THE SAGA OF CABLE TV (PART II)

By THOMAS W. KELTY, Chief Counsel
Illinois Municipal League

Part I of this Article in last month's Review discussed four of the major purposes of Congress in implementing the Cable Communications Policy Act of 1984. Also, the current and future impact of those stated purposes and the provisions of the Act on municipalities throughout Illinois and the country were analyzed. In this month's concluding segment, the final two purposes of the Act along with some of the litigation that has sprung up subsequent to the effective date of the Act will be discussed.

FRANCHISE RENEWALS

The fifth purpose of the Act enumerated by Congress provides that the Act is to:

"Establish an orderly process for franchise renewal which protects cable operators against unfair denials of renewal where the operator's past performance and proposal for future performance meet the standards established by this title . . ."

The Act, in two sections, deregulates the cable operator and severely regulates the municipal franchisor. Section 626 of the Act sets forth procedures and the standards which may be used for the renewal of cable franchises. This section of the Act is one of the few sections which does not require mandatory compliance by the franchisor. A cable operator and a municipal franchisor may independently negotiate the renewal of a franchise upon expiration of an existing franchise; and, they may also reach agreement on a franchise renewal at any time during the franchise. The Committee on Energy and Commerce of the United States House of Representatives in its report to Congress on this Act has analyzed the purposes for including this language.

"The purpose of this section is to establish a process which protects the cable operator against an unfair denial of renewal by the franchising authority. It is intended that a cable operator whose past performance and proposal for future performance meet the standards established by this section be granted renewal. This protection is intended to encourage investment by the cable operator at the time of the initial franchise and during the franchise term. It will ensure such investment will not be jeopardized at franchise expiration without actions on the part of the operator justifying such a loss of business."

Aside from the negotiated franchise renewal, this section establishes a two stage process for a review of the cable operator's performance and to consider renewal. The first stage is a hearing process that must be initiated if requested by the cable operator or may be initiated by the franchisor between thirty and thirty-six months prior to the expiration of a current franchise. The purposes for the proceedings under this section are to identify "the future cable related community needs and interests" and a review of "the performance of the cable operator under the franchise during the then current franchise term." Upon completion of these proceedings, the municipal franchisor may require the cable operator to submit a proposal for franchise renewal. The proposal requested by the franchisor must be within the limits of the activities which the franchisors are allowed to regulate under the Act. Within those limits, the municipal franchis or may require that certain information be included in the proposal, including proposals for a technical upgrade of the system and can require the proposal to be submitted by a specific date. The cable operator has the option of submitting a pro-

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posal prior to a request by the franchisor [or on its own motion even if the franchisor chooses not to request a proposal from the operator.] However, the municipal franchisor may not require the cable operator to submit a proposal prior to the first stage proceedings.

Once the proposal has been submitted, if there is no agreement between the parties in the interim, the franchising authority must "commence an administrative proceeding." The municipal franchisor is required to provide public notice of the proceeding, must conduct the proceeding in a manner that affords the cable operator and the municipal franchisor "due process protection;" must allow introduction of evidence, questioning of witnesses and must require, as requested, the production of evidence. This section provides that only the cable operator and the municipal franchisor (or its designee) may participate as principals in the hearing. The purpose of the proceeding is to determine four questions. First, whether the cable operator has substantially complied with the terms of the existing franchise and with all applicable laws. Second, whether the quality of the operator's service has been "reasonable" in light of the needs of the community. Third, whether the operator has the financial, legal and technical ability to provide the services set forth in the operator's proposal. And, fourth, whether the operator's proposal is reasonable to meet the future cable related community needs and interests. Upon completion of this administrative proceeding, the franchisor must provide the cable operator with a written decision either granting or denying the operator's proposal for renewal of the franchise. An adverse decision by the franchisor must be justified on the basis of one of the four considerations enumerated above. A cable operator who does not receive a renewal of a franchise through this process or who feels aggrieved by the procedural methods used in the proceeding may appeal to a State Court or to the U.S. District Court for relief. The decision of the franchising authority is considered to be final after all avenues of administrative review have been exhausted or the time period for application for those reviews has expired. If the decision of the municipal franchisor is upheld, the franchise agreement is then executed on the basis of the decision by the municipal franchisor. If the decision to deny a franchise is upheld, the Act then goes on to specify the conditions under which the existing cable system must be sold to a new cable operator who reaches a franchise agreement with the municipal franchisor.

Very few, if any, industries regulated or deregulated by federal law have provisions in the law which set a minimum price for the sale of the business in the event that the owner of the business loses its exclusive contract to do business. This is exactly what the United States Congress has provided for the cable television industry.

Section 627 of the Act sets the "conditions of sale" that must be adhered to in the event that renewal of a franchise is denied and provides an alternate in the event that the franchise is revoked for cause. If a municipal franchisor denies renewal of a franchise the cable operator must be compensated for the sale of the cable system "at fair market value, determined on the basis of the cable system valued as a going concern but with no value allocated to the franchise itself ..." However, this subsection provides that if the franchise agreement which is expiring specifies a method for determining the price to be paid upon such a transfer, the agreement controls notwithstanding the language of the Cable Communications Policy Act. In the event that a franchise is revoked for cause, the provisions of a franchise agreement for such a sale, if they exist, are to apply. In the alternative, the system is to be sold "at an equitable price." The Act itself does not provide a definition or any guidance in defining the term "equitable price." However, the committee report states "(u)nder the term equitable price, such matters as harm to the community resulting from the operator's breach of the franchise might be considered in determining the appropriate price." Certainly, the vague nature of the language and the legislative history could open a Pandora's box of problems in attempting to reach an agreement with a cable operator on an "equitable price."

PROMOTION OF COMPETITION

The final statement of purpose of the United States Congress is that the Act is intended to "(p)romote competition in cable communications and minimize unnecessary regulation that would impose an undue economic burden on cable systems." Certainly, the United States Congress has achieved its intended purpose of minimizing regulation imposing economic burdens on cable systems. They have accomplished this to the extreme detriment of the consumers of cable services in

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Illinois and throughout the United States and the municipal franchisors who were previously charged, by their citizens, with the regulation and oversight of cable services in their communities. Virtually every provision of the Act operates to the benefit of the cable television industry and defeats the stated purpose of promoting competition in cable communications. The cable operator has little if any incentive to provide the highest quality of technical or programmatic services to the consumer because of the security that is granted by the Cable Communications Policy Act. The anti-competitive nature of the Act has resulted in a number of significant lawsuits being filed challenging both the Act and certain of the remaining areas of cable regulation that are available to municipal franchisors.

CURRENT LITIGATION

As might be expected, various pieces of litigation have been filed subsequent to the effective date of the Cable Communications Policy Act. Two of these pending cases are noteworthy to municipalities, one because of its potential beneficial effects and the other because of its potentially devastating effects.

The National League of Cities, in conjunction with the American Civil Liberties Union, New York City and various other local governments and public interest groups have filed a comprehensive challenge to the Federal Communications Commission's 1985 Order deregulating basic service rates. In addition, the action challenges the authority of the FCC to resolve all franchise fee disputes between cities and cable operators and challenges other technical areas that the FCC has chosen to regulate in implementing the Act. (NLC v. FCC, USCA, D.C. Circ.)

The principal issue in the case is the legality of the April 19, 1985 FCC determination of the "effective competition" standard for a cable system under the Act. Currently, the effect of the FCC's effective competition standard is to prohibit the overwhelming majority of municipalities throughout the United States from regulating basic service. In oral arguments held before the United States Court of Appeals for the District of Columbia Circuit in late January, a three judge panel closely scrutinized the decisions of the FCC and sharply questioned the FCC's counsel concerning certain definitions that the FCC had established. According to the January 26, 1987 issue of Nation Cities Weekly, the questioning by the panel seemed to focus on the FCC's authority to implement certain regulations which appeared to be beyond the scope of the statutory definitions. Although the Appellate Court is not likely to make a decision in the case for some time, the outcome of this decision could provide municipalities with expanded powers under the Act and a conscription of the FCC's authority to regulate in certain areas.

The second case which could have devastating effects to municipalities relating to franchises fees is the case of Erie Telecommunications, Inc. vs. The City of Erie, Pennsylvania. This case is a challenge by the Telecommunications Company of the authority of the City of Erie to charge a franchise fee in excess of the funds that are necessary to supervise and regulate the cable operator. According to the company, the city's demand for franchise fees in excess of those funds necessary to regulate the company present a threat to the company's ability to exercise its claimed protections under the first amendment guarantees of free speech and free press. As of this time, the matter is still pending before District Judge Glenn Mencer of the United States District Court, Western District of Pennsylvania.

THE FUTURE

The Cable Communications Policy Act of 1984 and the litigation filed in its wake will change the methods and practices with which municipalities deal with cable operators forever. Although a successful ruling for the cities in the National League of Cities case may rein in the FCC in its interpretation of the Act, the Act will remain with its various proscriptions of municipal authority. The Erie Telecommunications case has the potential to severely limit the amount of funds that may be collected from the cable operator in exchange for the granting of the franchise. In the face of this rapidly changing environment, municipalities have the option of seeking new avenues that will restore, to the maximum extent possible, the previous system of regulation of cable television.

One of those options is municipal ownership of the cable television system. At the end of 1985, at least 48 cable television systems were owned and operated by municipalities throughout the United States. In fact, an affiliate organization of the National League of Cities called The National Association of Telecommunications Officers and Advisors (NATOA) advocated municipal ownership as a refranchising option. In the Sep-

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tember, 1985 issue of the NATOA News a lengthy article discussed the advantages, disadvantages and pitfalls of municipal ownership of the cable system. In concluding the article, Joel Reish clearly summarized the concept of municipal ownership.

"In deciding in favor of municipal ownership, decision-makers have not guaranteed the best system possible or even a good system. What they have done is opted for the realization of a basic set of beliefs about the proper and efficient use of funds, accountability to the public and operational capabilities of municipal governments rather than private interests. Such a choice will necessarily mean tradeoffs; the municipal system most assuredly will be inferior in many respects to a private system operating in the same city. However, in order to justify a decision to implement municipal ownership, an evaluation of the ultimate good derived from each option should mitigate in favor of the city government."

The Act has not changed the ability of a "state or franchising authority" to own a cable system. The Act requires that a "state or franchising authority" owning a cable system must not exercise any editorial control over the content of the cable service provided over the municipally owned system unless the editorial control is exercised through an entity separate from the franchising authority. According to the committee report, this provision was included to preclude "undue government control of programming contrary to the first amendment."

In Illinois, specific authority does not exist within the statutes that would allow a municipality to own and operate a cable system, nor does a specific prohibition against ownership and operation exist. The Industrial Project Revenue Bond Act does, however, provide broad powers to a municipality in the area of acquisition and ownership of "industrial projects." A review of the pertinent sections of the Act defining an "industrial project" reveals that a cable television system would clearly fall within the boundaries of the definition. Additionally, the Act also authorizes municipal acquisition, renting, leasing, sale or other disposition of an industrial project. It is entirely possible that a municipality could acquire a municipal system under the formula provided in the Cable Communications Policy Act and subsequently use the authority of the Industrial Project Revenue Bond Act to own the system, issue bonds to finance its acquisition or expansion, own and operate the system or lease the system to a private operator in a clearly defined contractual arrangement.

Acquisition and operation or acquisition and leasing of a cable television system would allow a municipality to achieve contractually what it is currently unable to achieve through a franchise agreement under the Cable Communications Policy Act. Obviously, in the case of ownership a municipality is in a position to control the number of channels available, the rates charged and the services provided so long as the editorial content of the programming is not controlled directly by the municipality. Leasing of a system to a private operator could provide the opportunity to establish rate formulas which would allow the operator a six percentage profit over and above agreed costs of operating the system and could specify the services that would be made available pursuant to the lease. Either scenario eliminates the principal objections of the cable operators that resulted in the implementation of the Cable Communications Policy Act. First, the municipality is at risk, in the case of ownership, and must act responsibly in its control of the system to ensure that the system will be used by residents of the municipality sufficiently to pay the costs of operation. In the case of leasing, a municipality must similarly take responsible actions to ensure that sufficient funds are generated under the lease to provide for the payment of the purchase price of the system or to service debt that is issued to purchase the system. Certainly, a wide variety of concerns must be addressed by a municipality prior to taking the step of purchasing or constructing a municipally owned or operated cable television system. These concerns must be carefully and thoughtfully addressed by the corporate authorities because of the magnitude of the financial commitment that the municipality will be making to purchase or construct a system. And, as Mr. Reish points out, municipal ownership or operation is not necessarily the solution to all of the problems perceived by a municipality under current operation of a cable system.

The Act, the litigation discussed in this Article and other litigation, as well as the innovative nature of municipal governments will continue to cause an evolution in the area of regulation and control of cable television systems. As the networks are fond of saying, "Stay tuned for future developments." •

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