How are Public Obligations Balanced?

A. Should the new entrant be required to build to all parts of the community?


1. The arithmetic of overbuilds is simple to understand. An over-builder needs 20 subscribers per mile of plant construction to pay off the capital investment of the new network. A conservative business plan may assume the overbuilder can reasonably expect to capture only ¼ of the current operator's subscribers. This means the overbuilder will argue against building to neighborhoods with densities below 80 homes per mile (1/4 x 80 = 20 subscribers per mile). This number is usually reached in urban neighborhoods and areas with multiple unit dwellings. But suburban areas with homes averaging lot widths greater than 50 feet will not qualify under a strict, unaveraged 80-homes/mile standard.

2. The original cable operator in the community (the incumbent) faced little or no competition. A 100% market share meant the incumbent could achieve 20 subscribers per mile by building down to densities of 27-homes per mile. (75% homes/passed by the cable system subscribe to cable. 75% x 27 homes/mile passed = 20 subscribers/mile). Most communities considered it important to assure that adequate television coverage was available everywhere in the community. As a result, the original cable franchises in most communities required a universal buildout of the cable network down to densities of 20 to 50 households/mile. It is true that the new fiber optic and digital technologies have reduced the cost of construction of the new overbuild networks. But the costs of the new networks are still significant. Overbuilders argue that they cannot succeed if they are required to serve everywhere the incumbent serves. The incumbent argues that without a universal service obligation, the new entrants will cherry-pick. Some cities are concerned that if a second franchise is authorized for a portion of the community, the remainder may not be attractive enough, standing alone, to ever attract a competitor.

B. How fast should construction be completed? This is both a practical and a political question. If the overbuilder constructs selectively, or on an extended schedule, there may be pockets where subscribers obtain the benefits of competition and pockets where subscribers remain dependent on the incumbent. In those situations, operators have sometimes dropped prices in competitive areas, while maintaining or even raising prices in areas that do not face competition.

C. Public, educational and government access obligations. Cable franchises often require the operator to provide channels, facilities, equipment and other support for public, educational and government ("PEG") use of the cable system. In many communities the incumbent's franchise required the incumbent to make a large cash payment at the beginning of the franchise term and requires the incumbent to provide additional regular cash payments throughout the franchise term, without regard to the number of subscribers actually served. The new entrant often will agree to assume PEG obligations on a per subscriber basis: that is, the overbuilder will divide the dollar obligations of the incumbent by the incumbent's subscriber base, and then offer to pay the same amount per subscriber as it obtains subscribers. This defers payment to the future when (presumably) the new entrant will have cash flow. The problem with this approach, in its simplest form, is that as the incumbent loses customers to the new entrant, the incumbent's subscriber base drops, and the amount it is paying per subscriber increases. In addition, this approach does not address embedded costs. Some communities are changing the incumbent's obligations at the same time the new entrant is granted a franchise, so that both operators pay on a "per subscriber" basis. Others are requiring up-front cash payments from the overbuilder to recognize the contributions made by the cable operator in the past, and then equalizing obligations going forward on a per subscriber basis.ⁱ The new entry provides an opportunity to address community changes that are not reflected in the incumbent's franchise -- e.g., there may be a performing arts center which should be connected to the cable system.

In addition, as suggested above, the franchise process provides a community an opportunity to reevaluate cable-related needs and interests in light of changes in technology, and to develop new franchise obligations that address issues not addressed in the incumbent's franchise. For example, some overbuild systems will be able to provide more robust, interactive PEG services that utilize the data and video capabilities of many of these new overbuild systems.

D. Institutional networks. An institutional network, or INET, is a part of a cable system devoted primarily to serving governmental and non-residential cable system users. The Cable Act allows a local government to require a cable operator to build an INET, and to dedicate capacity on that INET for educational and governmental use. Many operators have agreed in franchises to install a fiber INET dedicated exclusively to school or government use, at no or very low cost. INETs present similar, but even more difficult issues than PEG requirements. If the incumbent has already built an adequate INET, there may not be a need for additional facilities. Requiring the new entrant to pay part of the cost of the incumbent's institutional network may be problematic under the Cable Act, 47 U.S.C. §531; requiring an equivalent cash payment unrelated to an INET may create problems under the franchise fee provisions of the Cable Act, 47 U.S.C. '542. The issue would be whether such payments would be counted against the franchise fee limit. INETs can be such a critical component of a franchising authority's infrastructure. It is essential that INET obligations are coordinated, and that management of the INET is clear. The best solution is a multi-party agreement negotiated among the competing operators and the franchising authority. Is it necessary to say that does not occur often?

E. Term. Most communities are adopting shorter terms for incumbent franchise renewals. Experience proves that there is a need to revisit franchise issues frequently, particularly as technology changes accelerate. And the incumbent is not faced with a long pay-off period to recover its capital investment in a renewal of a pre-existing system. Overbuilders, however, are seeking long franchises in order to obtain better financing terms. The dilemma for the Franchising Authority is the accelerating pace of technological change, which promises to modify community needs and interests sooner rather than later. For example, there are certain to be new capital needs for digital PEG studio facilities, new INET issues, and new technical issues that will need to be addressed. If the new entrant's franchise is not coterminous with the incumbent's franchise, the local franchising authority has a problem avoiding a "least common requirement" demand from each operator as the agreements come up for renewal out of sequence.

F. Franchise fees. The federal franchise fee is based on gross revenues. Even though a new entrant may be substantially disrupting streets and roads, it will not owe a penny in franchise fees until it has customers. Even then, the revenues may not reflect the burden on the right-of-way for years. Some communities are requiring advance fee payments, where permitted by state law (federal law allows advance payments). 47 U.S.C. §542(b). Others are ensuring that permit fees are designed to recover costs, to at least ensure that the construction process does not cost the community money.

i The FCC has provided some guidance in this area through one of its OVS orders, In the Matter of Implementation of Section 302 of the Telecommunications Act of 1996 Open Video Systems, Third Report and Order and Second Order On Reconsideration, 1996 WL 457194, 11 FCC Rcd 20227 (1996).