CABLE PRIMER: LOCAL AUTHORITY OVER CABLE SYSTEMS
FRANCHISE RENEWAL
A local government has particular opportunities to enhance the local communications infrastructure
and to advance the quality of life in the community through the cable television franchise renewal
process.
Some contend that the renewal process is stacked against cities. The experience of many communities
suggests otherwise. While there are very few cases where a locality and an operator have completed
the ?formal? renewal process, in every case where a locality has been through the process and denied
renewal, the denial has been upheld by the courts. Union CATV, Inc. v. City of Sturgis, 107 F.3d
434, 438 (6th Cir.1977); Rolla Cable Sys., Inc. v. City of Rolla, 761 F.Supp. 1398 (E.D.Mo.1991);
Cablevision of the Midwest, Inc. v. City of Brunswick, Ohio, 1:99CV1442 (E.D. Ohio Dec. 18, 2000);
see also Communications Sys., Inc. v. City of Danville, 880 F.2d 887, 891-92 (6th Cir.1989).
Perhaps even more importantly, recent "informal" renewals include: (1) substantial system upgrades;
(2) substantial improvements in the quality of cable service; (3) contributions of television
channel capacity, facilities and equipment for local community programming; and (4) video, data and
voice facilities that link schools, libraries and government buildings so that these institutions
can communicate more efficiently with one another and with the public. These benefits have been
obtained in many communities without significantly increasing rates to consumers. The renewal
process. A request for a franchise renewal can be resolved informally, through negotiations.
Federal law has very little to say about the conduct of informal negotiations. It merely provides
that, once a renewal franchise has been negotiated, the franchising authority must notify the public
and provide an opportunity to comment on the renewal franchise before it is finally adopted. 47
U.S.C. ? 546(h).
But the Cable Act also spells out a more formal process. This formal process must be followed if
the operator or the City properly initiates it, although it can be stopped at any time if renewal
issues are resolved informally. Typically, localities have little reason to initiate the formal
process, but almost all operators do initiate it. In order to comply with federal law, a community
must take certain steps once the formal process is initiated. For that reason communities typically
move forward with the formal process and informal negotiations at the same time. Conceptually this
is no different than settlement negotiations in typical litigation ? the parties move forward
through the courts while at the same time trying to settle disputes amicably). In the end, most
renewals are resolved informally.
The formal renewal process is initiated either by the cable operator's submitting a written notice
to the franchising authority requesting the commencement of formal renewal proceedings, or by the
franchising authority?s initiating such proceedings on its own in the 30-36 month window before the
franchise is scheduled to expire. Any operator renewal notice must request that the franchising
authority commence renewal proceedings under the Cable Act. If the window is missed, the locality
has no obligation to follow the federal formal process? See Triad CATV, Inc. v. The City of
Hastings and Americable International-Michigan, Inc., 89-30090LA (W.D. Mich. filed October 2, 1989)
(operator lost renewal rights under Cable Act because notice requesting renewal not timely and
notice did not state intent to renew utilizing Cable Act procedures). However, the franchise or
state law may set certain unavoidable renewal requirements
The federal law formal process, once begun, can be divided into four stages.
First stage. The Cable Act directs the franchising authority to commence a proceeding within six
months from the date of submission of a renewal notice. The proceeding is to identify future
cable-related community needs and interests and review the past performance of the cable operator 47
U.S.C. ? 546(a). "Proceeding" is an undefined term and is best read as any process that allows the
community to develop and understand its needs and interests and the operator's past performance.
The proceeding can go on as long as desired. The "needs and interests" and "past performance"
ascertainment can be performed using a variety of tools, including public hearings, surveys, focus
groups, interviews, and reports and audits of the operator's past performance. In some communities,
this initial proceeding ends with the adoption of a staff report that lists the cable-related needs
and interests of the community, and evaluates the operator's past performance.
Second stage. Once the City has decided its needs and interests and reviewed the operator's past
performance, the initial proceeding is closed. The federal law then permits the City to reduce
these findings into a demand document to the operator, requiring the operator to submit a detailed
renewal proposal that addresses those findings. The City can issue a formal request for a renewal
proposal to the incumbent operator. That request may establish requirements, inter alia for
facilities and equipment, PEG channels and the like. 47 U.S.C. ? 531, 544(b). A franchising
authority can establish a deadline for submission of the operator's formal proposal. 47 U.S.C. ?
546(b)(3). Such deadlines must conform to state and local law and must be communicated to the cable
operator in writing. See Eastern Telecom Corporation v. Borough of East Conemaugh, 872 F.2d 30, 35
(3rd Cir. 1989). Best practices suggest that the request for renewal proposal should be issued
contemporaneously with the closing of the First stage proceeding. The federal law permits the cable
operator to submit a proposal on its own initiative upon completion of the first stage. 47 U.S.C. ?
546(b)(1). This may preempt the City's later request for renewal proposal and unnecessarily confuse
the procedural setting.
Within four months of receipt of the operator's formal proposal, the franchising authority must
either renew or issue a preliminary assessment that renewal should be denied. It may be possible to
delay this deadline by agreement, although that issue has not been firmly resolved, FrontierVision
Operating Partners, L.P. v. Town of Naples, 2001 WL 220192 (D.Me., Mar 07, 2001).
Third stage. If the franchise is not renewed, the cable operator can require the City to commence
an administrative proceeding before making a final determination to grant or deny renewal. 47
U.S.C. ? 546(c)(1). The cable operator must be given adequate notice and fair opportunity for full
participation in the administrative proceeding, including the right to introduce evidence, to
require the production of evidence and to question witnesses. A transcript of the proceedings must
be made.
Four issues are considered in the administrative hearing. Those are:
Whether the cable operator has substantially complied with the material terms of the franchise and
applicable law.
Whether 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.
Whether 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. The mere fact that an
operator is large or well-funded does not mean it is qualified ? it is also important to consider
whether the operator is willing to devote the resources required to serve a community properly.
Whether the cable operator's proposal is reasonable to meet the future cable-related community needs
and interests, taking into account the cost of meeting such needs and interests.
The franchising authority may not deny a proposal merely on the basis of a comparative bid that
offers more, but "a court should defer to the franchising authority's identification of the
community's needs and interests except to the extent necessary to weigh the needs and interests
against the cost of implementing them." Union CATV, Inc. v. City of Sturgis, 107 F.3d 434 (6th Cir.
1997).
Upon completion of the administrative proceeding, the franchising authority must issue a written
decision stating the reasons for denial. 47 U.S.C. ? 546(c)(3). The operator can appeal the
franchising authority decision to the courts, but is not entitled to have the court conduct a new
hearing to determine whether the franchise should be renewed. The court reviews the record of the
proceeding below, and (absent procedural error) must affirm unless the operator proves that the
decision of the franchising authority was not supported by a preponderance of the evidence. 47
U.S.C. ?? 546(e)(1), 555. Renewal challenges.
While the basic outline of the renewal process is clear, cable operators have begun to raise
fundamental challenges to local franchising authority under the Cable Act on statutory and first
amendment grounds. Among the outstanding questions:
What system rebuild requirements can a community establish? The cable industry argues that 1996
changes to the Cable Act prohibit communities from requiring a company to install fiber optics, or
from requiring any particular system design. The FCC has stated that there are some limitations on
local authority: according to the FCC, a community may not dictate "whether a cable operator uses
digital or analog transmissions [or to] determine whether its transmission plant is composed of
coaxial cable, fiber optic cable or microwave radio facilities ...." However, the FCC went on to
state that "[w]hile the 1996 Act imposes some specific limits of the role [local franchising
authorities] play with respect to subscriber equipment and transmission technology, it does not
diminish the [local franchising authorities'] important responsibilities in determining local
cable-related needs and interests and seeing that those needs are met through the franchising and
renewal process. Although local authorities are limited in dictating the use of transmission
technologies, other facility and equipment requirements can still be enforced..." The FCC decision
has led many operators to argue (the authors believe, incorrectly) that design requirements are
prohibited altogether, or that requirements that have an effect on design choices are prohibited.
Such a reading may prove difficult to square with the wording of the statute (since it allows
localities to establish facilities and equipment requirements at 47 U.S.C. ? 544(b)) and the
language quoted above. As importantly for the industry, any ruling that prevents a locality from
establishing meaningful build requirements should also lead cities to significantly shorten
franchise terms ? since one of the justifications for a longer franchise term has traditionally been
the need to recover funds invested to meet franchise construction requirements.
Institutional Networks? Communities commonly require operators to provide institutional networks to
link schools, libraries and governments for video, voice and data communications. I-Nets take a
variety of forms. In some cases, the "I-Net" is a frequency set aside on the established network; in
some cases, the operator provides fiber optic links, and the community is responsible for purchasing
end-user equipment necessary to "light" the fiber and use those links; in some cases, operators
agree to provide a pool of funds that can be used to pay for a certain amount of construction and
equipment. I-Nets are traditionally planned to transport video, data and voice. The 1984
legislative history notes that institutional networks were being used ?to provide communications
facilities that link almost all individuals and institutions in a universally available
communications network.? The legislative history explains that localities may establish ?facilities
and equipment requirements? for institutional networks pursuant to 47 U.S.C. ? 544(b). Nonetheless,
some cable operators are now arguing, inter alia that (a) localities cannot require operators to
build I-Nets; and (b) that I-Nets are restricted to internal communications, or to video
communications. Some operators do not make these arguments explicitly, but propose I-Net language
containing restrictions on use which seem inoffensive but which have the effect of preventing
interconnection of the I-NET to other networks, or which prevent a community from providing services
to the community (such as transmission of GIS information) and recovering costs associated with
providing that service.
PEG Requirements? Communities have required operators to set aside subscriber network channels for
public, educational and government use for some time now - and many communities that have obtained
adequate financial support for those channels generally have found them to be an invaluable
communications asset to the community. As companies move into a new digital world, however, new
questions arise: can the community control the new digital capacity for PEG purposes and use this
digital capacity to provide multiple channels of video and non-video information to subscribers?
homes? If the operator controls all of the digital capacity, will PEG be precluded from digital use
entirely, or limited only to the bandwidth required to send a one-way video channel to the home,
thereby limiting the type and amount of information that can be provided via PEG channels? Should
some PEG programming be provided ?on-demand? just as commercial programming is provided ?on-demand??
To what extent can communities insist that PEG users be permitted to take advantage of cable system
capabilities for simultaneous transmission of video and data? Some operators argue that PEG is
limited to transmission of one-way video ? meaning that PEG users would not be able to take
advantage of technology developments.
Scope of the franchise. Operators often seek to include language in the franchise which effectively
authorizes provision of telecommunications and other services without obtaining any additional
license or franchise. Operators will often argue that 1996 amendments to the Cable Act require
cities to allow cable operators to provide telecommunications services without such additional
authorization. This argument is tenuous to say the least [see HYPERLINK "www.millervaneaton.com"
www.millervaneaton.com for more on this topic]. While operators sometimes contend that the issue
was resolved in their favor by the FCC, the issue has specifically not been resolved by the
Commission. See Inquiry Concerning High-Speed Access to the Internet Over Cable and Other
Facilities; Internet Over Cable Declaratory Ruling; Appropriate Regulatory Treatment for Broadband
Access to the Internet Over Cable Facilities, GN Docket No. 00-185, CS Docket No. 02-52 (?Cable
Modem Rulemaking?), Declaratory Ruling and Notice of Proposed Rulemaking, FCC 02-77 at ??38 (March
15, 2002) (?Cable Modem Ruling?).
Why is the debate significant? Local authority to charge for use of the rights-of-way to provide
non-cable services could be affected. Prior to 1996, the franchise fee provisions of the Cable Act
permitted localities to require operators to pay a franchise fee equal to 5% of gross revenues
derived from the operation of the cable system. 47 U.S.C. ? 542. As part of the Telecommunications
Act of 1996, Congress amended the franchise fee provisions of the Cable Act to provide allow
imposition of a Cable Act franchise fee on gross revenues derived from the operation of the system
?to provide cable services.? While the amendment limited fees that could be imposed under the
federal Cable Act, the conferees indicated that they did not intend to prevent imposition of
franchise fees on other services ?to the extent permissible under State and local law.? H. Rep. No.
104-458, 104th Cong 2d Sess. at 180 (1996) (noting cable operators could be required to pay ?fair
and reasonable fees? in connection with the provision of telecommunications services). An operator
that convinces a community to issue a franchise authorizing the construction of a cable system,
without limiting the services authorized by the franchise, can be expected to claim that the fees
and charges it must pay are limited to those specified in the cable franchise. Fees in post-1996
franchises typically do not reach telecommunications or other non-cable services.
Several of the issues described above have been preliminarily debated in a court case involving
Comcast and the City of San Jos?. Comcast claimed, among other things that the Cable Act strictly
limited what a community can do with an institutional network, and that amounts contributed by an
operator to support construction of an institutional network must be treated as part of the
franchise fee payment. Comcast also argued that PEG requirements must be limited to one-way video
programming. Comcast claimed that the City was demanding things through the renewal process that it
could not demand and that the court should stop the renewal process in the City until the City had
reformed that process. In 2003, the district court rejected Comcast?s motion for a preliminary
injunction. Comcast of California II, LLC v. San Jos?, No. 5:03-cv-02532-RS (N.D. Cal. Sept. 29,
2003). In 2004, the district court dismissed Comcast?s claims entirely, concluding that, because
Comcast?s request for renewal had not been finally denied, its contentions were not yet ripe for
determination. A copy of the unpublished decision is attached to this paper. While the decision is
quite favorable to the City and preserves the integrity of the process, the decision does not
resolve the merits of Comcast?s complaint. Comcast has appealed the decision to the Ninth Circuit.
The "level playing field" demand? Almost all operators are now demanding a renewal clause that
requires anyone who provides cable service within the community to satisfy the same conditions as
those imposed on the incumbent operator. These clauses can create several significant problems for
local governments. First, in 1996 Congress authorized local telephone companies and other entities
to enter the cable services market by building open video systems (?OVS?). An OVS provides services
similar to those provided by traditional cable operators, but an OVS operator is required to set
aside up to a third of the capacity of its system for lease to other companies. In return for
assuming this common-carrier type obligation, an OVS is relieved of several federal requirements
that apply to cable operators ? including the obligation to construct an institutional network. 47
U.S.C. ? 573. The OVS provisions of federal law do not preempt local franchising authority, City of
Dallas v. FCC, 165 F.3d 341, 347 (5th Cir. 1999). OVS operators contend that the federal provisions
do eliminate local authority to impose requirements such as build-out and universal service
requirements on an OVS. At least one court has rejected that position, WH Link, LLC v. City of
Otsego, 664 N.W.2d 390 (Ct. App. Mn. 2003), but the matter is not finally settled. Depending on the
franchise language and scope, a level playing field clause (a) may prevent a locality from adopting
a deregulatory policy for OVS paralleling the federal policy; and (b) may face the locality with the
prospect of litigation from the OVS (challenging local franchise requirements) or from the cable
operator (seeking to enforce the level playing field contract).
More generally, new entrants into the market often argue that applying the same requirements to them
effectively makes it impossible to enter the market. For example, new entrants often argue
overbuilds will only work in very high-density areas, so that a ?level playing field? clause that
requires a build out of 100% of the incumbent?s territory prevents entry. One may agree or disagree
with this analysis; the point is that a level playing field clause can limit the ability of local
government to develop rules to promote competition.
Many communities try to avoid the formal process because they are intimidated by the complexity and
expense. That is usually a mistake. The cable operator has no incentive to agree to more stringent
franchise terms if there is no risk of non-renewal. Negotiations can drag on for years, be just as
expensive as the formal process in terms of time and effort, and may effectively result in long,
ongoing franchise extensions, with the resulting loss of improved service during the franchise
extension period. The formal process provides a means for finally resolving disputes if the parties
are unable to negotiate a fair deal. The formal process should generate information that is useful
to both parties in negotiating a settlement, and the process can be timed to enhance the prospects
for successful completion of the negotiation process. With respect to the first two standards,
renewal cannot be denied based on violations occurring after 1984 unless the cable operator was
given notice and opportunity to cure the defects in performance. 47 U.S.C. ? 546(d). While notice
could be given during the first stage of the renewal process, this requirement underlines the
importance of ongoing enforcement. Implementation of Cable Act Reform Provisions of the
Telecommunications Act of 1996, Report and Order, FCC 99-57, 14 FCC Rcd. 5296 at ? 141 (March 29,
1999). Id. at ? 142. 1984 U.S.C.C.A.N. 4655, 4664 (1984). The legislative history goes on to
recognize that I-Nets were being to provide data transmission services. Id. at 4665. 1984
U.S.C.C.A.N. at 4705.
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