THE SAGA OF CABLE TV (PART I)

By THOMAS W. KELTY, Chief Counsel
Illinois Municipal League

Deregulation of regulated industries has become popular during the 1980's. Two major industries that have benefited from or suffered from deregulation, depending on your perspective, are the airline and trucking industry. Various forms of deregulation of other industries has been proposed and implemented. The latest industry to join the deregulated ranks is the cable television industry. With that deregulation, municipalities throughout the country have been preempted in large part from local control under existing franchise agreements. In addition to the loss of control, deregulation has spurred at least one case brought by a cable television company attacking the ability of a municipality to franchise for revenue purposes.

The erosion of municipal authority in this area has been caused by the Cable Communications Policy Act of 1984. Despite the commendable purposes set forth in the Act, operation of the Act coupled with regulations promulgated by the FCC has set up a preemptory scheme that is virtually immune to attack by municipalities around the country. According to the United States Congress,

"The purposes of this title (the Act) are to:
(1) Establish a national policy concerning cable communications;
(2) Establish franchise procedures and standards which encourage the growth and development of cable systems and which assure that cable systems are responsive to the needs and interests of the local community;
(3) Establish guidelines for the exercise of federal, state and local authority with respect to the regulation of cable systems;
(4) Assure that cable communications provide and are encouraged to provide the widest possible diversity of information sources and services to the public;
(5) 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; and
(6) Promote competition in cable communications and minimize unnecessary regulation that would impose an undue economic burden on cable systems."

A point by point analysis of the purposes of the Act reveals the reality that the Act has served to eliminate virtually all possibility of regulation at the local level.

Certainly, it is not arguable that the Act has established a national policy concerning cable communications. What is unspoken is that the national policy operates to the exclusion of local authorities in the consumers of cable services. The "national policy" that is established by the Act is composed of ten broad concepts, four of which directly affect the franchising ability of local governments. Three of the other policy initiatives can have a direct impact on a franchisor under certain conditions. The ten policy concepts contained in the Act are:

(1) Restriction of cable system ownership by certain regulated companies
(2) Codification of general franchising requirements
(3) Limitation of franchisor ability to assess franchise fees
(4) Limitation of local regulation of subscriber rates
(5) Limitation of franchisor regulation of services, facilities and equipment of the cable operator
(6) Establishment of procedures for appeal of franchisor decisions relating to modification of the franchise agreement
(7) Establishment of renewal standards for franchise agreement
(8) Establishment of conditions of sale of the assets of the cable system upon a nonrenewal of a franchise
(9) Provision of federal penalties for unauthorized reception of cable service
(10) Requirement of compliance with equal employment opportunity standards by certain cable operators

These ten concepts have and will continue to significantly alter the relationship between a local government as a franchisor and the cable operator as the franchisee. Under the statements of purpose, these ten

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policy initiatives can be reviewed in detail to exhibit their full impact on local government.

The second statement of purpose of the Congress consists of two parts. The first part is to establish franchise procedures and standards; the second part is to assure that cable systems are responsive to the needs and interests of the local community.

Section 621 of the Act has established general franchise requirements that affect both the municipality and the cable operator. This Section provides that all franchises are to be construed to authorize access to the "public rights-of-way" and easements whether specifically articulated in the franchise agreement or not. Second, a cable operator who was providing cable service as of July 1, 1984 without a franchise is not required to obtain a franchise "unless the franchising authority so requires." Third, the franchisor is to ensure that access to cable service is not denied to any residential cable subscribers as a result of the income of the residents in a particular area. Without question, these general limitations begin a pattern of constraint that is reflected throughout the part of the Act dealing with franchising. The interpretation of all franchises as granting access to easements and public rights-of-way limits the ability of the franchisor to control the methods and aesthetics of installation of a cable system. Nevertheless, some franchisors have chosen to require the placement of cable underground in certain residential areas and have made an effort to control the aesthetic quality of facilities installed by the cable operator. While these abilities are not totally prohibited, the Act is not clear as to whether control of the safety, functioning and appearance of the cable equipment placed within the public rights-of-way or easements may still be controlled by the franchisor.

The third stated purpose of the Act is the area that is most troublesome to local governments acting as franchisors. The establishment of guidelines for regulation of cable systems has resulted in the preemption of local government in three critical areas: franchise fees, subscriber rates and programming requirements.

In some communities, franchise fees have become a significant source of revenue to supplement the municipal budget. Congress has chosen to place a 5% limitation on the amount of franchise fees that the franchisor may impose. The 5% regulation is calculated based on the gross revenues of the cable operator for a 12 month period under the franchise. Section 622, regulating franchise fees, allows the franchisor and the cable operator to agree that the lawful fees may be collected on a prepaid or deferred basis; except, if the fees are prepaid, the franchisor must consider the time value of money and reduce the amount of the payments to an amount which credits the cable operator for the time value of money calculation. In addition, the cable operator is authorized to pass through to the subscribers the amount of any increase in a franchise fee unless the franchisor can establish that the rate structure charged by the cable operator contained in a previous franchise agreement reflects all costs of previously agreed amounts of franchise fees and notifies the cable operator of this fact in writing. In other words, if a previously valid franchise fee agreed upon a rate for cable services which was determined to have included the cost of franchise fees, the cable operator may not pass on any increase in franchise fees to the subscribers if the municipality can demonstrate that this was the agreement of the parties at the time the franchise agreement was entered into. Under this Section, the demonstration of agreement, if disputed, is to be made in federal district court.

Certain items are exempted from the definition of franchise fee. According to the Act, any taxes, fees or assessments that are imposed on cable operators which are not "unduly discriminatory against the cable operators or subscribers", cost incurred by the cable operator for public education or government access channels, charges incidental to the awarding or inforcing of the franchise or fees imposed under the Cable Communications Policy Act are exempt from the calculation of the franchise fee.

COMPETITIVE RATES

The Section of the Act that has provoked the greatest outcry by municipalities and cable subscribers is Section 623 regarding subscriber rate regulation. This Section prohibits a franchisor from regulating rates charged to subscribers after the passing of a two year period after the effective date of the Act. This two year period expired on December 29,1986. The only exception to the rate regulation rules is contained in a regulation established by the Federal Communications Commission at the direction of Congress. This exception to the preemption of rate regulation is when a cable

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system is not subject to "effective competition." Even when the exemption applies, only rates for basic cable service may be regulated. "Effective competition" is deemed to exist if at least three unduplicated signals serve the cable community. "Signals shall be counted if they place a Grade B Contour over any portion of the cable community, are significantly viewed within the community or are translator stations licensed to serve the cable community." In other words, most, if not all, communities in Illinois are preempted from regulating rates. The broad standards that are applied to these definitions work to reinforce the presumption of effective competition in the municipality. For example, to determine that a "Grade B Contour" exists in the community, it must simply be shown that the signal can be received by 50% of the population during 90% of the day. Procedures are established within the FCC regulations for a municipality to demonstrate "through engineering studies" that effective competition does not exist and therefore the municipality is eligible to regulate the rates for basic cable service. Although this opportunity to contest a finding of effective competition exists, no current regulations clearly define the methods or standards that are to be applied to the engineering studies in attempting to overcome a finding of effective competition.

Finally, the municipality has been preempted from regulating programmatic content by Section 624. Under the Act, the cable operator and the franchisor may agree "that certain cable services shall not be provided or shall be provided subject to conditions, if such cable services are obscene or are otherwise unprotected by the Constitution of the United States." No longer may the franchisor use franchise negotiations or procedures within the franchise to pressure the cable operator to provide (or not to provide) certain services that may be desired (or not desired) by the subscribers. Effectively, the Act allows the cable operator, with limited exceptions, to utilize the services that it sees fit.

The next statement of purpose in the Act relates back to a previous statement and reinforces the intention of the Congress to assure that cable companies provide a variety and diversity of information to the cable consumer. In the second statement of purpose, the Congress expresses its desire that the cable systems be "responsive to the needs and interests of the local community. "The fourth statement, also programmatic in nature, expresses Congress' desire that cable operators provide "the widest possible diversity of information sources and services to the public." These two concepts are codified in Section 611 and 612 of the Act.

Section 611 enables franchising authorities to establish requirements for the designation and use of public educational and governmental (PEG) access channels. At the time of its passage, the Committee on Energy and Commerce published a report describing the background and need for this legislation. With respect to PEG channels, the report states,

"One of the greatest challenges over the years in establishing communications policy has been assuring access to the electronic media by people other than the licensees or owners of those media . . . Almost all recent franchise agreements provide for access by local governments, schools and nonprofit and community groups over so-called 'PEG' channels. Public access channels are often the video equivalent of the speaker's soapbox or the electronic parallel to the printed leaflet . . . (This Act) continues the policy of allowing cities to specify and cable franchises that channel capacity and other facilities be devoted to such use."

The continuation of this policy of requiring a franchisor to provide PEG channels will assure that municipalities can continue programs begun under previous franchise agreements to provide a diversity of information through locally and regionally generated programming that does not have as its primary focus entertainment.

Section 612 deals with commercial access to cable channels. Again, referring to the Committee report,

"Third party commercial access complements PEG access by assuring that sufficient channels are available for commercial program suppliers with program services which compete with existing cable offerings, or which are otherwise not offered by the cable operator . . . The franchising process has devoted far less attention to commercial access than to PEG . . . Cities do not have the political incentives to push for the leased access with the vigor with which they bargained for PEG access ... To fill this gap, (the Act) establishes a clear and comprehensive scheme for commercial access. The requirement that channels be set aside for third party commercial access separates editorial control over a limited number of cable

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channels from the ownership of the cable system itself. Such a requirement is fundamental to the goal of providing subscribers with the diversity of information sources intended by the First Amendment."

Although the scheme developed by the Congress in assuring open commercial access to cable communications has commendable purposes, once again the franchisors (municipalities) are eliminated from participation in the process. The method for guaranteeing access to these channels operates without the participation of the franchisor thus eliminating the input of the municipality in the decision making process of what third party cable channels are to be carried. The single reference to the ability of the franchisor to impact channel selection under this Section is contained in Subsection (a). "Any cable service offered pursuant to this Section shall not be provided, or shall be provided subject to conditions, if such cable service in the judgment of the franchising authority is obscene or is in conflict with community standards in that it is lewd, lascivious, filthy, or indecent or is otherwise unprotected by the Constitution of the United States."

The final two statements of purpose relate to renewal of franchises and the promotion of competition in the cable communications industry. In Part 2, next month, these final two purposes will be discussed along with litigation that has been spawned in the wake of this Act and some ideas and thoughts for municipalities attempting to address the desires of their citizens for cable services in their communities. •

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