1. I understand that the federal law has a complicated formal process, and also an informal process. My operator wants me to ignore the formal process and just enter into negotiations. Is that a good idea?

It is generally not a good idea. Federal law does allow two ways to work a renewal: through a formal process, or by negotiated agreement. But the two processes can and should work in tandem. The first step in the formal process is to identify future, cable-related needs and interests of the community and to review the past performance of the operator. By taking this first step, a community will obtain the information that it needs to be successful at the bargaining table, and it will be in a position to comply with the formal procedures if bargaining fails. An operator that suggests that you ignore this step often is seeking to bring the local franchise authority to the bargaining table before it has a good idea of community needs , and before it can understand or put itself in a good position to protect its interests.

2. Why can’t I just kick my operator out of town and seek bids from others?

Federal law doesn’t allow it. Under the federal Cable Act, the incumbent cable operator has special rights to consideration. If the operator activates the formal renewal process, it is protected against an arbitrary denial of renewal. A community has to go through certain steps and conduct certain proceedings before renewal can be denied. The process is not competitive. Renewal cannot be denied simply because someone else might be willing to offer more. An incumbent operator’s past performance and proposal for future renewal must be evaluated on its own merits (or demerits).

Yes, both legally and practically. Although most communities do renew the incumbent’s franchise, several communities have successfully denied renewal. The Cable Act permits a community to deny renewal if past performance has been inadequate, or if the operator is legally unqualified or is unwilling or unable to devote the necessary technical skills and financial resources to the community; or if the operator is unwilling to reasonably satisfy the future, cable-related needs and interests of the community (considering the cost of meeting those needs and interests).

Communities usually devote one to three years, or more, to the renewal process. A longer period is possible but carries additional practical and legal risks.

Among other things, as part of the renewal process, you can ensure that the cable system is properly upgraded; require the operator to set aside channels for public educational and government use of the cable system, and require certain support for those channels (studios and equipment, for example). You can also require the operator to provide an institutional network providing, for example, a modern telecommunications link for schools, libraries and government.

A community can also ensure that any construction of the cable system proceeds in an orderly fashion, that all parts of the community can obtain service, and that the system is rebuilt in a reasonable period of time. The franchise term can also be established through the renewal process – renewals do not have to be for 15 years, and often are far shorter. In addition, as the renewal process proceeds, communities often will establish customer service standards; franchise fee requirements; procedures for reviewing operator performance and for ensuring that the operator continues to satisfy community needs throughout the franchise term.

There are some things that communities cannot do through the renewal process. Perhaps most importantly, a municipality cannot (1) require the operator to provide specific programs (a community should be able to establish channel capacity requirements); or (2) require the operator to provide service at a certain rate (other than the rate established consistent with federal regulations).

No, it is not. In communities that are regulating cable rates, an operator can pass through increases in its external costs to subscribers. Some franchise requirements, such as PEG and franchise fee requirements, are external costs, but not all are. In addition, because the operator is only entitled to pass through the increase in those costs, renewal franchise requirements do not necessarily result in rate increases, depending in part on what was required under the prior franchise. In several recent renewals, for example, operators have agreed that only a small part of the total renewal franchise requirements are eligible for rate pass-through under FCC rules. Moreover, the notion of a "pass-through" really only applies where rates are subject to rate regulation. If your operator is claiming a pass-through is necessary, ask for detailed information on its revenues and expenses. It is often rather simple to show that the community’s needs and interests can be satisfied without raising rates.

A. Background

1. The formal renewal process is initiated either by the cable operator's submitting a written notice to the franchising authority requesting the commencement of formal renewal proceedings, or by the franchising authority initiating such proceedings on its own.

2. If the cable operator has timely requested the franchising authority to begin formal renewal proceedings, renewal cannot be denied without recourse to the formal process (unless the operator defaults on the process), although it may be possible to revoke a franchise even after renewal proceedings have begun.

B. Renewal Notice.

3. Timing of renewal notice. Section 626(a)(1) provides that a franchising authority may, on its own initiative, during the 6-month period beginning 36 months prior to the expiration of the franchise, commence formal franchise renewal proceedings. Cable operator may initiate formal proceedings by providing franchising authority with proper written notice within that time period.

4. Requisites of proper notice from cable operator. The renewal notice must request that the franchising authority commence renewal proceedings under the Cable Act. See Triad CATV, Inc. v. The City of Hastings and Americable International-Michigan, Inc., 89-30090LA (W.D. Mich. filed October 2, 1989). Court held operator lost renewal rights under Cable Act because notice requesting renewal not timely and notice did not state intent to renew utilizing Cable Act procedures.

C. Needs Ascertainment.

1. First stage in formal renewal process. Cable Act allows franchising authority six months from the date of submission of renewal notice to commence ascertainment process. Process intended to give public and franchising authority opportunity to identify future cable-related community needs and interests and review past performance of cable operator (§ 626(a)).

2. Ascertainment can be accomplished through a variety of tools, including public hearings, surveys, focus groups, interviews, and reports and audits of the operator's past performance.

D. Renewal Proposal.

1. Second stage of formal renewal process. Proposal may be submitted upon request of franchising authority or cable operator's initiative.

2. A proposal initiated by franchising authority may establish requirements for facilities and equipment that are related to operation of system, including proposals for an upgrade, but not for video programming or other information services, all subject to § 624(b).

3. Section 622(b) limits franchise fee to 5% of cable operator's gross revenue. However, not all payments made by the operator are franchise fees, e.g., funds contributed by cable operator as capital costs of PEG are not considered part of franchise fee (§ 622(g)).

4. A franchising authority can establish deadlines for submission of formal proposal (§ 626(b)(3)). Such deadlines must conform to state and local law and must be communicated to the cable operator in writing. See Eastern Telecom Corporation v. Borough of East Conemaugh, et al., 872 F.2d 30, 35 (3rd Cir. 1989).

5. The franchising authority cannot require submission of formal proposal prior to completion of ascertainment proceeding (House Report at 73), and upon submission of formal proposal, must provide prompt notice of the proposal (§ 626(c)(1)).

6. The franchising authority must decide to renew or preliminarily deny within four months of receipt of proposal.

E. Administrative Proceeding for Denial.

1. If the renewal proposal is preliminarily denied, the cable operator can request administrative proceedings, or such proceedings may begin upon franchising authority's own initiative. § 626(c)(1). In such an administrative proceeding the cable operator must be given adequate notice and fair opportunity for full participation, including the right to introduce evidence, to require the production of evidence and to question witnesses. A transcript of the proceedings must be made.

2. If the cable operator believes the franchising authority is unfairly biased, it must raise its objections during administrative proceeding or they shall be deemed waived. See Rolla Cable System, Inc., v. City of Rolla, 89-211C(2) (E.D. Mo. April 15, 1991). Rolla narrowly defined bias as a personal or institutional financial interest in the outcome of the renewal proceedings.

3. A franchising authority's decision to grant renewal upon terms unacceptable to cable operator may be treated as denial. House Report at 75.

4. ANY FINAL DECISION NOT TO RENEW MUST BE BASED ON AN ADVERSE FINDING WITH RESPECT TO ONE OF FOUR FACTORS:

a. Whether the cable operator has substantially complied with the material terms of the franchise and applicable law. Any violations occurring after 12/29/84 (effective date of Cable Act) cannot be held against cable operator unless it has been given notice and opportunity to cure. § 626(d).

b. Whether the quality of the cable operator's service, including signal quality, response to consumer complaints, and billing practices, but without regard to the mix or quality of cable services or other services provided over the system has been reasonable in light of community needs. Any violations occurring after 12/29/84 (effective date of Cable Act) cannot be held against cable operator unless it has been given notice and opportunity to cure. § 626(d).

c. Whether the cable operator has the financial, legal and technical ability to provide the services, facilities and equipment as set forth in the cable operator's proposal. Past performance relevant and may be considered in reaching decision on cable operator's technical ability. Rolla at 26.

d. Whether the cable operator's proposal is reasonable to meet the future cable-related community needs and interests, taking into account the cost of meeting such needs and interests. The franchising authority may not deny a proposal on the basis of a comparative bid, but "a court should defer to the franchising authority's identification of the community's needs and interests except to the extent necessary to weigh the needs and interests against the cost of implementing them." Union CATV, Inc. v. City of Sturgis, 107 F.3d 434 (6th Cir. 1997).

5. Upon completion of the administrative proceeding, the franchising authority must issue a written decision stating the reasons for denial. § 626(c)(3).

F. Judicial Review.

Following final denial, cable operator must file an appeal in federal or state court within 120 days of receipt of the notice of the decision. §§ 626(e)(1), 635. If any action of the franchising authority is not in compliance with the Cable Act or the cable operator demonstrates that the adverse finding with respect to each of the four criteria was not supported by a preponderance of the evidence, on the record of the proceedings, the court is directed to grant appropriate relief. However, no relief granted for "harmless error". § 626(e)(2).

Most franchises renewed through informal negotiation process set forth in § 626(h). Congress anticipated that most renewals would be through informal process. House Report at 72. Informal proceedings can be conducted at any time and do not affect the rights of the cable operator to proceed under the formal procedures if an appropriate renewal notice has been sent. TCI of South Carolina, Inc., v. The City of Bennettsville, 4.89-0334-2 (D.S.C. filed July 17, 1990).

Once a successful franchise renewal has been negotiated, the franchising authority must notify the public and provide an opportunity to comment on the renewal before it is finally granted. § 626(h).

1. Overview. As cable operators upgraded their systems, they began to offer internet services via the cable system. The service offered is dramatically different from the service now being taken by most consumers -- "cable modem" service is as much as 1000 times faster than typical dial-up service. Though several MSO’s offer the service, when AT&T announced its merger with TCI, the issue of open access rose to the forefront of debate at both the federal and local levels.

AT&T offers cable modem service through @Home, a company in which it owns a substantial interest. @Home is given the exclusive right to provide cable modem service over the system, and @Home agrees not to use the Internet’s capabilities to compete with the cable operator in the provision of video programming or telephone services. While theoretically any user can access any Internet content, including content offered by other ISPs, @Home installs equipment that is intended to allow it to favor content it chooses, by connecting more slowly to some sites.

Many consumer groups, ISPs, and local exchange companies became concerned that through this arrangement, AT&T, which has become the largest and most dominant MSO in terms of the percentage of cable subscribers it serves, will be in a position to dominate high-speed access to the Internet, and will use that domination to exact payment from any e-commerce provider, or content provider that wants a clean, fast connection to subscribers. The ability to control what sites are seen first and which sites are most accessible could affect how the Internet and Internet businesses develop.

At the Federal level, the FCC took a "hands-off" approach, asserting that the technology was too new and that the market forces, rather than regulators, should determine whether AT&T should open its cable-modem platforms to competing ISP’s. However, local communities, concerned about the effects on competition, because began considering whether to require AT&T to allow other companies to have access to its system (for a fee) to provide Internet access to subscribers, as a condition of approving the transfer of local franchises from TCI to AT&T.

2. AT&T v. Portland. In January, 1999, the City of Portland, and Multnomah County, Oregon (collectively referred to as "Portland") conditionally approved the transfer of their respective local cable franchise from TCI to AT&T. One of the conditions was that AT&T must provide "non-discriminatory" access to its cable modem platform -- that is, that AT&T allow internet service providers ("ISPs") not affiliated with AT&T to connect to AT&T’s cable modem platform, on the same terms and conditions as @Home. Practically, this would allow subscribers to bypass AT&T’s @Home cable ISP service and have direct access to the ISP of their choice, without having to pay the @Home retail rate.

AT&T refused to accept the non-discriminatory access condition, and accordingly, Portland denied the companies’ request for approval of the change of control. AT&T then sued Portland in the United States District Court for the District of Oregon, claiming under various statutory and constitutional theories that Portland did not have authority to require nondiscriminatory ISP access to the cable platform as a condition of approving the change of control. On June 3, 1999, the District Court granted Portland’s motion for summary judgment. (43 F. Supp. 1146), concluding that the non-discrimination condition on the transfer is within Portland’s authority as a reasonable regulatory requirement to protect competition.

AT&T filed notice of appeal in the Ninth Circuit, and an expedited briefing schedule was set. Notable among the many amici who filed briefs on behalf of the parties on both sides of the litigation was the FCC. The Commission’s brief did not, as some had predicted, argue that Portland was preempted from imposing an open access requirement. Instead, the Commission’s stressed in its brief that it had not yet decided whether internet service was a cable service or a common carrier service. Oral argument on the appeal was held on November 1, 1999. During the argument, the court seemed to be quite interested in the FCC’s statement, as attorneys from both sides were questioned on the effect of a ruling that internet access is a telecommunications service rather than a cable service.

A decision from the Ninth Circuit is expected in the first quarter of 2000.

3. AT&T-Mindspring agreement. In December, 1999, AT&T and Mindspring Enterprises delivered a letter to Chairman Kennard outlining an agreement between the two companies whereby AT&T agreed to adhere to certain "principles" with respect to internet access, once its exclusive agreements with @Home expired.

According to the letter, these principles include providing customers with:

a choice of ISPs; the ability to exercise their choice of ISPs without having to subscribe to any other ISP; a choice of Internet connections at different speeds, and at prices reasonable and appropriate to those speeds; direct access to all content available on the World Wide Web without any AT&T-imposed charge to the consumer for such content; the continued ability to change or customize their "start page" and other aspects of their Internet experience; the functionality of their ISP comparable to that which such ISP has on competing high-speed systems, subject to any technical constraints particular to, or imposed upon, all ISPs using AT&T’s cable system to deliver high-speed Internet access.

The letter further stated that AT&T was "prepared to negotiate private commercial arrangements with multiple ISPs" which would take effect upon the expiration of AT&T’s exclusive contractual arrangement with @Home. These arrangements, according to the letter, will provide ISP’s with:

Internet transport services for high-speed Internet access at prices reasonably comparable to those offered by AT&T to any other ISP for similar services, subject to other terms negotiated between the parties on a commercial basis; the opportunity to market directly to consumers high-speed Internet access over cable using AT&T’s Internet transport services; the opportunity through means to be mutually agreed upon, to market their high-speed Internet access which uses AT&T’s Internet transport services to AT&T’s cable customers who have not already designated an ISP; the opportunity to bill cable subscribers directly for services provided by the ISP that are additional to the services provided by AT&T; the opportunity to differentiate service offerings by various means, such as enhanced customer care and advanced applications; and the opportunity to maintain brand recognition in all such offerings.

The letter was signed by MindSpring, AT&T, and Ken Fellman, Chair of the FCC’s Local State Government Advisory Committee.

The letter was greeted with mixed reviews among the many industry, government, and legal participants who are actively involved in the open access debate. Among the negative reactions is the argument that the agreement falls short of true open access, because, among other things, only ISP’s who reach a negotiated agreement with AT&T will have access to the cable modem platform. This is different from non-discriminatory access by any ISP for a non-discriminatory fee.

The impact of the AT&T/Mindspring letter is unclear. Thus far, other MSO’s have not joined AT&T in agreeing to offer negotiated access. Perhaps the most significant impact of the letter, however, is that AT&T has effectively conceded two long-standing arguments: that providing open access to multiple ISP’s is not technically feasible; and that multiple ISP access will slow the investment in cable modem deployment.

4. AOL/Time Warner merger: Recently, AOL announced the acquisition of Time

Warner. Time Warner is, among other things, a major operator of multiple cable systems. Time Warner had been offering internet access service through its Roadrunner cable modem platform. AOL, prior to this transaction, was a major force in the open access debate, investing large amounts of resources and money in support of the position that AT&T should provide open access to its cable modem platform. Since the merger was announced, AOL has issued statements representing that it still committed to the open access fight, and assuring that it will be offering open access on its newly acquired cable systems. However, like AT&T and @Home, Time Warner had exclusive contracts with Roadrunner. Further, Time Warner, like other multiple system operators, failed to offer much support or enthusiasm for AT&T agreement with Mindspring.

Like the AT&T/Mindspring agreement, the ultimate impact of the AOL/Time Warner merger on the Open Access debate will become clearer in the coming months. However, there is little doubt that these developments, as well as the pending Ninth Circuit decision in the Portland case, will alter both the issues to be debates, and the players involved in the debate.