CABLE FRANCHISE RENEWAL IN MINNESOTA: 2012 AND BEYOND

CABLE FRANCHISE RENEWAL IN MINNESOTA: 2012 AND BEYOND MACTA s Franchise Renewal Workshop Park Plaza Bloomington Hotel 4460 West 78 th Street, Bloomington, MN 55435 Brian T. Grogan, Esq. Moss & Barnett 4800 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402 612-877-5340 (ph)/612-877-5999 (fx) GroganB@moss-barnett.com www.municipalcommunicationslaw.com

TABLE OF CONTENTS TOP FIFTEEN COMMENTS YOU ARE LIKELY TO HEAR FROM YOUR CABLE OPERATOR DURING FRANCHISE RENEWAL NEGOTIATIONS... 1 FRANCHISE RENEWAL - CURRENT FEDERAL LAW... 2 TEN STEPS TO FRANCHISE RENEWAL... 4 KEY FRANCHISE PROVISIONS TO BE NEGOTIATED IN RENEWAL... 14 2005516v1 i

TOP FIFTEEN COMMENTS YOU ARE LIKELY TO HEAR FROM YOUR CABLE OPERATOR DURING FRANCHISE RENEWAL NEGOTIATIONS 1. We do not provide financial support for PEG use your 5% franchise fee. 2. Our corporate policy does not permit us to provide bonds/letter of credits/security funds. 3. We don t believe liquidated damages/penalties/enforcement provisions are necessary given our outstanding track record in your city. 4. Satellite and telephone companies are stealing our subscribers - we cannot afford (insert whatever city may be seeking). 5. If we do it for your city we have to do it for every other LFA so we cannot do it. 6. We have to deal with 800, 1,500 4,500 franchises - these franchise reporting requirements are simply too burdensome. 7. Subscribers (who pay $60-$120 per month for cable television) will revolt if $.50/$1.00/$2.00 shows up on the bill to support PEG/I-Net costs. 8. We won t sign the franchise without our level playing field language. 9. I-Nets are handled by a separate commercial services group - we do not do I- Nets in franchises anymore. 10. Our new corporate policy we have to cite to GAAP when defining gross revenues. 11. We will offer free services to schools and city buildings, but we cannot put it in the franchise these are voluntary, but trust us, we have no plans to change our policy. 12. We cannot agree to HD PEG channels or any designated PEG channel location. 13. Cities cannot dictate transmission technology so everything related to our system capacity, equipment and design is off limits. 14. No one watches PEG programming they have YouTube and web streaming PEG is obsolete today. 15. We will not work off the city s draft franchise document you must work from our model document instead. 2005516v1 1

FRANCHISE RENEWAL - CURRENT FEDERAL LAW In 1984, Congress passed a law that was intended to provide cable operators with a fair opportunity to obtain renewal. To that end, the Cable Communication Policy Act of 1984 - the Cable Act 1 - establishes two possible ways a community can respond to a request for franchise renewal: informal renewal negotiations and the statutory formal renewal process. Under the informal process, Congress contemplated that a city and a cable operator will meet informally and attempt to resolve franchise issues through negotiation. 2 If the issues are resolved a city can, after providing the public with an opportunity for comment, adopt a renewal franchise. An informal proposal can be rejected at any time. Alternatively, either the cable operator or the city can invoke the more formal renewal procedures set out at 47 U.S.C. 546(a)-(g). These formal procedures give a cable operator the opportunity for a fair hearing on its renewal proposal. At the same time, the procedures ensure that a city can deny renewal if a cable operator has performed poorly in the past, or is not qualified, or is not willing to make a reasonable proposal for meeting the community s needs and interests for the future. Under the formal process, the city is given authority to define the needs and interests of the community. It is up to the cable operator to then submit a proposal that is reasonable to meet the community s cable-related needs and interests, taking into account the costs of meeting those needs and interests (the focus is the entire community, not just the individual subscriber currently receiving service). The legislative history of the 1984 Cable Act explains: The ability of a local government entity to require particular cable facilities (and to enforce requirements in the franchise to provide those facilities) is essential if cable systems are to be tailored to the needs of each community [and the legislation] explicitly grants this power to the franchising authority. 3 More specifically, the formal renewal process under the Cable Act is a four-stage process. In the first stage, a city must conduct a proceeding to identify future, cable- 1 47 U.S.C. 521 et. seq. 2 47 U.S.C. 546(h). 3 1984 House Report at 26, 1984 U.S.C.C.A.N. at 4663. Congress intended that: the franchise process take place at the local level where [local] officials have the best understanding of local communications needs and can require cable operators to tailor the cable system to meet those needs. 1984 House Report at 24, 1984 U.S.C.C.A.N. at 4661. However, the Cable Act does not give local governments unlimited authority to impose conditions on cable operators. For example, it limits local authority to require an operator to carry a specific programming service. 2005516v1 2

related needs and interests of the community, and to review the past performance of the cable operators serving the community. 4 Once that proceeding is complete, the city may issue a Request for Formal Renewal Proposals ( RFRP ). Because each renewal proposal is evaluated on its own merits, this RFRP cannot simply be a competitive bidding document. 5 The Cable Act specifically allows the City to establish the following requirements in an RFRP: (a) (b) that channel capacity be designated for public, educational or government use, and channel capacity on institutional networks be designated for educational or governmental use, and may require rules and procedures for the use of channel capacity designated... 6 for facilities and equipment. The legislative history explains that this includes requirements for institutional networks, studios, equipment for public, educational and government use, two-way networks, and so on. 7 The Cable Act also states that a franchising authority may establish and enforce customer service requirements of the cable operator, and construction schedules and other construction-related requirements, including construction-related performance requirements, of the cable operator. 8 Many cities maintain that this language permits the city to establish these requirements unilaterally in a franchise (or through a regulatory ordinance), along with various other requirements established pursuant to the city s police powers and other governmental authority. In the next stage of the renewal process, the cable operator submits a renewal proposal in response to the city s RFRP. Any such proposal shall contain such material as the franchising authority may require. 9 If a cable operator submits a timely and proper response, 10 the city has four months to evaluate the proposal, and decide whether to grant renewal based on the proposal or to preliminarily deny renewal. 11 Finally, if franchise renewal is preliminarily denied, and a cable operator desires it, the city must commence an administrative proceeding. The four issues that are considered at that proceeding are whether: 4 47 U.S.C. 546(a). 5 47 U.S.C. 546(b). 6 47 U.S.C. 531(b). 7 47 U.S.C. 544. 8 47 U.S.C. 552. 9 Id. 10 The proposal must be submitted by a deadline established by the city. If the operator fails to do so, then its rights are ended. 11 47 U.S.C. 546(c). 2005516v1 3

(a) (b) (c) (d) the cable operator has substantially complied with the material terms of the existing franchise and with applicable law; the quality of the cable operator s service, including signal quality, response to consumer complaints, and billing practices, but without regard to the mix or quality of cable services or other services provided over the system, has been reasonable in light of community needs; the cable operator has the financial, legal, and technical ability to provide the services, facilities, and equipment as set forth in the cable operator s proposal; and the cable operator s proposal is reasonable to meet the future cablerelated community needs and interests, taking into account the cost of meeting such needs and interests. 12 TEN STEPS TO FRANCHISE RENEWAL STEP # 1 INITIAL RESPONSE TO OPERATOR S RENEWAL REQUEST LETTER The city s goal: Conduct renewal process informally while reserving the right to reenter the formal process if the city and cable operator cannot agree upon franchise documents. Why is this goal important? Allows city to conduct renewal process without formal timing requirements. Affords greater flexibility to negotiate franchise provisions. Places city in control of the process and the documents to be considered. Satisfies statutory requirement. What the city must do to accomplish this goal: The cable operator s written request for renewal will be sent between 36 and 30 months prior to the expiration of its franchise. The request will trigger the formal renewal process but will likely encourage informal negotiations. 47 U.S.C. 546 (a)(1) requires that the city commence a needs assessment proceeding not later than six (6) months after the date such notice is submitted. 12 Id. 2005516v1 4

Upon receipt of the cable operator s letter, the city should respond by agreeing to proceed informally and requesting that the cable operator agree in writing to place the formal renewal process on hold until the parties determine whether renewal can be achieved through informal negotiations. This written agreement is often referred to as a standstill agreement. The standstill agreement should clarify that the city s obligation to commence a needs assessment proceeding is also on hold or is satisfied by virtue of the agreement. What to expect from the cable operator: Most cable operators prefer the informal renewal process and will not object to a standstill agreement so long as each party has the right to reenter the formal process at any time. Typically, the cable operator will request information on the timing and details of the informal process to be undertaken by the city. The city should endeavor to keep the cable operator informed of the informal renewal procedure as it moves toward the negotiation stage. However, recognize that in the informal process neither party has any statutory requirements to respond in a prescribed time period or to negotiate at all. Therefore, if both sides are not willing to commit to an informal process it may result in wasted time and money. STEP #2 DEVELOPMENT OF INFORMAL PROCESS The city s goal: Place the city in control of informal renewal proceedings and all document preparation. Why is this goal important? Ensures renewal process reflects city s timetable. - City staff can anticipate appropriate city meetings for consideration of key issues. - Process can be arranged to avoid difficult times of the year, i.e., holidays, summer vacation season, etc. The party which drafts the key documents negotiates from a position of strength. It is always preferable to negotiate from your own documents. Ensures sufficient time to consider responses from the cable operator. What the city must do to accomplish this goal: Shortly after a standstill agreement is signed, the city should draft an outline of the steps to be undertaken in its informal renewal process. The informal renewal process should include information gathering/needs assessment, document preparation, analysis of the cable operator s response and negotiation. Particular emphasis should be placed on the information gathering/needs assessment stage, during which the city should solicit information from all interested parties within the city. The informal 2005516v1 5

renewal process should also outline a general time frame to assist the parties in moving forward in the process. Often a city may wish to determine its goals or objectives that it desires to achieve in a renewal process before the needs assessment commences. Once the goals are established the city can then build a needs assessment process to gather information and further refine the goals/objectives as information becomes available. Below is a sample of a city s typical goals/objectives during renewal negotiations: 1. Maintain the 5% franchise fee as consideration for use of the city s ROW which includes a definition for gross revenues that will maximize revenue to the city. 2. Provide for capital support fee for local PEG channels. 3. Create strong customer service obligations to govern cable operator with reporting and enforcement provisions. 4. Review city code to determine if right-of-way (ROW) regulations govern cable service providers and all other ROW users consistently. 5. Ensure sufficient reporting obligations exist in franchise to verify cable operator s compliance. 6. Address digital migration of local PEG channels: location, technology, quality, capacity. 7. Review institutional network requirements or return capacity for live PEG origination capability. 8. Maximize regulatory authority over cable operator with an eye on possible competitive franchise in the future do not create barriers to competition. 9. Renew cable operator for a franchise term to maximize flexibility as the industry changes but with eye on possible state and federal regulatory changes. 10. Adopt enforcement procedures and security to ensure compliance by cable operator. What to expect from the cable operator: Most cable operators prefer to handle franchise renewal as quickly and painlessly as possible. Some operators will suggest that the old franchise documents should simply be extended for an additional three to five years often they may believe that state franchising will occur during that time period and they do not want to commit to a longer term. Other operators may suggest a face-to-face meeting between the company s general manager and the city s mayor or city manager. The cable operator may appear to be surprised to find the city has developed a detailed informal renewal process. Remember, however, that the cable operator needs the city s authorization to 2005516v1 6

continue providing service in the community. In the end, cable operators will participate with an informal process developed by the city. Although, if a cable operator chooses to delay responses, meetings, etc., the city has little or no leverage to force a more timely schedule. The only recourse available to the city is to pursue renewal via the formal process. STEP #3 IDENTIFY CITY S CABLE-RELATED NEEDS The city s goal: Develop a list of cable-related needs and interests of the city s residents, educational institutions, key community groups and governmental agencies. Why is this goal important? Provides foundation for franchise documents and negotiations. Can be used to rebut cable operator s argument that no demand exists for certain services. Ensures that significant issues will not arise during the eleventh hour of the process because an opportunity did not exist for public participation. What the city must do to accomplish this goal: The city may use a variety of methods to gather information. Often, cities will conduct a subscriber/non-subscriber survey asking for responses on key issues, such as signal quality, customer service, public access channels, equipment and facilities, and related matters. Cities may also employ the services of a technical consultant to review the quality of the existing cable system and make recommendations for institutional network services. The city may wish to conduct public hearings to solicit information from members of the general public and may use focus groups comprised of key city leaders, local programming producers or educational leaders to identify needs in specific areas. The city may solicit information from the cable operator regarding existing policies and procedures and the technical capabilities of the cable system. Be careful not to spend time and effort on issues over which the city has limited control such as rates and programming preferences. Also, pay close attention to the distinction between cable services over which the city has control and telecommunications or broadband over which the city likely has limited or no control. What to expect from the cable operator: Some cable operators may wish to participate in various information gathering steps. However, most choose to simply observe public hearings and request copies of reports on any surveys conducted. Cable operators are generally cooperative, completing information requests so long as sufficient time is provided. 2005516v1 7

The key is to gather the information simultaneously so that when a needs assessment report is prepared certain data is not considered irrelevant given the time period when it was collected. STEP #4 IDENTIFY DEFICIENCIES IN OPERATOR S PAST PERFORMANCE The city s goal: Document cable operator s performance deficiencies for use (a) if informal process is unsuccessful and (b) to improve deficiencies in existing franchise documents. Why is this goal important? Protects the city s right to identify cable operator s past deficiencies as a basis for non-renewal should informal negotiations break down and the parties choose to proceed under the formal renewal process. Deficiencies in a cable operator s performance often result from franchise provisions which lack specificity or are otherwise ambiguous. - New franchise documents should correct these mistakes. May result in financial benefit for city prior to franchise renewal, i.e., discovery of franchise fee underpayments. What the city must do to accomplish this goal: The city should carefully review the existing franchise documents and outline all requirements with which the cable operator must comply. The city should verify whether the cable operator has complied with these requirements, using technical and/or financial expertise as required. One area typically scrutinized is the cable operator s payment of franchise fees. Many cities conduct franchise fee audits to ensure the payments have been correctly made and often discover underpayments going back several years, resulting in a financial benefit to the city. These issues, if properly documented, can also be used to strengthen the city s negotiation position during franchise renewal. What to expect from the cable operator: In order to effectively deal with a cable operator s deficient past performance, the city must issue a written notice of franchise violations and provide the cable operator an opportunity to cure the deficiency. Operators will argue that if written notice was not provided, the city waived its right to raise objections. 2005516v1 8

STEP #5 PREPARATION OF NEEDS ASSESSMENT REPORT The city s goal: Preparation of a concise document which clearly outlines the cable-related needs and interests of the community as well as any deficiencies in cable operator s past performance. Why is this goal important? The process of preparing the report helps the city to focus on key issues to be addressed in document preparation and negotiations. Provides a roadmap for the city s negotiation team on key issues. Provides solid foundation on which to base negotiations and rebut claims made by the cable operator. What the city must do to accomplish this goal: The city should assimilate all information obtained during the information gathering/needs assessment stage. This includes all survey information, public hearing and focus group information, responses from key city leaders, local programming producers, educational leaders, and any responses received from the cable operator. If outside technical or financial consultants are involved, their recommendations should be incorporated into the report. The report should be concise in order to be of maximum benefit for document preparation and negotiations, but should be supported by ample documentation and exhibits. What to expect from the cable operator: The cable operator will likely challenge many of the conclusions made in the needs assessment report. In some cases, the cable operator will conduct separate surveys or evaluations of the system to rebut the city s conclusions. If properly prepared, the city s needs assessment report will nevertheless serve as a valuable tool to ensure the legitimate needs and interests of the city are addressed in the new franchise documents. STEP #6 DRAFT MODEL FRANCHISE DOCUMENTS The city s goal: Adopt either a separate regulatory ordinance and franchise agreement or single franchise which include provisions addressing all of the needs and interests identified in the needs assessment report. 2005516v1 9

Why is this goal important? A regulatory ordinance can be incorporated into the city s code and thereafter unilaterally amended as necessary. A franchise agreement can be executed based on a procedure identified within the regulatory ordinance. - If more than one cable operator seeks a franchise from the city, the franchise agreement can address issues which may be unique to that cable operator. A single, all inclusive, franchise may be appropriate based on the city code and competitive issues already in place. What the city must do to accomplish this goal: In preparing a regulatory ordinance, the city should incorporate all rights and regulatory authority allowed under the Cable Act and applicable FCC regulations. The regulatory ordinance should include provisions regarding customer service, technical standards, public educational and governmental access channels, franchise fee requirements, transfer, renewal, indemnification and insurance and related provisions. The franchise agreement should include provisions authorizing operations within the city, line extension criteria, public access equipment and facilities, institutional network provisions, performance bond and/or security fund provisions, franchise term, and other issues unique to the relationship between the cable operator and the city. What to expect from the cable operator: It is not uncommon for a cable operator to provide the city with its own draft franchise document for the city s review and consideration. The cable operator will prefer to negotiate from their own document since it is far easier for the cable operator to work from language which generally favors its position and which may maintain consistency with franchises in a given region. The city should avoid working from the cable operator s franchise document. The city will incur far greater expense attempting to negotiate additions/deletions to the cable operator s proposed franchise than would be expended in drafting its own model document. STEP #7 ANALYSIS OF OPERATOR S RESPONSE TO MODEL DOCUMENTS The city s goal: Develop a list of open issues to be negotiated with the cable operator and identify strengths and weaknesses of city s position. 2005516v1 10

Why is this goal important? Some of the changes proposed by the cable operator will be acceptable to the city because they deal with routine, practical issues not affecting the substance of the documents. The city s negotiation team will need a list of topics to focus on as opposed to negotiating the franchise line by line. Preparation for negotiations is essential to ensure the city s negotiation team is coordinated and knowledgeable of the pros and cons of each issue. What the city must do to accomplish this goal: When presenting the model franchise documents to the cable operator, the city should specifically request that the cable operator respond using the legislative format. That is, the cable operator should strike over language it wishes to delete and underscore all new language proposed to be added to the documents. The city should also require that the cable operator provide written rationale for each change made to the documents to assist the city in understanding the cable operator s response. Upon review of the cable operator s response, the city can then identify those changes which are acceptable and those which will require negotiation between the parties. A short list of key issues should emerge to help focus the negotiations. What to expect from the cable operator: The cable operator s response will likely reflect changes which the cable operator may desire but may not require to reach agreement. In other words, the cable operator will attempt to position itself to have some bargaining power as negotiations proceed. The key for the city is to identify any false demands contained in the cable operator s response so as not to unknowingly negotiate away valuable franchise provisions. STEP #8 DEVELOP NEGOTIATION STRATEGY The city s goal: Ensure that the city s negotiation team clearly understands the key elements which must be included in franchise documents in order to obtain city approval. Why is this goal important? Cities typically have several layers of administration which must approve franchise documents. - Cable advisory committees and city staff must understand the desires of elected officials. City will be negotiating against individuals who negotiate cable television franchises year-round. 2005516v1 11

- Many cable operators have regional staff which work exclusively on government relations and franchise documents. - The cable operator will be well coordinated and prepared on each and every issue to be discussed. What the city must do to accomplish this goal: The city should establish a negotiation team which consists of individuals with expertise on each particular provision to be negotiated. In other words, if technical or financial issues are to be addressed, the city s negotiation team should consist of individuals knowledgeable in these areas. It is often helpful to have an elected official (city council member) serve on an advisory committee or even the negotiation team to ensure the documents ultimately negotiated will meet the expectations and desires of the city. The negotiation strategy itself should identify all open issues, the strengths and weaknesses of each provision and how the city plans to rebut the cable operator s arguments. What to expect from the cable operator: The cable operator s negotiation team will consist of experienced industry professionals who deal in cable television 365 days a year. They will know the cable television industry better than most city representatives and will reference federal laws, regulations or trends to bolster their position. It is important for the city to place on its negotiation team individuals with sufficient expertise in cable television laws and regulations and the likely industry trends so that the cable operator s arguments can be effectively rebutted. STEP #9 NEGOTIATE FRANCHISE LANGUAGE WITH OPERATOR The city s goal: Reach agreement with cable operator on strong franchise documents which retain sufficient flexibility to adapt to changes in the law and the industry. Why is this goal important? Even if the city has a positive relationship with the cable operator, it is entirely possible the system may be sold or transferred during the franchise term. - Franchise documents should be as strong as possible to ensure a reasonable level of service will be provided. - The stronger the franchise documents, the less likely the city will be forced to spend time and money arguing over enforcement issues. Even if existing city officials are disinclined to be aggressive regulators, subsequent elected officials may find the need to become more aggressive in franchise enforcement. 2005516v1 12

What the city must do to accomplish this goal: City should take charge of negotiations by establishing the timetable for meetings and topics to be discussed. Whenever possible, the city should draft all rewrites of various franchise provisions and should retain control over authorship of the franchise documents. The city should avoid allowing time pressures to impact negotiations and should base negotiations on conclusions made within the needs assessment report. What to expect from the cable operator: The cable operator will likely begin negotiations with the local general manager. If negotiations become protracted, a state or regional manager will become involved. Typically, these individuals lack authority to bind the company on any franchise provisions. Cable operators will also continually remind the city of the costs associated with each and every requirement within the franchise and may even threaten political pressure on existing elected officials. Finally, if the cable operator is unable to work effectively with the city s negotiation team, operators may attempt to circumvent the negotiation team, going directly to elected officials even to the point of attempting to discredit the city s negotiation team. STEP # 10 ADOPT FRANCHISE DOCUMENTS The city s goal: Ensure all federal, state and local procedural steps are satisfied when adopting franchise documents. Why is this goal important? Typically there are numerous procedural steps to be followed when adopting an ordinance and entering into a contract with a private entity. Procedure must be coordinated to ensure that necessary steps at city council level are fulfilled. What the city must do to accomplish this goal: The city should outline all federal, state and local procedural requirements to be followed in adopting franchise documents. If the city is within the informal renewal process and a public hearing has already been held, no federal procedural requirements will exist. Typically, under state and local law, adoption of an ordinance requires published notice given approximately two weeks before the scheduled meeting in a newspaper of general circulation. There may be multiple reading requirements, depending upon local law, and typically the ordinance, or a summary of it, must be published within two weeks following adoption. The franchise should identify various acceptance documents to be provided by the cable operator which may include security funds, performance bonds, insurance documents, payment of franchise renewal expenses, and acceptance agreements. 2005516v1 13

What to expect from the cable operator: The cable operator will likely attempt to delay acceptance of the franchise documents for as long as possible. Many operators are now requesting between sixty and ninety days to accept a franchise once approved by a city council. Assuming the process proceeds informally, there is no reason a cable operator should need more than thirty days to obtain necessary signatures for acceptance of franchise documents. KEY FRANCHISE PROVISIONS TO BE NEGOTIATED IN RENEWAL 1. GRANT OF AUTHORITY Purpose This provision will dictate the types of service your cable operator can provide over its cable system. The provision will usually allow the cable operator access to all of your city s public rights-of-way and easements for the purpose of constructing, operating and maintaining its cable system. The issue is what services can the cable operator provide over that cable system. Cable television franchises typically include regulations relevant only to the distribution of video programming. Since cable operators often desire to provide many other noncable services over their systems, the language in this section must be carefully drafted to ensure the city s rights with respect to its public rights-of-way are protected. Issues to Consider It is prudent to include language in this section specifying exactly what services the cable operator can and cannot provide over the cable system. You may consider a requirement that the cable operator must seek additional approval from your city to provide non-cable services to the extent not inconsistent with state and federal law. If you authorize the cable operator to provide any and all services it desires over the cable system, you may wish to add provisions to your franchise documentation to ensure that reasonable regulations regarding the provision of such services will be available to protect the rights and interests of your citizens. Cable Operator s Perspective Cable operator s typically desire franchise language which will allow them to provide any possible services over their cable systems. These services may include data or other electronic intelligence transmissions such as online services, facsimile reproductions, burglar alarms, and telephone services. Interestingly, cable operators are often reluctant to agree to any franchise fees on the revenues derived from the provision of these ancillary services arguing that they cannot compete with other 2005516v1 14

service providers if such fees are assessed. The Telecommunications Act of 1996 strengthens the cable operator s argument since cities cannot prevent the cable operator from providing telecommunications services, although compensation may still be obtained. Relevant Law Section 541(a)(2) of the Cable Act provides that a franchise shall be construed to authorize the construction of a cable system. Section 522(7) defines cable system as a facility consisting of a set of closed transmission paths and associated signal generation, reception and control equipment that is designed to provide cable service which includes video programming and which is provided to multiple subscribers within a community... Section 522(6) defines cable service, in part, as the one way transmission to subscribers of video programming, or other programming service and subscriber interaction, if any, which is required for the selection or use of such video programming or other programming service. Finally, Section 522(13) defines other programming service as information that a cable operator makes available to all subscribers generally. While an initial review of these definitions appears to support the cable operator s position that it can provide whatever services it desires over the cable system, the legislative history of the Cable Act supports a more narrow interpretation of the definition of cable service. Making available a cable system for voice communication between cable subscribers would not be a cable service because the information transmitted between the parties would not be generally available to all. Similarly, offering cable system capacity for the transmission of private data such as bank records or payrolls (for instance to and from data processing centers or between the separate locations of a single business in a local area) would not be a cable service because only specific subscribers would have access to this information... All services offered by a cable system that go beyond providing generally-available video programming or other programming are not cable services. For instance, a cable service may not include active information services such as athome shopping and banking that allow transactions between subscribers and cable operators or third parties. In general, services providing subscribers with the capacity to engage in transactions or to store, transform, forward, manipulate, or otherwise process information or data would not be cable services. This legislative history provides strong support for the position that a cable operator is not entitled to use its cable system for any purpose it desires unless authorization has been specifically provided. While your city may desire that the cable operator provide ancillary services on the cable system, it is important to retain the necessary regulatory authority to address legitimate health, safety and welfare concerns regarding the cable 2005516v1 15

operator s use of the public rights-of-way. These regulations may include assessment of a reasonable fee for such use. The Telecommunications Act of 1996 amended the term cable service only slightly by adding or use to the definition. This two-word amendment is intended to reflect the evolution of cable to include interactive services such as game channels and information services made available to subscribers by the cable operator, as well as enhanced services. This amendment is not intended to affect federal or state regulation of telecommunication service offered through cable system facilities, or to cause dial-up access to information services over telephone lines to be classified as a cable service. 2. FRANCHISE TERM Purpose Traditionally, cable operators have desired a lengthy franchise term of fifteen or more years to ensure a sufficiently stable financial future and to allow enough time to earn a return on their investment. Cities typically desire a far shorter franchise term to ensure that the cable system serving their community does not become antiquated and lose pace with the ever changing industry. Those positions have flipped in recent years as cable operators have witnessed several states move to abolish local franchising and operators have shied away from long term commitments. Determining the appropriate length of the franchise term often hinges on the commitments made by the cable operator regarding PEG and related financial obligations. Issues to Consider Some cities have used a graduated franchise term in an effort to preserve flexibility. Under this plan, a cable operator will be granted an initial franchise term of five years, then will be rewarded with an additional five to ten year term if certain objective conditions are met. These conditions usually involve compliance with franchise terms or payment of grant funding. Cable Operator s Perspective Cable operators have begun to express a comfort level with a ten year franchise term so long as they have adequate level playing field protections contained in the franchise. One possible reason for this change is the belief that as competition continually emerges, franchise obligations will be reduced or eliminated due to reduced regulatory need in the face of true competition. Relevant Law There are no express provisions under federal law governing the appropriate length of time for a franchise. The only reference to franchise term is contained in the House Report to the Cable Act on the franchise renewal provision (47 U.S.C Section 546). In 2005516v1 16

the House Report a statement is made that franchises are granted for a determined length of time - generally ten to fifteen years. Prior to adoption of the Cable Act, FCC regulations recommended a fifteen year term. 47 C.F.R. Section 76.31 (note) (1982) (deleted 1985). During the initial franchising phase in the early 1980 s, many cities used the fifteen year term as an industry standard. Several states across the country have also adopted limitations on the length of franchise terms. In the State of Minnesota, the franchise term cannot exceed fifteen years. One case on the length of a franchise term is Preferred Communications. Inc. v. City of Los Angeles, No. CV 83-5846 C.D. Cal. (Jan. 5, 1990), which held that a five-year franchise term exerted a potentially chilling effect on operators and therefore was unconstitutional. It is important to note, however, that in the Preferred case the facts dealt with an initial franchise where the cable operator was forced to expend considerable capital to build out the entire system. In the case of franchise renewals, the franchise term will often be dictated based upon the capital investment needed for a system upgrade/rebuild and other long term financial commitments. 3. FRANCHISE FEES Purpose The payment of a franchise fee is considered compensation for the use of public rightsof-way and other public property and for the ongoing enforcement and administration of the cable television franchise. The key reason for issuing a franchise is that the cable operator uses the public rights-of-way to string cable and provide service thereby generating a profit. Aside from the city s responsibility to ensure that the public health, safety and welfare are protected with respect to the cable operator s use, the city has a legitimate right to obtain fair compensation for allowing a public resource to be used for the benefit of a private company. Failure of a city to collect a franchise fee may mean the residents of the city are in essence subsidizing cable subscribers. Issues to Consider While most operators will pay a 5% franchise fee, there is often heated debate regarding the base on which the franchise fee should be paid. Therefore, it is important to pay particular attention to the definition of gross revenues and to define this term as broadly as possible. Properly defining gross revenues will ensure that the cable operator is required to provide compensation on any and all revenue derived from the operation of the cable system. 2005516v1 17

Cable Operator s Perspective Cable operators also have the right under Section 542 of the Cable Act to identify the franchise fee as a line item on subscriber bills. Therefore, for cities which are not currently assessing a franchise fee, it is quite likely the cable operator will begin including this fee as a separate line item and may blame any rate increase on the city for imposing an additional tax on cable service. Cable operators also may argue that imposing a 5% franchise fee places them at a competitive disadvantage with other service providers such as direct broadcast satellite or wireless television operators. Cable operators therefore attempt to include language which will relieve them of franchise fee payment obligations when effective competition exists. Of course, cable operators argue that that competition is already present, while cities believe otherwise. Relevant Law Section 542(b) of the Cable Act permits cities to charge up to a 5% franchise fee based on the cable operator s gross revenues from the operation of the cable system. The House Report indicates that the language from the operation of the cable system is not intended to prescribe any particular accounting method but limits the application of the franchise fee to revenues derived from the cable system to which the franchise applies. As originally promulgated in 1972, FCC regulations limited franchise fees to gross subscriber revenues. In 1977, the FCC amended this rule, changing the revenue base from gross subscriber revenues to gross revenues from all cable services in the community and capping the fee at 3%, subject to certain exceptions. Under these FCC rules, all cable revenues, whether from basic television service, pay cable, advertising, auxiliary services, equipment associated with receiving the services, as well as installation charges, were included in the fee calculation. In adopting Section 542 of the Cable Act, the House Report indicates that Congress was cognizant of the FCC s franchise fee methodology and used the same reference to gross revenues but simply increased the maximum permissible amount of the franchise fee from 3% to 5%. 4. CUSTOMER SERVICE Purpose Both the Cable Act and FCC regulations provide cities with the ability to establish and enforce customer service standards at the time of renewing a franchise. In general, the FCC s customer service standards address the specific performance of the cable operator in the areas of telephone response, repair service, installation, billing practices and system reliability. The FCC s standards, however, contain no enforcement guidelines and, thus, it is up to cities to create remedies if the standards are not met. 2005516v1 18

Cities are free to enact and enforce consumer protection laws over and above those found in federal law. When drafting such provisions cities should strive for specific, quantifiable and verifiable standards by which to measure the cable operator s performance. Issues to Consider If you choose to simply incorporate by reference the FCC s customer service standards at 47 C.F.R. 76.309, recognize that if these FCC standards are amended or deleted your community may lose its right to enforce any objective customer service standards on the cable operator. It is best to specifically outline the standards within the franchise and require compliance with the standards and with all other federal laws and regulations regarding customer service standards which may go beyond those outlined in the franchise. Operator s Perspective Cable operators have recently been publicizing their compliance with the FCC s aggressive customer service standards. Interestingly, however, cable operators have become quite resistant to include specific, quantifiable and verifiable customer service standards within franchise. Cable operators argue that their competitors are not obligated to comply with such standards and that, while cable operators may currently exceed all industry standards, they do not wish to be tied to these standards throughout the term of the franchise. In return, cable operators often suggest very minimal customer service standards in an attempt to reduce any administrative burdens which may result from these requirements. Relevant Law Section 522 of the Cable Act outlines the consumer protection laws and customer service agreements permitted under federal law. Often your state s laws will also include customer service requirements for operators. 47 C.F.R. 76.309 outlines the FCC s customer service standards which may be implemented by a city at any time upon 90 days advance written notice to the cable operator. These standards include aggressive requirements for: 1. Office hours and telephone availability; 2. Installations, outages and service calls; 3. Communications between operators and cable subscribers; and 4. Billing, refunds and credits. 2005516v1 19

5. RATE REGULATION Purpose Although rate regulation is now governed by an incredibly complex web of FCC regulations, it is important that the city retain all of its rights to regulate all of the rates and charges assessed by the cable operator to the extent not prohibited by federal law. Over the last two decades we have witnessed the cable industry become completely deregulated (1986 -- per 1984 Cable Act) then reregulated (1993 -- per 1992 Cable Act) and then very nearly deregulated once again (via Telecommunications Act of 1996). It is, therefore, important in your franchise documentation that your city retain maximum flexibility to regulate rates, to the extent allowed under federal law. Issues to Consider Since existing federal law requires specific procedures to be followed to regulate a cable operator s rates, it is probably not prudent to spend significant time developing a rate regulation process which deviates from federal law. Language should be included, however, which will allow the city to develop procedures to regulate the cable operator s rates consistent with then-existing state and federal law, should the FCC no longer be involved in rate regulation at some future date. Recognize that many jurisdictions are now subject to effective competition under FCC regulations and have no rate regulatory authority. Cable Operator s Perspective Cable operators obviously desire to limit a city s ability to regulate any of their rates which may be charged for cable services. The cable operator will seek the narrowest possible language in this area and may even propose language which would result in the city waiving some of its federal rights. Cable operators argue that, since competition is present from direct broadcast satellite and other service providers which are not regulated, the cable operator s services likewise should be accorded similar, unregulated treatment. In many cases the cable operator may be able to cite to an FCC order determining effective competition and rendering the issue moot. Relevant Law Section 543 of the Cable Act governs the regulation of rates charged by a cable operator. Congress essentially delegated much of the responsibility for rate regulation to the FCC which promulgated rules at Part 76, Subpart N, Sections 76.900-76.987. 6. PEG ACCESS REQUIREMENTS Purpose If your city desires local programming channel(s), numerous issues must be considered. First, you must determine the appropriate number of channels to accommodate the 2005516v1 20

public, educational and governmental (PEG) programming needs within your city. Second, you must determine who will be in control of programming these channels. Third, you must identify the needed capital support to purchase equipment and facilities to produce the programming to be aired on the PEG channels. Fourth, you must identify funding sources for personnel to facilitate the production and related details of the access programming. Fifth you must determine the distribution method for PEG programming from the origination location to the cable operator s headend. Issues to Consider In addition to the issues listed above, the city should carefully consider the details of operating PEG access channels and possibly owning equipment and controlling PEG access facilities. Invariably, certain details are forgotten and heated debates often occur attempting to interpret subtle issues regarding PEG access operations. These issues may include whether the cable operator can assess a charge for the use of channel time on the PEG channels, who is responsible for transmitting PEG access programming tapes to and from the cable operator s master control facilities and who makes the editorial decisions regarding programming to be carried on the system. Recent issues include, HD carriage, channel location following digital transition, quality of PEG signals and a host of related issues. This is by far the most complicated of the issues faced in renewal negotiations. Operator s Perspective Generally, cable operators view PEG access channels and support payments as unnecessary and burdensome. In many smaller communities around the country the cable operators will argue that PEG access equipment often sits in a storage closet at city hall and may be rarely used. They will assert that the access channels themselves typically contain character generated information or remain blank full time in some communities. In larger communities where more sophisticated access centers have been developed, significant funding is required to provide quality access programming and operators argue that they alone should not be required to finance these endeavors. A very small minority of cable operators have publicly acknowledged the value of local programming to their system and have slowly started to embrace PEG access programming as one element which makes cable television service unique from satellite competitors. Relevant Law Prior to the 1984 Cable Act, cities could require not only PEG channel capacity and equipment but, also, operating support from the cable operator to finance access operations. This operating support was used to pay salaries and various other associated expenses. Cable operators argue that Section 542 of the 1984 Cable Act prohibits cities from requiring that cable operators provide operational support for PEG access; however, cities are still allowed to require capital support for PEG access 2005516v1 21