Major Changes Ahead for CATV
(from Maine Townsman, December 1984)
by Charles Woodard, MMA Cable Consultant

Congress has enacted, and the President has signed, legislation which significantly affects the rights and authority of municipalities and states in dealing with cable television systems. The new law, introduced in the Senate as S 66 and in the House as HR 4103, is entitled the Cable Franchise Policy and Communications Act of 1984.

This article reviews significant provisions of the new law. ("Cities," as used in this article, includes any governmental body with cable franchising authority. Quotations are from the new law itself or from the explanatory House Commerce Committee Report on HR 4103.)

The new law is of benefit to cities in one important respect: according to the House Report, the law "establishes the authority of local governments to regulate cable television through the franchise process." Some cable companies have challenged city authority to impose any requirements on cable systems other than requirements directly related to cable use of public rights of way, asserting that cities have no right, for example, to regulate cable operations, specify channel capacity, require payment of franchise fees or require access channels.

The new law eliminates almost all rationales for cable company challenge to city authority. Some cable companies are still claiming a "First Amendment" prohibition of municipal regulation and collection of franchise fees, but in my opinion the courts will not uphold this position. And there should be no supportable basis for any asserted violation of federal anti-trust laws, as has been claimed by some cable companies in past franchise award proceedings, if the city follows proper procedures in the franchise award, renewal and negotiation process.

The sections of the bill which most significantly impact city/cable system relations are those dealing with franchise award, franchise renewal, rate regulation and franchise fees.

Franchise Award and Renewal

The law provides that cities setting requirements for a new franchise or a franchise renewal "may establish requirements for facilities and equipment, but may not establish requirements for video programming or other information services . . ." Cities may require "a specified number of (public, educational and governmental) access channels and, as to any institutional network, a specified number of educational or governmental channels." Cities are also permitted to establish "provisions for enforcement of ... customer service requirements" and "construction related requirements."

The House Report describes customer service requirements as matters related to "the direct business relation between a cable operator and a subscriber," such as billing, response to service calls, location of a business office, etc.

According to the House Report, the facility and equipment requirements which a city may specify include, among other things, requirements relating to channel capacity, institutional networks, two-way capability and addressability, and, for public, educational and governmental access use, "microwave facilities, antennae, satellite earth stations, uplinks, studios and production facilities, vans and cameras.

However, in the case of a franchise renewal, any facilities and equipment requirements must be "reasonable (requirements) to meet ... further cable-related community needs and interests, taking into account the cost of meeting such needs and interests" (discussed below).

As for programming services, according to the House Report, a city may not require "particular video or other information services, or even a broad category of video or other information service." However, a city "may enforce any requirements contained within the franchise ... for broad categories of video programming or other services offered by the cable operator and incorporated into a new franchise."

In other words, the House seems to be saying that a city may specify neither specific programs and services nor broad categories of programs and other services in a Request For Proposals ("RFP") for a new or renewal franchise, but if the cable operator offers broad categories of such services, these services may be specified in the franchise as a requirement and the requirement can be enforced.

What this means in practice is that, although a city in the process of granting a new or renewal franchise may not require either specific or broad categories of services, it should make every effort to encourage franchise applicants to offer "broad categories of video programming (and) other services."

Examples of broad categories, suggested by the House Report, include "children's programming; programming in a particular foreign language; programming which is primarily of interest to a particular minority group; news and public affairs programming; (and) sports programming."

The law contains detailed provisions governing renewal of a franchise. According to the House Report, the legislation is designed to "protect the cable operator against any unfair denial of renewal," and to assure that "a cable operator whose past performance and proposal for future performance meet the standards established by "the new law" be granted renewal."

The specified renewal process includes, among other things, a requirement that the city conduct an administrative proceeding "to consider" (1) whether "the cable operator has substantially complied with the material terms of the existing franchise and with applicable law;" (2) the quality of the operator's service; (3) the operator's "financial, legal and technical ability;" and (4) whether "the operator's proposal is reasonable to meet ... future cable-related community needs and interests, taking into account the cost of meeting such needs and interests."

Upon completion of the administrative proceeding, the city must issue a written decision granting or denying the renewal and specifying, if a denial, the reasons for the denial. A denial to renew must be based on an adverse finding with respect to one or more of the four issues considered at the administrative proceeding.

The cable operator denied a renewal may appeal to the courts, but to prevail must establish in court that the city's decision "is not supported by a preponderance of the evidence, based on the record of the (administrative) proceedings . . ."

This step-by-step renewal process can be interrupted and discontinued at any time if the city and cable operator reach agreement on the terms of a new franchise. Discussions to that end may be initiated by either party at any point in the process.

Of the four renewal issues, two are particularly important and require maximum thought, consideration and planning by cities: proposals for the future and quality of past performance.

On the reasonableness of proposals for the future, this is uncharted territory. The House Report attempts to give some guidelines, but this issue will undoubtedly be the subject of protracted disputes between cities and cable systems for years.

The crux of the problem is that, in this rapidly evolving industry, what is a reasonable proposal based on today's state-of-the-art and present conditions in a city may be absolutely unreasonable five years from today. This presents the issue of balancing the cable operator's desire/need for a long term franchise in which to recover his investment and make what he considers to be a reasonable profit, and the city's need not to be stuck with an obsolete system for an unreasonable length of time.

What is required for cities today is careful thought, planning and imagination in negotiations with the cable operator and especially in drafting a new franchise. At a minimum, if a ten or fifteen year franchise is granted, the city must retain an option in some form to require system upgrading before the franchise expires.

On the subject of past performance, it is absolutely crucial that cities keep careful track of the cable system's performance, notify the system and demand correction when there are failures in performance, and keep a written record. The statute provides that a franchise renewal may not be denied for failure to comply with franchise requirements "unless the (city) has provided the operator with notice and the opportunity to cure" the branch. The House Report states:

"The extent to which the (city) has explicitly or implicitly concurred with ... variations from the franchise terms should be taken into account in assessing the operator's compliance ...

In other words, ignoring violations of franchise provisions could be held to be an implicit concurrence with such violations. The result would be that such violations could not be used as the basis for denial of a franchise renewal, an option (denial) which a city might find extremely important in dealing with a recalcitrant operator of a poorly run cable system.

One additional point to bear in mind: according to the House Report, the second issue - quality of the operator's service - refers to operational services such as response to subscriber complaints, billing problems, etc., not to "the quality or level of particular programming services or other cable services." And, if a franchise is transferred with city approval, in considering this "quality of service" issue the city can only review service during "the period in which the franchise was held by the operator seeking renewal." This suggests that cities should approach a request for approval of a transfer of control of a cable system with great care, especially towards the end of the term of the franchise.

Rates

Cities may no longer regulate any of the rates charged by cable systems, except as noted below and except that cities may regulate basic cable service rates "where a franchise has been granted on or before the effective date of the [new law], to the extent provided in [the] franchise," and subject to any restrictions imposed by state law or regulation. Even this authority expires two years after the effective date of the statute, however. The authority includes the right to regulate rates charged for the minimum equipment necessary for a subscriber to receive basic cable service, including, with no two-year limit, special equipment for the hearing impaired.

"Basic cable service" is defined as any service tier or tiers which include "must carry" stations (as defined by the FCC).

During this two-year period cities may continue to require any free service tiers specified in an existing franchise.

A city which has rate regulation authority must take final action within 180 days of a request for approval of a rate increase or the city will be deemed to have approved the increase. (This period may be extended by mutual consent.)

In addition, unless the franchise "provides that a rate will be frozen at a particular level or levels for a specified period or periods, the cable operator may automatically increase any rate by 5% each year," subject to certain restrictions.

Rate regulation after the two-year period will be permitted only in communities in which, as determined by standards to be established by the FCC, "a cable system is not subject to effective competition." The FCC is required to establish these standards within 180 days after the effective date of the new law.

Note that city regulation of rates in such "non-competitive" communities will be limited to regulation of basic service rates, will be subject to any state restrictions on city authority to act, and such regulation is authorized only to the extent provided in the franchise. That is, the statute confers no regulatory authority on cities beyond what is specified in each city's franchise. At this point there is no way of knowing what standards the FCC will adopt, and cities should prepare, in franchise negotiations and drafting, for any eventuality. Cities which want to regulate rates should provide for rate regulation in all new franchises, with the obvious understanding that any such provisions will be subject to applicable federal law and regulation.

Franchise Fees

A franchise fee in the maximum amount of 5% of gross revenue is authorized. The FCC 3% limit is no longer in effect. However, this provision permits a city to collect a franchise fee only to the extent provided in the franchise. A cable system operating under a current franchise which provides for a 3% franchise fee, for example, would only be required to pay 3% until the franchise is renewed or renegotiated.

"Franchise fee" is defined as "any tax, fee or assessment of any kind," and the 5% cap is intended to apply to any payments required to be made by the cable operator, whether or not designated as franchise fees.

There are exceptions, and certain payments are not considered franchise fee payments and are therefore not subject to the 5% ceiling: taxes, fees and other assessments of "general applicability;" certain costs connected with public, educational and governmental access channels; and "charges incidental to the awarding or enforcing of the franchise."

Other Provisions

Other provisions include

* A requirement that cities "prescribe rules and procedures for the use of unused [public, educational and governmental] channel capacity by the cable operator;"

* Detailed requirements for the designation of specified numbers of channels for commercial (i.e., leased) access use, and the establishment of rules governing the operation of such channels; and

* Authorization for the cable operator to avoid some franchise obligations if he can establish to the satisfaction of the city, or the courts on an appeal from an adverse city decision, that compliance with a franchise requirement is "commercially impracticable."

Among other provisions are sections which deal with restrictions on ownership of a cable system; city purchase of a cable system; protection of subscriber privacy; obscenity; changes in the franchise fee; consumer access to cable service; unauthorized reception of cable service; equal employment opportunity; regulation of non-cable services; and the grandfathering of certain provisions in existing franchises.

The law is complex and, as is often the case with legislation which has been the focus of hotly contested points of view, is something less than clear in all of its requirements. Maximum thought, care and planning by cities in dealing with cable operators and franchise applicants is required if cities are to get satisfactory service from cable systems.