Division of Legislative Services > Legislative Record > 2005

Subcommittees on Utilities of the House and Senate Commerce and Labor Committees to Study Video Franchising Issues

October 18, 2005

The Subcommittees on Utilities of the House and Senate Commerce and Labor Committees met jointly, at the request of the chairs of the standing committees, to examine issues raised in HB 2534 and SB1337 of the 2005 Session. The meeting was jointly chaired by Senator Stosch and Delegate Tata, who chair the Utilities Subcommittees. These bills sought to facilitate the ability of Verizon and similarly situated telecommunications firms to provide cable television service without lengthy negotiations with local governments.


The issue before the subcommittees was precipitated by rapid changes in the telecommunications industry. As a result of technological advances and the Telecommunications Act of 1996, companies that traditionally provided cable service are now also providing telephone service and broadband internet service. Verizon, which has offered telephone service and broadband internet service over copper lines, has commenced efforts to provide services, including video programming, via fiber optic lines to the user's premises. However, current law requires the issuance of a franchise prior to the provision of cable service. While Verizon could attempt to negotiate a cable franchise from localities (and has recently received franchises from Fairfax County, Fairfax City, and the Town of Herndon), the prospect of negotiating franchises from all localities is anticipated to be a lengthy process.

Staff reported that recent trends indicate that the market share of cable television providers nationwide is declining. Between 2000 and 2004, the percentage of U.S. households that only subscribe to cable service fell from 66% to 60%, while the percentage that only subscribe to satellite service increased from 12% to 27%. Where cable operators face competition from a wire-based competitor, cable rates are 15% lower than in markets without such competition.


The regulatory framework applicable to the provision of cable involves federal, state, and local governments. The federal Cable Act of 1984, as amended, requires all cable systems commencing service after 1984 to obtain a franchise from "any governmental entity empowered by Federal, State, or local law to grant a franchise" prior to commencing operations. A franchise allows a cable operator to construct a cable system over public rights-of-way within the area to be served by the cable system which have been dedicated for compatible uses. Franchises may not be exclusive, and franchising authorities "may not unreasonably refuse to award" an additional competitive franchise.

Three elements of the Cable Act that are of particular concern to the parties are redlining, build-out requirements, and fees. The Cable Act prohibits redlining, which means the refusal to serve low-income areas within the franchise territory. The Act provides that "a franchising authority shall ensure that access to cable service is not denied to any group of potential residential cable subscribers because of the income of the residents of the local area in which such group resides."

The Cable Act also requires franchising authorities to allow the applicant's cable system a reasonable time to become capable of providing cable service to all households in the franchise area. Local governments have the responsibility of ensuring the cable system becomes available to all households in the franchise area in a reasonable period of time while preserving the local government's flexibility to establish service areas. Some franchises require the operator to "build out" its system so that it can provide service to all residences in a community; some require that the system be constructed so that it can serve all businesses and residences; and some require operators to serve all areas with a certain population density.

Franchising authorities may impose a franchise fee that does not exceed 5% of gross revenues. A locality may require the operator to pay, in addition to the franchise fee, a separate fee for public, education, and government access (PEG) and institutional network (INET) uses and support. Franchising authorities may require the cable operator, through the franchising process, to build an institutional network and to dedicate capacity on that network for educational and government use. Franchises may require the operator to provide channels, equipment, and studios that non-profit groups and others can use to produce programming.

In the Commonwealth, local governments are authorized to grant video franchises, and the State Corporation Commission has no regulatory oversight. Virginia Code § 15.2-2108 authorizes localities to grant a franchise to a television system, and to award additional franchises as it deems appropriate. Subsection C prohibits localities from granting overlapping franchises for cable service within its jurisdiction on terms or conditions more favorable or less burdensome than those in any existing franchise.

Virginia's video franchising process is further subject to the Constitution of Virginia, Article VII, §§ 8 and 9, which provide that a provider of utility services shall not be permitted to use the streets, alleys, or public grounds of a city or town without the consent of its governing body, and that a franchise to use such public property shall not be for a term exceeding 40 years.


SB 1337 (Stosch) was tabled by the Senate Commerce and Labor Committee. As introduced, it granted eligible video providers a cable franchise by deeming their preexisting telecommunications franchise to be a 20-year franchise for cable service. An amendment in the nature of a substitute adopted by the Senate Commerce and Labor Committee abbreviated the bill by only amending subsection C of § 15.2-2108 to eliminate the requirement that overlapping franchises be on terms that are not more favorable or less burdensome than those in the existing franchise. In lieu of this requirement, the substitute would provide that a locality shall not grant an overlapping cable franchise that it finds will unreasonably prejudice or disadvantage any class of cable service customers or cable television systems.

HB 2534 (Ingram) was tabled by the House Commerce and Labor Committee. The introduced bill was similar in many respects to the introduced SB 1337. It granted eligible video providers a cable franchise by deeming their preexisting telecommunications franchise to be a cable service franchise, though for a term of 40 years. An amendment in the nature of a substitute to HB 2534 was adopted by the House Committee. The substitute continued to provide that, upon compliance with stated requirements, the previous consent granted to an eligible video provider allowing it to use the public rights-of-way becomes a franchise authorizing it to provide cable service. The term of the new cable franchise is 15 years, and the franchise does not obligate an eligible video provider to provide cable service throughout the locality or in any specific territory within the locality. The conditions imposed on the eligible video provider include carrying the same number of PEG channels currently provided in the locality today and allowing for future growth; not denying access to any group of potential subscribers based on income; paying the same franchise fee paid by incumbent operators; paying equivalent PEG and INET fees as those paid or donated in-kind by other cable operators in each locality; and providing free video connections to public buildings and government facilities.


Texas is the only state that to date has enacted legislation giving telecommunications firms the ability to provide cable service without obtaining local franchises. The legislation, signed into law on September 9, 2005, gives the state's Public Utility Commission the power to grant cable franchises. State-issued cable franchises are required to be issued to companies entering the cable television business on the 17th day after the applicant files an affidavit stating that it will comply with the requirements of the act. Entrants will define the area they will serve, and no system build-out is required. The Texas Cable & Telecommunications Association filed suit in federal district court seeking to overturn the new state law on grounds that it violates the federal Cable Act.


Legislation has been introduced in Congress in 2005 that would abolish cable franchising and grant video providers the right to use public rights-of-way in perpetuity. One version would prohibit a competitive video services provider from being required to obtain a franchise in order to provide any video services in an area in which it has a right to access public rights-of-way. In addition, the Federal Communications Commission chairman has stated that his agency may have authority under the Cable Act to compel cities to let regional Bell companies compete with cable operators.


Robert Woltz of Verizon announced his firm's six principles for effective franchise reform legislation: Expedite and simplify the approval process for new providers seeking to offer consumers a competitive alternative to cable television; require that local governments charge the same cable franchise fees to new competitors as to incumbents; preserve the right of state and local governments to manage public rights-of-way; require all cable systems to provide channel capacity for PEG channels and assure availability of PEG channel content to all providers; permit new competitors to deploy television services without barriers to entry such as build-out requirements; and apply the same federal prohibition of discrimination that currently applies to cable to new competitors.

Noting that incumbent cable providers may object to giving new entrants a franchise that does not require service to be provided throughout a locality, Mr. Woltz observed that Verizon, as an incumbent local exchange carrier, has "carrier of last resort" obligations to provide telephone service within its franchise territory, regardless of market share. He denied that Verizon is seeking an advantage over cable firms, and noted that localities will continue to regulate the rights-of-way. Rather, Verizon seeks to get into the business quickly and to avoid the 15 to 18 month delay typically required to negotiate a local cable franchise.

Mr. Woltz characterized the build-out requirement as an unreasonable barrier to entry. Under the Telecommunications Act of 1996, states may not require competitors to build out a telecommunications network. In response to a question from Delegate Parrish, Mr. Woltz acknowledged that the move to get into the cable business is driven in part by the uncertain future for a business based only on providing voice telephony over copper lines. Over the past three or four year, the company has had a 5% to 7% access line loss, some of which may be due to competition from other land-line service providers and some of which is due to customers dropping land lines altogether and switching to wireless service. To remain viable, his company will seek to provide broadband internet and video service. While SBC, Cavalier, and others are delivering signals to the neighborhood by fiber optic cable and compressing signals over copper wires to the user's premises, Verizon has elected to take fiber optic cable all the way to the premises. Adding cable to the bundle of services the firm can offer consumers is an important advantage. The savings in billing and facility costs that bundling services provides can allow the services to be offered to customers at lower prices.

Mr. Woltz testified that Verizon is not waiting for the resolution of the issues underlying the legislation. The firm is investing between $400 million and $1 billion to build a fiber network in Virginia, and 215,000 homes currently have fiber at their property line. Verizon has been able to commence installation of its fiber system in rights-of-way under the terms of its existing telecommunications franchises.

Members were provided with a copy of the latest draft of legislation proposed by Verizon. The bill retains many elements of the Committee substitute to HB 2534 but would require that a locality adopt an ordinance in order to implement certain provisions.


Ray LaMura of the Virginia Cable Telecommunications Association (VCTA) observed that cable franchises are contracts between a local government and a cable provider that address local needs. The VCTA favors the current system which provides that competing, overlapping franchises may be approved provided there is a level playing field.

Mr. LaMura criticized Verizon's proposal as establishing separate standards that would apply to incumbent cable providers and to the telecommunications firms that receive rights under the bill. He identified the build-out issue as a major point of disagreement. Verizon would be able to "cherry pick" in areas that provided economic value, while incumbent cable providers would be subject to build-out requirements to serve all areas, subject to density limits.

A more general area of concern voiced by the VCTA was the fact that Verizon's proposed legislation would allow new entrants to be regulated by the terms of an ordinance while incumbent cable firms would be bound by the terms of long-term contracts. The VCTA did not object to the requests by Verizon for overlapping cable franchises in Fairfax City, Fairfax County, and Reston, and suggested that Verizon follow the same process in the other localities in which it seeks to provide cable service. Mr. LaMura stated that the VCTA supported the pending federal legislation that would eliminate all cable franchises, noting that such a law would apply the same rules to all providers.

A representative of Cox Communications in Hampton Roads stated that the reason cable operators sought long-term contracts was to allow a longer period for amortizing its capital investment in the infrastructure. The ability to negotiate the length of the contract was cited as an example of where the state has allowed localities to negotiate terms and conditions that are responsive to each community's circumstances.


Mark Flynn of the Virginia Municipal League (VML) acknowledged that Verizon's proposal creates a significant change in Virginia's policy of regulating cable service. The VML has worked with Verizon to address concerns involving provisions that may impair the obligations of contracts and the Constitutional requirement that a franchise be issued before fiber can be deployed. Following discussion of reasons why an incumbent cable provider would seek to terminate its existing contract with a locality, it was noted that avoiding a contract may allow a provider to end build-out requirements and other obligations, such as providing a studio for PEG channels. This may be sought if a new entrant became eligible to provide cable service without the obligation to comply with the same requirements. Another sticking point may be reimbursements for capital grants made by incumbents to pay for studios, which may require a monthly per-customer charge. Mr. Flynn observed that the "devil is in the details."

Two issues that instigated debate were allegations that Verizon had been guaranteed a return on its investment of telephone system infrastructure and had received Universal Service funds to subsidize the extension of telephone service to rural areas. Mr. Woltz responded that Verizon has not been guaranteed a rate of return since 1984, that none of the investment in its fiber optic system was made at a time that it had a guaranteed return, and that some cable companies have applied for Universal Service funds.

Phyllis Errico of the Virginia Association of Counties (VACO) stated that her organization currently has no position on the issue. The biggest concern of VACO members is that rural localities desire competition but are not sure that Verizon's bill will provide it. Build-out requirements are crucial as rural areas may not be economically viable for Verizon's service. In addition, the loss of flexibility regarding PEG and INET service is an issue, given the diversity of localities. The ability to negotiate the terms of franchise agreements that address local needs is a concern.


Michael Thompson of the Thomas Jefferson Institute for Public Policy stated his organization's opposition to build-out requirements and encouraged the subcommittees to take action to bring a more competitive environment to the cable industry.

Martin Clift, Vice President of Regulatory Affairs at Cavalier Telephone, advised the subcommittees that his company is testing Internet-protocol television (IPTV), under which video programming signals are transmitted to premises over existing copper lines.

Cavalier has adopted the position, as has SBC in Texas, that its service, which involves the transmission of data over telephone lines, is not subject to the federal Cable Act's requirement that a franchise be obtained.


The subcommittee took no action, and the chairs agreed to report on the meeting to the chairman of their respective standing committee.

The Hon. Walter A. Stosch

The Hon. Robert Tata

For information, contact:
Frank Munyan, DLS Staff Attorney


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