FCC Bars Local Cable Franchising Actions That Impede Competition

The FCC voted 3-2 to bar local franchise authorities from impeding competitive entry into cable markets by unreasonably deterring Verizon, AT&T and others from getting franchises. The vote at the FCC meeting Wed. was opposed strongly by Comrs. Copps and Adelstein. They said the order could lead to lawsuits, because the FCC lacks authority to limit local govt. actions. The move was quickly assailed by the cable industry and praised by the Bells.

The FCC said local franchising entities act unreasonably when they pursue “drawn-out local negotiations with no time limits, seek unfair build-out requirements, make requests for ‘in-kind’ payments… that attempt to subvert the 5% cap on franchise fees,” and make unfair requests for PEG access. The FCC has been looking into local franchising under Sec. 621 of the Communications Act, which allows it to act to ensure against impediments to competition.

The order would set limits on: (1) How long local govts. have to act on franchise requests. As expected, the order imposes a 90-day limit for applicants already authorized to access communities’ rights-of-way and 6 months for others. (2) “Unreasonable” buildout requirements under which “everyone has to have service before anyone does,” according to a staff explanation at the meeting. (3) Fees that local authorities can demand of new entrants and which costs count toward a 5% franchise fee cap. The FCC said that unless fees and other compensation required by local franchising authorities count toward the statutory 5% cap on franchise fees, “demanding them could result in an unreasonable refusal to award a competitive franchise.” (4) PEG and institutional network requirements. These requirements can’t be “more burdensome” on new entrants than incumbents, Media Bureau attorney Brendan Murray told the agenda meeting.

The FCC said the rules apply to county or municipal franchising authorities, because the Commission lacks a “record” to include statewide franchising, which is newer. The agency also issued a further notice of proposed rulemaking to collect comments on how to handle existing franchise holders. The proposal tentatively concludes that the new rules should apply at franchise renewal time and asks for comment on its authority to require such action. The agency promised to release an order based on the further NPRM within 6 months.

Copps said commissioners and staff worked Tues. night and early Wed. to reach agreement on the order, but he still doesn’t feel comfortable with it. He said he’s “troubled” by the lack of evidence that the local process “is broken.” Comr. Adelstein asked a Media Bureau staffer if she could give examples of unfair actions by local authorities against new entrants. The staffer said she couldn’t off the cuff. But FCC Chmn. Martin later offered examples to be included, many in footnotes, when the order is officially published. Martin said “unreasonable requirements [by franchising authorities] are troubling because competition is needed.” Consumers have had “limited choice for increasing prices,” he said.

Adelstein said the order will “offend many in Congress” working on video franchising legislation and now seeing the FCC “rushing through” a measure. The FCC lacks authority to take the action, and the order “engages in legal gymnastics” to justify it, he said. Reading aloud from an 8-page statement raising concerns about the order, Adelstein called the move “faith-based” because it “takes it on faith that there is a problem” needing correcting by the FCC. The order is based on “paper-thin jurisdiction,” he said.

Comr. Tate said complex technical and legal arguments surround the order, but the bottom line is that it will “encourage more robust competition in the video market which has long been a goal of the Commission.” She said she agrees “with our conclusion that the FCC has the jurisdictional authority” to deal with the local franchising issue. Comr. McDowell said he had been unsure about the agency’s jurisdiction, but after studying the law “I feel we are now on safe legal ground.”

House Commerce Committee Chmn.-designate Dingell (D- Mich.) gave Martin to Jan. 3 to explain the FCC’s authority to set the video franchising rules. In a letter sent late Tues., Dingell asked Martin to provide the “statutory and legal authority” that enables the agency to set requirements for local franchise authorities. “It would be extremely inappropriate for the [FCC] to take action that would exceed the agency’s authority and usurp Congressional prerogative to reform the cable television local franchising process,” Dingell wrote.

The FCC action was “an early Christmas present for the Bells but a lump of coal for many communities around the country,” said Rep. Markey (D-Mass.), soon to be House Telecom Subcommittee chmn. The FCC’s “haste” in approving franchising policies could have “problematic and unintended consequences,” he said. Congress spent a year battling over the same franchise-related subjects, he said. Like the FCC Democrats, he warned that “the Commission may be acting without clear legal authority.” Further, community efforts to bolster localism through PEG channels and use of institutional networks for municipal functions “may be put in jeopardy by novel interpretations of the Cable Act,” Markey said.

“We believe there is significant litigation risk,” Stifel Nicolaus analysts said: “We would expect litigation over the FCC order to be addressed on a parallel track as local franchise decisions, or nondecisions, are challenged in court.” If not overturned in court, the order “could give the telcos some new leverage with localities in their negotiations,” Stifel Nicolaus said.

NCTA, Others: FCC Overstepping

NCTA doesn’t like the FCC franchising order but hasn’t decided whether to sue, Pres. Kyle McSlarrow said Wed. in a conference call. The notion of a level playing field is fundamental to the group’s analysis, McSlarrow said: “That’s how we're going to approach this order.” He said NCTA appreciates FCC’s commitment to finish acting within 6 months.

But the cable group and other critics said the FCC is overstepping its authority. “This is legislation disguised as regulation,” McSlarrow said. The FCC decision may hurt consumers, said Consumers Union (CU) policy analyst Jeannine Kenney: “It is hard to believe that by waving its regulatory wand, the federal government has done anything to help consumers see the end of spiraling cable rates.” The FCC order doesn’t level the playing field, a goal “universally supported up until now at federal, state and local levels,” Kenney said: “We don’t believe the Commission has the legal authority to establish separate regimes for incumbents and new entrants in today’s highly competitive marketplace.”

“Today the FCC played Scrooge to local governments when they changed the agency from a regulatory to a legislative body,” said NATOA Exec. Dir. Libby Beaty. Unfortunately, unlike Scrooge, the FCC is highly unlikely to see the error of its ways without court or Congressional intervention, she said: “We will look forward to providing them both opportunities.” NATOA will respond to the Commission’s order in detail when it’s released, she said.

Phone companies praised the franchising order, saying it will help bring competition to the market. “The federal government’s own studies show that cable rates are reduced by as much as 40% when a 2nd wireline competitor enters a market,” said Gary Lytle, Qwest senior vp-federal relations. But Lytle said critical issues must be resolved, including creation of a streamlined franchise process that “actively encourages companies to begin offering new services.” Only through combined federal-state action will consumers see the benefits of competition, he said.

Verizon sees the order as speeding deployment of its FiOS service, said Susanne Guyer, senior vp-regulatory affairs, in a statement: “This order will enable us to reach agreements with local franchise authorities more quickly.” AT&T praised the order for streamlining franchising. New video services “should not be held hostage to the administration of a franchising process created for monopoly cable providers,” said Bob Quinn, AT&T senior vp-federal relations.

Cable Pricing Report Criticized

This year’s annual cable pricing survey, released at the same meeting and cited by Chmn. Martin as evidence franchise reforms are needed, improved on 2005’s but is deeply flawed, said Democrats on the Commission. The report’s “insufficient data and analysis” leave “both us and Congress without the information we need to know how to combat rising cable rates,” Comr. Adelstein said. The report, which surveyed basic and expanded basic video in 2004, found average rates for most customers rose 5.2% for the year and 93% since 1996. Cable industry officials have criticized the report, saying it fails to account for discounted bundles many operators offer (CD Dec 20 p3).

Another flaw in the report is its reliance on unaudited information from cable operators, Comrs. Copps and Adelstein said. Next year’s report may include audited figures, Martin said: “I certainly will commit to both of my colleagues… to include independent audits next year.”

The report fueled FCC debate on franchising: 4 of 5 commissioners cited it in statements explaining their votes. The report was finished months ago, but Martin’s office held it to bolster the franchising item, FCC officials said. Media Bureau officials wouldn’t say when they completed the survey. Such surveys have no fixed duration, another FCC official said: “I think the chairman released it when he felt it was ready to be released.”

The report won measured praise from Copps for including an econometric analysis of cable rate growth and operators’ local market share. It found that operators with larger local market shares typically raise prices more steeply. “This result certainly does raise troubling questions about market power,” he said. The report links lower price rises to the presence in a market of a wire-based competitor. In markets where an overbuilder operates, cable prices were 17% lower than in markets where cable operators have less competition.

DBS penetration doesn’t seem to affect cable prices, even though the two sectors provide similar services, the report found. “The presence of a DBS operator does not seem to have an impact on the price a cable operator charges,” Martin said.

Next year’s study should include more data on how product bundling and “greater value being offered today” affect price increases, Comr. McDowell said: “Compiling this information, while potentially helpful, is only a first step.”