At an open meeting yesterday, the FCC adopted a Report and Order and Further Notice of Proposed Rulemaking (the “Decision”) that will include specific rules to prohibit local franchise authorities (“LFAs”) from “unreasonably” refusing to grant competitive cable franchises. Although the text of the Decision is not yet available, the FCC’s news summary of its action, along with FCC staff comments and Commissioners’ statements made at the meeting, provide an outline of the rules the Commission will impose to control the franchising of competitive franchise applicants (principally Verizon, AT&T and other ILECs). Incumbent cable operators are not given the benefit of the streamlined processes or the new standards adopted by the FCC. In the Further Notice, the FCC will consider whether to make the new rules available to incumbents upon the renewal of existing franchises. The FCC’s vote was 3-2, split on party lines (with Democrats Copps and Adelstein dissenting). The Decision is likely to be appealed by LFAs and possibly by the cable television industry.
The Decision addresses four principal areas of allegedly “unreasonable” LFA behavior in the franchising of competitive cable providers:
- Shot Clock--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 ROW authority, this “shot clock” is set at 180 days. If an ILEC’s 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 90th day or after interim authority commences, then the ILEC must seek redress in court. Interim authority will apparently terminate at such time as the LFA denies an application.
There is obviously considerable doubt as to the Commission’s authority to grant such “interim authority” to provide cable service in the local rights-of-way. Indeed, absent the final text of the Decision, the extent and import of the “interim authority” remains unclear. - Build Out--LFA’s 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, or
- Requiring a telephone company to build out beyond its telephone service area.
It appears that the Decision will allow reasonable build out benchmarks that are tied in some way to the competitor achieving certain levels of cable penetration in a market before triggering additional deployment requirements.
- In-Kind Payments—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% franchise fee cap. This raises the question of what is “unrelated” to the provision of cable service. Based on the discussion at the FCC’s meeting, the Decision may identify some examples of requirements that are not cable related services (e.g., constructing a swimming pool, planting trees…) and that are flatly prohibited.
- PEG and I-Nets—LFAs cannot impose unreasonable PEG or I-Net requirements. It appears that any obligation in excess of what the incumbent is required to pay, as well as significant up-front, lump sum payments, would be deemed unreasonable. However, financial obligations based upon pro rata contributions (matching the incumbent’s obligation---1% of gross revenues, for example) would likely be acceptable. It is not clear if the Decision addresses whether a competitor will be required to contribute to investments that the incumbent made in the past, such as construction of a PEG studio or an I-Net.
In addition to these actions, the Decision apparently will preempt all level playing field provisions in existing local franchise agreements and in municipal and county ordinances. However, level playing field requirements in state laws and recently enacted state video franchise laws are not preempted. The Decision also reportedly preempts LFA authority over regulating “mixed use networks,” which apparently will prohibit LFAs from requiring telephone companies from obtaining a cable franchise before upgrading the telephone network in order to provide video service. Commissioners’ statements suggest that the Decision may also direct that LFAs are not authorized to regulate the provision of non-cable services (i.e. broadband and VoIP). However, the Decision will not address the regulatory classification of IP video (e.g., AT&T’s video service), which will be decided in another proceeding.
As noted above, the Further Notice of Proposed Rulemaking will address the incumbent cable industry’s ability to benefit from the new rules. Unfortunately, the FCC’s tentative conclusion is that incumbents will be entitled to the new rules only upon renewal of existing franchises. Thus, the Decision ignores the central cable industry message that parity among competitors is vital. The FCC asserts that it will adopt its ruling on these additional issues within 6 months of the issuance of the Decision.
The Decision is an aggressive attack on LFA authority and, we believe, exceeds FCC authority in a number of respects. The failure to provide incumbents with a level playing field further weakens the legal basis of the Decision. Consequently, an appeal of the Decision seems likely.
The text of the Decision is still being finalized by the Commission, but the new rules are expected to become effective early next year. Please contact us if you would like additional information regarding the Decision.
- Requiring construction of an entire market before any cable service can be offered anywhere in the market;