The Telecommunications Act of 1996 deregulated all but the lowest, often unpublicized, package of cable channels -- limited basic service. Since then, cable rates have increased 59% (almost three times the rate of inflation according to the Consumers Union), industry profits have soared, and acquisitions and system swaps have further concentrated the market power of the industry leaders. Comcast is now the largest cable systems operator in the world with 23.2 million U.S. subscribers, followed by Time Warner Cable with 14.4 million subscribers. Combined, they have two-thirds of all U.S. cable subscribers.

Despite deregulation, cable competition has largely failed to materialize outside of satellite, and even competitive cable companies already established in the same market, as Comcast and Bright House Networks are in Indianapolis, refuse to compete with one another. While satellite television now holds 20 percent of the multichannel video market nationwide, research shows that satellite TV does not have a significant impact on cable rates. Only other ?wireline? competitors significantly reduce cable rates, and for the 2% of U.S. households that have wireline competition, cable rates are 15% lower according to the Government Accountability Office (GAO). Indianapolis area Comcast customers have some of the highest cable rates in the country, according to the Indianapolis Cable Communications Agency.

The good news is that wireline competition may finally be just around the corner for many more communities from the Regional Bell Operating Companies (RBOCs) ? the ?Baby Bells.? They are just beginning to deploy video services over high speed internet, generically called IPTV for ?internet protocol television.? IPTV requires internet speeds that are faster than the Baby Bells? current Digital Subscriber Line (DSL) broadband services. To reach the necessary speeds, IPTV requires the use of fiber optic cables, which are more expensive than copper wires. Verizon calls their pure fiber to the home (FTTH) network, FiOS. SBC Communications (now AT&T) calls their ?fiber rich? network (fiber to the neighborhood or FTTH), Project Lightspeed.

The Baby Bells? War on Local Cable Franchising

The bad news is that the ?Baby Bells? ? especially AT&T -- do not want the obligations of local cable franchise agreements, which bring many benefits to communities. A non-exclusive contract between a local unit of government and a cable company, a cable franchise agreement sets the terms by which a cable company, using public right-of-ways to make their profits, operates in that community. Terms of local franchise agreements typically include

• The rate, calculation and payment of franchise fees paid to the local government for use of the public right-of-ways
• The number and support of public, education, and government (PEG) access channels
• The provision of an Institutional Network (I-Net)
• Rules for using and repairing public right-of-ways
• Build-out requirements to serve all neighborhoods in the area
• Customer service standards
• Penalties for failing to fulfill the terms of the contract

The Baby Bells contend that franchise agreements are an unreasonable barrier to market entry: that it is too time consuming and expensive to have to negotiate some 10,000 unique franchise agreements across the country to do business, like the cable companies did They contend that since they already have access to public right-of-ways for internet and telephone, they should not have to get permission or pay franchise fees to send video over their wires. They contend that some local franchise authorities are making unreasonable demands in order to keep them from entering the local market and competing against the established cable operators. Perhaps most importantly, they contend that they should not be forced to provide the same service to all households in a franchise service area, and that if they are not relieved of franchising requirements this opportunity for investment, technological innovation, and competition will be lost.

While Verizon has successfully secured some franchise agreements, AT&T has refused even to negotiate, challenging municipalities to take them court to stop building and arguing that they are exempt from cable franchising because their system uses different technology than cable. The Baby Bells are also waging a war against franchise agreements on several legislative and policy fronts: in Congress, at the FCC, and in state legislatures, including Indiana.

Baby Bell-friendly bills in the 2006 Indiana General Assembly, Senate Bill (SB) 245 and House Bill (HB) 1279, propose significant changes to state telecommunications laws. The bills propose a move from local cable franchising to streamlined state-level video franchising through the Indiana Utilities Regulatory Commission (IURC). Cable companies with existing franchise agreements would have the option of switching to statewide franchising on July 1, 2006, or continuing to abide by their local franchise agreements until they expire. The bills would also eliminate basic telephone and cable rate regulation, prohibit build-out requirements, prevent regulation of high speed internet and advanced internet services, and eliminate regulation of telephone service quality. SB 245 also limits the development of municipal broadband projects. A related bill in the Senate, SB 23, proposes property tax abatement for new communications service infrastructure.

AT&T, Verizon, the Indiana Telecommunications Association, the Indiana Chamber of Commerce, and Governor Mitch Daniels herald SB 245, claiming that deregulation and state level video franchising will create competition and lower prices to consumers, create jobs, spur investment, and increase broadband penetration in the state. Consumer groups, public interest groups and government associations, such as Citizens Action Coalition, Common Cause, public access television advocates, the Indiana Media Action Coalition, AARP, and the Indiana Association of Cities and Towns (IACT) oppose provisions of the bill. Concerns include increased telephone rates, redlining, unnecessary tax abatements, reduced telephone service quality and customer service enforcement, reduced cable franchise fees, financial threats to the existence and growth of PEG access television, and the curtailment of municipally-supported broadband projects. The cable industry is also opposed to the bill.

Numerous states are considering similar legislation in 2006, and the Indianapolis-based organization Consumers for Cable Choice has been a vocal proponent of reducing the requirements for telephone companies to enter the multichannel video services market. Their editorials and advertising tap into consumer frustration with rising cable rates and poor customer service, and suggest that if old, unnecessary laws protecting the cable industry were dropped, we could have competition that would lower prices for everyone and improve access to broadband technology, especially in rural areas. The cable industry recently exposed the handsome Verizon and AT&T funding behind their ?consumer? campaigns. Consumers for Cable Choice helped bring about the Texas legislation that ushered in statewide video franchising in 2005, and has been engaged in a massive state-level franchising campaign in New Jersey ? a campaign that had reports of Verizon generating ?unauthorized? letters of support and phone calls on behalf of constituents.

Consumers for Cable Choice has championed a pair of federal bills in the House and Senate each called the ?Video Choice Act of 2005? that nationalizes video franchising for ?competitive video services providers? who already have authority to use the public right-of-ways ? primarily the Baby Bells. There are currently three more sweeping telecommunications reform bills under consideration in Congress, that include provisions for simplified national franchising or eliminating video franchising altogether, along with changes to telephone and internet regulation. (See sidebar, ?National Challenges to Local Franchising and Control?)

The FCC recently released a Notice of Proposed Rule Making (NPRM) seeking information from cities on whether the local cable franchise process does in fact deter competition. The FCC does not support AT&T?s contention that IPTV does not require a cable franchise. The FCC does not assert that it has the authority to end all cable franchising, as that would have to be done by Congress, but it does assert that it has the authority to set rules for cable franchising to spur competition and prevent ?unreasonable? demands from local cable franchise authorities. There is a concern that the primary ?unreasonable? demand under consideration is the requirement to serve all homes in a franchise area. The Indianapolis Cable Communications Agency is planning to file comments with the FCC that challenge the Baby Bells? claims, and the Indianapolis City-County Council will consider a resolution expressing support of local cable franchising.

What?s At Stake

If the proposed legislation becomes law, the telecommunications landscape faces several changes.

Franchise Fees: Cable television franchise fees are the largest source of non-tax revenue in Marion County. The loss of some or all of that revenue, over $7.5m in 2005, would have a significant impact on local government finances. While most of the legislation introduced at the state and federal levels, except the U.S. Senate?s ?Digital Communications Act of 2005? (DACA), have mentioned continuation of the payment of franchise fees, the devil is in the details where there are significant revenue exclusions such as late fees, advertising revenue, new channel ?launch fees,? and the ability to allocate all the discounting of bundled services (video, telephone and internet services) to video, thus reducing the amount of franchise fees paid to municipalities. Franchise fee audits would also be eliminated. The Indianapolis Cable Communications Agency estimates that the city receives $1 million per year just as the result of audits, and that the proposed state-level franchising in the Indiana General Assembly would reduce total franchise fees paid to Indianapolis by 20% to 30%.

PEG Access Channels: While much of the legislation (except DACA) has thus far also included providing a limited or ?reasonable? number of PEG access channels, the financial impact of limiting financial support to decreased franchise fees could be devastating. Cable franchise agreements often include the payment of additional money for PEG equipment and the interconnection of PEG studios to the cable system. Franchise agreements sometimes include the provision of in-kind services, such as studio and staff, or the payment of additional money to nonprofits for operational support of PEG channels over and above franchise fees. Other PEG-related provisions of franchise agreements, such as the allocation of additional channels, the position of channels, the movement of channels, and video-on-demand placement, would also be lost.

The impact to PEG channels is not hypothetical. San Antonio?s public access television channel went dark after the enactment of the Texas legislation that created its statewide video franchises. Time Warner Cable had provided a studio and staff to support public access television per their local cable franchise agreement, but once they no longer had to, took the channel off the air and can keep it off until the city comes up with the funding, equipment and staff to program at least 8 hours per day.

I-Net and Public Safety: Many cable franchise agreements require the construction and maintenance of one or more I-Nets: very high speed, secure networks that can connect government buildings, including fire stations, police stations and courts; schools; libraries; museums; utilities; and community centers. An I-Net allows for encrypted, high quality video conferencing, remote roll call, secure telephone communications, and live programming on cable.None of the proposed legislation includes I-Net provisions, resulting in additional costs to communities.

Fiber to the Rich? Cable franchise agreements typically require cable companies to provide service to all households in the franchise area. One of the perhaps unforeseen benefits of this has been the fairly extensive deployment of high speed cable modem internet service in urban areas as cable companies upgrade their systems, typically deploying high speed fiber optic cable to a neighborhood ?node,? and traditional coaxial copper cable from the node into homes. Likewise, universal service provisions of telephone provided a good foundation for the extensive availability of DSL high speed internet service in high density urban areas using telephone twisted pair copper wiring into homes. Most experts agree that multiple channels of quality video over internet technology -- especially high definition TV -- is going to need higher internet speeds than what most homes have today with cable modem or DSL service, and require that more expensive fiber optic cable be deployed all the way to the home or ?premises? (FTTH or FTTP). AT&T has been widely criticized for its plans, presented at an SBC Investor Update in November 2004, to deliver Project Lightspeed to 90% of ?high value? customers willing to spend $160 to $200 a month on telephone, internet, and video services but to only 5% of ?low value? customers who spend less than $110 per month. If the build-out provisions of franchise agreements go away, those ?low value? areas most in need of competitive choices for lower prices are the least likely to actually get them, and the digital divide will increase.

Conclusion

The need for telecommunication reform is real. Companies providing like services ? cable television and IPTV ? should be required to abide by the same rules, and all telecommunications companies using public right-of-ways for profit should be required to provide adequate compensation for that use. Wireline competition from the telephone companies has and will result in a drop in cable television rates. However the current push for legislation reform and the elimination of local franchising is clearly being driven by the Baby Bells? desire to ease their entry into the very lucrative multichannel video services market -- at the expense of public interest obligations. The elimination of local cable television franchises would remove one of the last vestiges of power that local communities have over vital communications technology, reduce revenue to local governments, and jeopardize the future of local PEG access television.

This article is the second in a series on 2005/2006 telecommunications legislative reform in the January/February 2006 issue of The Right of Way newsletter.

Andrea Price is Board President of Public Access of Indianapolis, Inc.