playing field statute include: Alabama (Ala. Code § 11-27-2(counties); Connecticut (Conn. Gen. Stat. § 16-331(G)); Florida (Fla. Stat. Ch. 166.046(3); Georgia (O.C.G.A. § 36-90-5(a)), Illinois (55 Ill. Comp. Stat. 5/5-1095(E)(4)-(5) and 65 Ill. Comp. Stat. 5/11-42-11(E)(4)-(5); Minnesota (Minn. Stat. § 238.08, subd. 1(b)); Nevada (Nev. Rev. Stat. Ann. § 711.190(2)); New Hampshire (N.H. Rev. Stat. Ann § 53-C:3-b(I)-(II); Ohio (Ohio Rev. Code Ann. § 1332.04(B); Oklahoma (Okla. Stat. Title. 11 § 22-107.1); Rhode Island (R.I. Gen. Laws § 39-19-3); and Tennessee (Tenn. Code Ann. § 7-59-203).