A. Informal Procedures
- Most franchises renewed through informal negotiation process set forth in Sec. 626(h).
- Congress anticipated that most renewals would be through the informal process. House Report at 72.
- Informal proceedings can be conducted at any time and do not affect the rights of the cable operator to proceed under the formal procedures if an appropriate renewal notice has been sent. TCI of South Carolina, Inc., v. The City of Bennettsville, 4.89-0334-2 (D.S.C. filed July 17, 1990).
- Once a successful franchise renewal has been negotiated, the franchising authority must notify the public and provide an opportunity to comment on the renewal before it is finally granted. Sec. 626(h).
B. Formal Renewal Procedures
A. Background
- If the cable operator has timely requested its formal renewal rights, the City cannot deny renewal cannot without recourse to the formal process (unless the operator defaults on the process).
- It may be possible to revoke a franchise even after renewal proceedings have begun.
B. Needs Ascertainment
- First stage in formal renewal process>. Process intended to give public and franchising authority opportunity to identify future cable-related community needs and interests and review past performance of cable operator (Sec. 626(a)).
- Ascertainment can be accomplished through a variety of tools, including public hearings, surveys, focus groups, interviews, and reports and audits of the operator's past performance.
- No Time Limit. The Franchise Authority determines when the Ascertainment Process is completed. No single study or report automatically concludes the Ascertainment.
C. Renewal Proposal
- Second stage of renewal process. Proposal submitted by operator either upon request of franchising authority or upon cable operator's initiative after the Franchise Authority completes the Ascertainment Process.
- A request for proposal issued by franchising authority may establish requirements for facilities and equipment that are related to operation of system, including proposals for an upgrade, subject to Sec. 624(b).
- Franchise fee is limited to 5% of cable operator's gross revenue "related to cable services". However, not all payments made by the operator are franchise fees, e.g., funds contributed by cable operator as capital costs of PEG are not considered part of franchise fee (Sec. 622(g)).
- A franchising authority can establish deadlines for submission of formal proposal (Sec. 626(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, et al., 872 F.2d 30, 35 (3rd Cir. 1989).
- Third stage of renewal process. The franchising authority must decide to renew or preliminarily deny within four months of receipt of proposal.
D. Administrative Proceeding for Denial
- Fourth Stage of renewal Process. If preliminarily denied, the cable operator can request administrative proceedings, or such proceedings may begin upon franchising authority's own initiative. Sec. 626(c)(1).
- Cable operator must be given adequate notice and fair opportunity for full participation, including the right to introduce evidence, to require the production of evidence and to question witnesses. A transcript of the proceedings must be made.
- A grant of renewal upon terms unacceptable to cable operator may be treated as denial. House Report at 75.
- ANY FINAL DECISION NOT TO RENEW MUST BE BASED ON AN ADVERSE FINDING WITH RESPECT TO ONE OF FOUR FACTORS:
- Whether the cable operator has substantially complied with the material terms of the franchise and applicable law. Any violations cannot be held against cable operator unless it has been given notice and opportunity to cure. Sec. 626(d).
- 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. Any violations cannot be held against cable operator unless it has been given notice and opportunity to cure. Sec. 626(d).
- 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. Past performance is relevant and may be considered in reaching decision on cable operator's technical ability. See Rolla Cable System, Inc., v. City of Rolla, 89-211C(2) (E.D. Mo. April 15, 1991).
- 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 on the basis of a comparative bid, 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. Sec. 626(c)(3).
E. Judicial Review
- Cable operator must appeal in federal or state court within 120 days of receipt of the notice of the decision. Secs. 626(e)(1), 635.
- The court grants "appropriate relief" if
- The franchising authority does not comply with the Cable Act; or
- The cable operator demonstrates adverse finding was not supported by a preponderance of the evidence. Sec. 626(e)(2).
1. I understand that the federal law has a complicated formal process, and also an informal process. My operator wants me to ignore the formal process and just enter into negotiations. Is that a good idea?
It is generally not a good idea. Federal law does allow two ways to work a renewal: through a formal process, or by negotiated agreement. But the two processes can and should work in tandem.
The first step in the formal process is to identify future, cable-related needs and interests of the community and to review the past performance of the operator. By taking this first step, a community will obtain the information that it needs to be successful at the bargaining table, and it will be in a position to comply with the formal procedures if bargaining fails.
2. Why can't I just kick my operator out of town and seek bids from others?
Federal law doesn't allow it. Under the federal Cable Act, the incumbent cable operator has special rights to consideration. If the operator activates the formal renewal process, it is protected against an arbitrary denial of renewal. A community has to go through certain steps and conduct certain proceedings before renewal can be denied. The process is not competitive. Renewal cannot be denied simply because someone else might be willing to offer more. An incumbent operator's past performance and proposal for future renewal must be evaluated on its own merits (or demerits).
3. Can a renewal request be denied?
Yes, both legally and practically. Although most communities do renew the incumbent's franchise, several communities have successfully denied renewal.
The Cable Act permits a community to deny renewal under any of the following tests.
- Past performance has been inadequate.
- The operator is legally unqualified.
- The operator is unwilling or unable to devote the necessary technical skills and financial resources to the community.
- The operator is unwilling to satisfy the future, cable-related needs and interests of the community (considering the cost of meeting those needs and interests).
4. What can I get through the renewal process?
Among other things, as part of the renewal process, a community can insist on the following.
- Ensure that the cable system is properly upgraded.
- Require the operator to set aside system capacity for public educational and government use of the cable system.
- Require capital support for those channels (studios and equipment, for example).
- Require the operator to provide an institutional network providing, for example, a modern telecommunications link for schools, libraries and government.
A community can also ensure that any construction of the cable system proceeds in an orderly fashion, that all parts of the community can obtain service, and that the system is rebuilt in a reasonable period of time.
The franchise term can also be established through the renewal process--renewals do not have to be for 15 years, and often are far shorter.
Communities often will establish customer service standards; franchise fee requirements; procedures for reviewing operator performance and for ensuring that the operator continues to satisfy community needs throughout the franchise term.
There are some things that communities cannot do through the renewal process. Perhaps most importantly, a municipality cannot (1) require the operator to provide specific programs (a community should be able to establish channel capacity requirements); or (2) require the operator to provide service at certain prices (other than rates for basic service and equipment established consistent with federal regulations).
5. The operator tells me that anything I ask for will be passed through in rates. Is that right?
No, it is not.
In communities like Los Angeles that are regulating cable rates, an operator can pass through increases> in its external costs to subscribers. Some franchise requirements, such as PEG and franchise fee requirements, are external costs, but not all are.
In addition, the operator is only entitled to pass through the increase in those costs. Modern franchise requirements do not necessarily result in increases in costs to the operator, depending in part on what was required under the prior franchise. In several recent renewals, for example, operators have agreed that only a small part of the total renewal franchise requirements are eligible for rate pass-through under FCC rules.
If the operator claims a pass-through is necessary, ask for detailed information on its revenues and expenses. It is often rather simple to show that the community's needs and interests can be satisfied without raising rates.
1. 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 are very dangerous. A community should approach level playing field clauses with extreme caution and skepticism. The typical "level playing field" clause proffered by cable industry negotiators can easily put a community in breach of its contract, and require the community to give up some of the benefits for which it bargained.
These clauses become more and more critical as new cable providers ask for franchises that contain far different provisions than existing franchises.
The debate over these clauses will be contentious, but can be resolved in a way favorable to the community.
2. How should cities regulate in a more competitive environment?
While cable service remains a de facto monopoly in most neighborhoods, Los Angeles is beginning to face questions as new companies seek "overbuild" cable franchises; as incumbent cable companies begin to provide advanced cable services; and as cable companies begin to enter non-cable markets.
Some communities have suspended certain requirements once two cable companies begin to compete head-to-head throughout the community (the Tacoma franchise provides an example of this approach).
Some communities have established requirements designed to prevent cable from using its market position to control high-speed Internet cable services. Some communities establish generic requirements that apply to all users of the right-of-ways, such as OVS operators and companies leasing lines to video service providers. As critically, consider how to review and audit franchise fee payments under circumstances where an operator may be providing a bundle of services--telephone, Internet and cable service--for a consolidated price. Is the entire package subject to a fee? Or only a portion of it?
3. Can a community establish detailed system rebuild requirements?
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 is a formula for confusion and trouble, and will undoubtedly lead many operators to continue to argue that any design requirements are prohibited. However, many operators recognize that it is useful to both sides to specify what sort of system will satisfy local needs and interests, and remain willing to agree to carefully crafted renewal provisions that require rebuild systems with fiber optics.
4. Institutional Networks
Communities commonly require operators to provide institutional networks to link schools, libraries and governments for video, voice and data communications. These are powerful tools to a community. With the "information age" it's a small percentage of the cost of building a separate information system.
I-NET language needs to be crafted so that both parties understand what is required to assure that the resulting network will be useable. Typically, I-NETs must be individually tailored to local needs, and integrated with the community's existing information systems. One common error is to agree to 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) for a charge. To get a good I-NET, a substantial amount of planning, organization and negotiation time is required.
5. PEG Requirements
Communities have required operators to set aside subscriber network capacity and channels for public, educational and government use for some time now - and 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?
6. Scope of the franchise
The operator will seek to include language in the franchise which effectively authorizes provision of telecommunications services without obtaining any additional license or franchise. Operators will often argue that the 1996 amendments to the Cable Act require cities to allow cable operators to provide telecommunications services without such additional authorization.
An operator wants a cable franchise that requires no further authorization to provide telecommunications services. If the cable franchise is authority to provide telecommunications services, the operator will claim that the fees and charges it must pay are limited to those specified in the cable franchise, which in new franchises do not reach telecommunications services.
Renewal should not be used as a tool to prevent telecommunications competition, but communities should ensure that the cable operator does not use renewal as a tool to gain an advantage over potential competitors.
7. Scope of Authority Over Internet Services
The Federal Communications Commission has declared that cable modem service is "an interstate information service" and neither a "telecommunications service" nor a "cable service." The 9th Circuit has found to the contrary--twice. In the 9th Circuit, cable modem service is part "telecommunications service" and part "cable service". Recently, the FCC is moving in the direction of declaring that Voice over Internet ("VoIP") is also an interstate information service, not subject to state or local authority.
If Internet service is treated as a cable service, issues as to the scope of the franchise are irrelevant --the cable franchise by definition permits the operator to provide cable services, and no other authorization would be necessary. Accordingly, several operators have agreed to rebuild systems so that the cable systems have the capability to provide high-speed, two-way communications to and from the home. Currently, all operators refuse to pay a franchise fee on Internet service revenues, claiming the FCC declaration insulates the service from franchise fees.
If the service is a "telecommunications service", the Cable Act and California statutes creating the Public Utility Commission largely preempt local regulatory authority. If the service is an "information service", then the City may retain very broad authority since the FCC's own authority to regulate or to preempt is unstated in federal law and California Home Rule authority empowers the City to assert all authority not reserved to the State. This subjects the cable operator to independent City regulations over competition, customer service, and Right-of-way access/compensation/construction rules.