Subcommittees on Utilities of the House and Senate Commerce and Labor
Committees to Study Video Franchising Issues
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
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.
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.
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
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
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
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
VA CABLE TELECOMMUNICATIONS ASSOCIATION
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.
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.
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
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.
WORK PLAN &
took no action, and the chairs agreed to report on the meeting to the
chairman of their respective standing committee.
The Hon. Walter
The Hon. Robert
Frank Munyan, DLS