| Subcommittees on Utilities of the House and Senate Commerce and Labor 
        Committees to Study Video Franchising IssuesOctober 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. BACKGROUND 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. REGULATORY FRAMEWORK 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. 2005 LEGISLATION 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 LEGISLATION 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. PENDING FEDERAL 
        LEGISLATION 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. PERSPECTIVE OF 
        VERIZON 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. PERSPECTIVE OF 
        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. 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. PERSPECTIVE OF 
        LOCAL GOVERNMENTS 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. OTHER PERSPECTIVES 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. WORK PLAN & 
        NEXT MEETING The subcommittee 
        took no action, and the chairs agreed to report on the meeting to the 
        chairman of their respective standing committee.
 Chairman:The Hon. Walter 
        A. Stosch
 Co-Chairman:The Hon. Robert 
        Tata
 For information, 
        contact:Frank Munyan, DLS 
        Staff Attorney
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