NEIL J. LEHTO
Attorney and Counselor at Law
4035 IVERNESS LANE
WEST BLOOMFIELD, MICHIGAN 48323-1714

____________

TELEPHONE AND FACSIMILE (248) 851-4276
E-MAIL nlehto@municable.com
March 28, 2006

TO: Municipal Clients and Others

FROM: Neil J. Lehto

RE: National Franchise Bill

Hurried-up draft legislation to be taken up by the Committee on Energy and Commerce of the U.S. House of Representatives on Thursday would attempt to end municipal franchising of cable television systems, allowing AT&T and others to begin offering competitive video services here and across the country 30 days after making a brief filing with the Federal Communications Commission ("FCC"). Cable television operators would continue to be bound by their existing municipal franchises until a nationally-franchised system began offering service locally at which time they could opt-into a national franchise themselves by making a similarly brief filing with the FCC.

The national franchise has very few requirements:

* The service area is already served by a cable television system. Areas not served by a cable operator would need a traditional franchise locally negotiated.

* the draft legislation requires payment of franchise fees not exceeding 5 percent of gross revenues, including advertising and home shopping, but DOES NOT specify how the percentage will be decided. This glaring omission highlights the sloppiness of this bill.

* The competitive provider would be required to connect to and provide the same channel capacity on its system as the existing cable operator for public, educational and governmental access use and pay 1 percent of gross revenues for PEG support. Cities, villages and townships may require one additional PEG channel every 10 years. [1]

* The FCC is required to adopt national consumer protection and customer service standards for enforcement locally by cities, villages and townships, subject to nominal enforcement-related fees and appeal to the FCC, which would be required to issue a final decision within 30 days.

* The Cable Act's leased access, emergency alert (absent any enforcement mechanism) and other requirements generally would apply to a system with a national franchise.

* The bill grandfathers any existing institutional networks but otherwise prohibits them from being required. This provision the bill superfluous since I-Nets can be required only under a locally-negotiated franchise -- suggests that it proponents barely understand municipal franchising.

* For reasons which defy explanation, the legislation exempts nationally-franchised systems from certain requirements of the U.S. Cable Communications Policy Act of 1984, as amended, regarding cross-ownership of broadcast stations and notice to customers of changes in channel line-ups and rates.

* The national franchise to provide service in any particular service area has a 10-year term subject to automatic renewal.

* The draft legislation deals with build-out and redlining by neighborhood income requirements of existing federal law and municipal franchises by authorizing the FCC to enforce a vague requirement that

[a] cable operator with a national franchise under this section shall not deny access to its cable service to any group of potential residential cable service subscribers because of the income of that group.] The language of the bill does not define the geographic area across which this standard applies. Consequently, it fails to have any meaningful impact.

It's noteworthy that Representative Fred Upton (R-St. Joseph) has scheduled a hearing beginning at 10 a.m., March 30, 2006, on "H.R. ____, a Committee Print on the Communications Opportunity, Promotion, and Enhancement Act of 2006" although that title does not appear anywhere in the draft obtained late yesterday.

The 34-page bill includes provisions which direct the FCC to enforce without further rulemaking its broadband policy statement adopted on August 5, 2005, In the Matters of Appropriate Framework for Broadband Access to the Internet Over Wireline Facilities and Other Matters (FCC 05-151), which consisted of a three-page document stating the following:

"[T]he Commission has jurisdiction necessary to ensure that providers of telecommunications for Internet access or Internet Protocol-enabled (IP-enabled) services are operated in a neutral manner. Moreover, to ensure that broadband networks are widely deployed, open, affordable, and accessible to all consumers, the Commission adopts the following principles:

To encourage broadband deployment and preserve and promote the open and interconnected nature of the public Internet, consumers are entitled to access the lawful Internet content of their choice.

To encourage broadband deployment and preserve and promote the open and interconnected nature of the public Internet, consumers are entitled to run applications and use services of their choice, subject to the needs of law enforcement.

To encourage broadband deployment and preserve and promote the open and interconnected nature of the public Internet, consumers are entitled to connect their choice of legal devices that do not harm the network.

To encourage broadband deployment and preserve and promote the open and interconnected nature of the public Internet, consumers are entitled to competition among network providers, application and service providers, and content providers."

Finally, the bill also preempts any state law prohibiting cities, villages and townships from providing any cable, telecommunications or Internet service.

This initial, rough draft of national franchise legislation runs head-long into the centuries old common law of public utility franchises. The issue of federal preemption of state and local cable television franchising under the interstate commerce has received scant attention by the courts. Regulations adopted by the FCC in March 1966 regarding cable television were upheld by the U.S. Supreme Court in United States v. Southwestern Cable Co, 392 U.S. 157 (1968) The Court ruled:

"[T]he Commission has reasonably concluded that regulatory authority over CATV is imperative if it is to perform with appropriate effectiveness certain of its responsibilities."

The Court found that the FCC needed authority over cable systems to assure the preservation of local broadcast service and to effect an equitable distribution of broadcast services among the various regions of the country. A few years later, in TV Pix, Inc., v. Taylor, 304 F. Supp. 459 (D. Nev. 1968) aff'd per curiam 396 U.S. 566 (1970) the role of local government in regulating cable television as a public utility subject to the franchise requirement was upheld by a three-judge court in a challenge to a Nevada statute specifically providing for such regulation. In affirming the local role, however, the court observed that certain aspects of cable television service -- those affecting interstate commerce -- were within the authority of federal law:

"Unquestionably, there is an area of where the Commerce Clause of the Constitution is in a sense self-executing; that is to say, state legislation of a certain kind in certain circumstances is adjured by the Constitution itself, regardless of whether Congress has acted."

On the other hand, the court disagreed that requiring a local public utility franchise was an activity affecting interstate commerce:

"We do not view the subjects of regulation contemplated by the Nevada statute, i.e., the quality of and rates charged for community antenna service, as being of the character demanding national uniformity so that state action is entirely inadmissible. On the contrary, these are subjects which lend themselves naturally to local control and supervision. National uniformity is probably not a possibility, let alone an acceptable ideal."

I observed earlier that this draft legislation is hurried-up. I make that judgment based on the following:

* The bill lacks any legislative findings, stating why the U.S. Congress should preempt state and local franchising of cable television. In 1984, the Committee on Energy and Commerce of the U.S. House of Representatives issued a report on what became the U.S. Cable Communications Policy Act of 1984. In that report, the Committee said:

"It is the Committee's intent that the franchise process take place at the local level where city officials have the best understanding of local communications needs and can require cable operators to tailor the cable system to meet those needs. However, if that process is to further the purposes of this legislation, the provision of these franchises, and the authority of the municipal government to enforce these provisions, must be based on certain important uniform Federal standards that are not continually altered by Federal, state or local regulation."

The wholesale federal preemption of municipal franchising 22 years later is hardly justified today.

It is important to note that municipal franchising of cable television systems has never been an obstacle to competitive entry by telecommunications companies. In 1969, cable television operators served about 6 percent of the country. In 1970, the entry of telecommunications companies into providing cable television service was banned by the FCC because of what it said was the industry's control of poles and conduits and their ability to preempt the market through discriminatory access. [2] In Michigan, however, almost all poles and conduits were then and are today owned by the electric utility companies, not Ameritech or Verizon, the two dominant telecommunications providers.

Nonetheless, in 1984, the U.S. Congress passed the U.S. Cable Communications Policy Act. Section 613(b) of the 1984 Cable Act made statutory the dubious FCC ban of 18 years before. In 1988, the FCC concluded that the telco-cable cross-ownership ban was constitutional. [3] In 1992, in the First Video Dialtone Order, [4] the FCC reversed course on grounds that growth of the cable television industry since 1970 had reduced the danger that telephone companies could exclude independent cable operators from the marketplace and that, with appropriate safeguards, there would be little risk of anti-competitive conduct. Over the next three years, the FCC embarked on a futile effort to adopt rules allowing telecommunications companies to do so. [5]

Meanwhile, frustrated with delay at the FCC, the telecommunications companies sought judicial relief. On August 24, 1993, the U.S. District Court for the Eastern District of Virginia struck down the telco-cable cross-ownership ban as a violation of the First Amendment and the Fourth Circuit affirmed. [6] The Ninth Circuit and district courts in five other jurisdictions also found the ban unconstitutional, including a challenge by Ameritech, which said it wanted to build competitive systems in Michigan, Ohio, Indiana and Illinois. [7] Meanwhile, Ameritechâ~@~Ys application for approval to begin construction of its competitive video dialtone system in southeastern Michigan filed in 1994 languished before the FCC. Finally, on December 23, 1994, the FCC acted. [8] There followed a petition for re-consideration and further wrangling. The FCC initiated new proceedings seeking comment on how it should alter its video dialtone regulations to facilitate the competitive entry of telephone companies. [9]

In early 1995, awaiting a ruling on the petition for reconsideration from the FCC, Ameritech itself changed course, undertaking efforts to begin secure cable television franchises within the areas it had earlier sought approval from the FCC to offer video dialtone service, using the engineering and marketing data it had already prepared. It started against the weakest cable operator in southeastern Michigan. Its subsidiary, Ameritech New Media, quickly concluded franchise negotiations with four communities and the cable television industry just as quickly filed objections to its application to the FCC under §214 for streamlined approval to proceed. [10] The cable television industry launched a series of other complaints against Ameritech New Media here and elsewhere, all of which were eventually rejected by the FCC, in proceedings which consumed more time than was taken in negotiating these four franchises with local government.

The FCC did not issue its decision re-affirming and dismissing the petition for re-consideration and until October 6, 1995 amidst the complete re-writing of U.S. telecommunications law pending by the U.S. Congress, which appeared poised to strike down the ban on telco-cable television cross-ownership. After several false starts and last minute political wrangling, the U.S. Congress passed the sweeping new law on February 1, 1996 by overwhelming margins. President Clinton signed the Act into law in a ceremony at the Library of Congress on February 8, 1996. The Act repealed the telco-cable cross-ownership ban and also terminated video dialtone regulations. It substantially abolished the historic barriers to cable's delivery of telephone services. It declares that no state or local laws or regulations "may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service." In addition, the Act superseded the MFJ, GTE consent decree and AT&T-McCaw consent decree. A telecommunications provider such as Ameritech providing video programming to subscribers is treated as any other cable television operator, subject to the 1984 Cable Act, including municipal franchising, PEG and leased access, customer service and other requirements, unless Ameritech elected to provide its programming via an open video system that replaced the FCCâ~@~Ys ill-fated video dialtone scheme.

* As already mentioned, the title of the bill scheduled for a hearing on Thursday is missing from the draft.

* There are numerous typos in the draft, i.e., line 17 of Page 6 and line 14 on Page 15.

* The bill reflects a lack of understanding of how PEG channels are actually delivered in many communities with multiple school districts where programming is geographically- segregated on a single educational channel. Subparagraph 630(e)(4)(A) of the bill requires that all PEG channels be delivered throughout each subscriber's franchise area -- which is undefined.

* The bill imposes what cable operators would call an extremely burdensome obligation to display program information for PEG channels in an print or electronic program guide it provides to subscribers.

* Provisions of the bill regarding access to easements will raise the ire of owners of multiple dwelling units. It is apparent that drafters of the legislation intend to give competitive providers access to apartments, mobile home parks and condominium developments, which have existing exclusive license agreements with cable operators.

* The bill specifically directs the FCC to update its consumer protection and customer service rules for enforcement by state and local government but also provides in subparagraph 630(g)(6) that "an order of a local franchising authority under this subsection shall be enforced by the Commission."

* The bill provides no mechanism by which state and local government may require a nationally-franchised cable operator offering cable service locally to connect to them for the transmission of local and regional emergency alerts.

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[1] . The bill provides that a franchising authority may require a cable operator having a national franchise to increase the channel capacity designated for public, educational or governmental use, and the channel capacity designated for such use on any institutional network by the higher of one channel or 10 percent of then existing PEG capacity. This 10 percent requirement is rather quirky.

[2] . Application of Telephone Companies for Section 214 Certificates for Channel Facilities, 21 F.C.C.2d 307, 325, aff'd sub nom. General Telephone Company of the Southwest v. United States, 449 F.2d. 846 (5th Cir. 1971). The ban was codified at 47 C.F.R. § 64.601.

[3]. Telephone Company-Cable Television Cross-Ownership Rules, 3 F.C.C.R. 5849, 5864 (1988) (Further Notice of Inquiry and Notice of Proposed Rulemaking).

[4]. Telephone Company-Cable Television Cross-Ownership Rules, 7 F.C.C.R. 5781, 5820 (1992)(Second Report and Order, Recommendation to Congress and Second Further Notice of Proposed Rulemaking).

[5]. Putting a timer on the U.S. Congress, FCC and local government decision-makers regarding competitive entry applications by telecommunications providers suggests that cities, townships and villages across the country are many, many years ahead of the U.S. Congress and the FCC in bringing competition to cable television.

[6]. Chesapeake & Potomac Telephone Company of Virginia v. United States, 830 F. Supp. 909 (E.D. Virginia 1993) aff'd 42 F.3d. 181 (4th Cir. 1994).

[7]. Ameritech Corp. v. United States, 867 F. Supp 721 (N.D. Ill. 1994).

[8]. In the Matter of the Application of Ameritech Operating Companies, FCC 94-340 adopted December 23, 1994.

[9]. Telephone Company-Cable Television Cross-Ownership Rules, 60 Fed. Reg. 8996 (1995)(Fourth Further Notice of Proposed Rulemaking).

[10]. In the Matter of the Applications of Ameritech New Media Enterprises, Inc., DA 95-1954, adopted September 11, 1995.

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