California Public Utilities Commission Releases Final Decision on Rulemaking to Implement California’s New Video Franchising Statute

On March 5, 2007, the California Public Utilities Commission (Commission) released its Final Decision on the Commission’s rulemaking to implement California’s new Digital Infrastructure and Video Competition Act (DIVCA). The Final Decision is similar to the Proposed Decision released by Commissioner Rachelle Chong on Jan. 16, 2007, on which we previously reported. There are a few important differences between the Proposed Decision and Final Decision, however, which are summarized in this memo. To view a copy of our previous memo summarizing the Proposed Decision, click here.

In response to the Proposed Decision, several local entities commented that DIVCA does not preempt local franchising. Rather, they argued, DIVCA provides an alternative means for obtaining video franchising authority. The Commission disagreed with these local entities and clarified that after Jan. 1, 2008, the Commission is the sole franchising authority in California and that a local franchise therefore may not be granted or renewed thereafter. This implicates the federal renewal rights of any incumbent cable operators that may prefer to negotiate a local franchise rather than accept the terms of a non-negotiable state franchise. For example, some incumbent operators may have large existing PEG fee obligations (e.g., 3 percent of gross revenues) they were hoping to reduce in a renewal, but that could now become perpetual under a state franchise. Under DIVCA, a local entity may impose a PEG fee equal to the rate paid by the incumbent as of Dec. 31, 2006, not to exceed 3 percent. Such an obligation could be imposed indefinitely and further disadvantage cable operators relative to satellite providers, who do not pay PEG or franchise fees.

Under federal law a state may act as the franchising authority for cable television systems. There is a legal question, however, about whether a state may forego the federal renewal procedures when it transfers franchising authority from local entities to the state. It is too early to tell whether any entity will challenge DIVCA on this basis. There has been some suggestion that local entities may do so. To succeed, however, they will have to overcome arguments that they have no standing to sue their mother state and that the federal renewal procedures were not meant to protect franchising authorities. For these reasons, we do not think such a case brought by a local entity has a high likelihood of success. Cable operators would not face these same legal obstacles, but from a practical standpoint, those that supported the legislation may now find it difficult to challenge the statute.

One important feature of the Proposed Decision is that it did not allow for a procedure to protest an application. While the Final Decision does not change this, it does appear to create an avenue for filing a form of informal protest. Specifically, the Commission acknowledges that any party may submit information relevant to the qualifications of an applicant at any time and that “[u] pon validation of evidence of ineligibility, [the Commission] can respond in a number of ways, including rejection of an application, immediate suspension of a state video franchise, and/or issuance of an order to show cause for why a state video franchise should not be deemed invalid.”

The Final Decision adds some confidentiality protections that were not included in the Proposed Decision. Pursuant to the Final Decision, statements of annual gross revenues, build-out plans, and broadband and video data reported on a granular level will be afforded confidential treatment to the maximum extent permitted by law. Under the Proposed Decision, this information would have been publicly available.

Under DIVCA, a telephone company is not required to construct outside of its existing telephone footprint. However, franchise holders with more than 1 million telephone customers in the state are required to meet various build-out requirements. For example, within two years of commencing service to an area, if at least 25 percent of the households with access to the service are not low-income households (annual income less than $35,000), the telephone company could be found to be in violation of the DIVCA redlining prohibition. The Final Decision interprets the build-out requirements to apply only to the extent that a state video franchise holder does not offer video service to all of its telephone customers within its “telephone service area.” If a franchisee does offer video services to all its telephone customers, then the franchisees shall submit an affidavit stating as much to the Commission within 30 days from the date the franchise is issued. The Final Decision also provides that in Phase II of the rulemaking, the Commission will set forth “safe harbor standards” for all other state video franchise holders having fewer than 1 million telephone subscribers. If a franchisee is unable to meet the Commission’s “safe harbor standards,” then the franchisee shall file an application with the Commission proposing reasonable build-out requirements. The Commission will then consider the application, and any interested party may protest it. The Commission will then vote on the application.

On March 5, 2007 the Federal Communications Commission released its decision establishing “reasonable” limitations on franchise authorities’ decisions to grant competitive franchise applications. In that decision the FCC ruled that reasonable build-out requirements are permissible. The decision provided examples of unreasonable requirements and suggested (through Chairman Martin’s accompanying statement) that build-out requirements tied to achievement of penetration levels by new competitive cable entrants would be reasonable. However, the FCC specifically declined to impose its decision on state level regulation of franchising requirements. Consequently, the California build-out requirements are not subject to FCC limitations.

The final decision modifies the definition of “affiliate” contained in the Proposed Decision to include wireless broadband providers. As a result, wireless broadband providers affiliated with state video franchise providers now must also comply with DIVCA’s data reporting requirements.

Pursuant to the Final Decision, applications now must include an affidavit from a single qualified corporate entity. Such entity must attest that it will be responsible for DIVCA compliance, accept service of process on behalf of the franchisee, and submit to the jurisdiction of California courts.