A Modest Proposal: Let the Regulatory Paradigm Reflect the Industry Being Regulated
2000
© Copyright 2000. All rights reserved.
...Your old road is rapidly aging,
Please get out of the new one
If you can't lend your hand
For the times they are a changing.
-Bob Dylan
I. Introduction
The three principal legislative regimes under which cable television has operated each reflects a goal suited to its technological and economic times: the Cable Communications Policy Act of 1984 (1984 Cable Act) -- "let this adolescent grow and prosper;" the Cable Television Consumer Protection and Competition Act of 1992 (1992 Cable Act)-- "let the monopoly be chastened;" and the Telecommunications Act of 1996 (the 1996 Act) -- "let competition reign."
Each Act used regulation to increase deployment of cable technology and consumer opportunities, but each generated unintended consequences prompting yet another regulatory change. The more comprehensive 1996 Act was intended to restrain regulation and unleash competition among facilities-based players in the cable, local and long distance telephone and data communications industries. However, the explosive growth of Internet related communications has been its principal effect (or perhaps byproduct). Competition among service providers and the convergence of video, voice and data services available on a variety of technical platforms, all used to access the Internet, calls into question the propriety of continued local regulation of cable system operators beyond non-discriminatory management of rights of way.
II. A Little (Selected) History, Please
A. 1984: Not at all Orwellian, the 1984 Cable Act was intended to (and did) eliminate a great deal of the regulatory uncertainty and patch work in which the cable industry and local governments thrashed about. The goals of the 1984 Cable Act were to (1) establish a national cable policy; (2) establish franchise procedures which encouraged growth and assured that cable systems were responsive to community needs and interests; (3) provide guidance on the division of regulatory authority; (4) assure the diversity of information sources and services; (5) establish an orderly process for renewal of franchises; and (6) promote competition [§601, 47 U.S.C. § 521].
Title VI of the Communications Act was added to govern cable television, and for the first time explicitly granted the FCC authority over it. Cities (i.e., the most common local franchising authority, or "LFA") and cable operators shared a mutual interest in bringing order to chaos by way of federal legislation. More than anything, the 1984 Cable Act sought to articulate a national program of regulatory authority divided among federal, state and local governments, with important limitations imposed upon the regulation itself. Section 622 of the 1984 Cable Act provided statutory authority to LFAs to collect franchise fees, but limited them to five percent of a cable operator's yearly gross revenue. The cable companies gave up the rights to freely drop, re-tier or re-price program offerings in order to eliminate rate regulation (in most jurisdictions by 1986), exclude telephone companies from offering cable services in their telephone service areas, and obtain franchise renewal standards protecting them against abuse by local authorities.
In the hope of expanding cable facilities and services, cable operators were encouraged to invest, expand and improve the quality of cable services and the capabilities of their cable systems, providing competition to broadcast television and potentially to the telephone companies. Local authority over technical standards was limited.
Section 624 (e) of the 1984 Cable Act confirmed the jurisdiction of the FCC to "establish technical standards relating to the facilities and equipment of cable systems" that are required by a franchising authority. Congress authorized total preemption of state and local law by the FCC, but left room for the FCC to allow some franchising authority discretion.
While limiting the power of state and local governments to regulate cable rates, program services and technical standards, the 1984 Cable Act did not preempt state authority to regulate (under Title II) common carrier telecommunication services, whether or not those services were delivered on a cable television system. Title VI explicitly states that cable operators are not to be treated as common carriers in providing cable services [§621, 47 U.S.C. §541(c)], setting the stage for later battles over Internet access (a subject covered by others today).
B. 1992: That which the 1984 Cable Act taketh away, Congress in the 1992 Cable Act giveth back when a vocal public decried service quality and failed to recognize the true value delivered by cable operators in exchange for sometimes double digit rate increases.
The FCC was instructed to establish consumer service standards, and LFAs were authorized to negotiate with cable operators higher standards or to adopt additional standards pursuant to municipal law. Rate regulation was reintroduced for certain services and equipment provided by most cable television systems. The FCC was directed to adopt regulations ensuring "reasonable" rates for the basic tier of cable services and to establish guidelines identifying unreasonable rates for higher tiers of services (and installation and use of equipment) [§623, 47 U.S.C. § 543]. At that time some subscribers saw service offerings shift from traditional "basic" and "expanded basic" to new product tiers and a la carte services. Others saw equipment charges added -- e.g., converters that had been included in service charges were charged for separately. Others saw equipment charges, such a remote control devices or additional outlets, reduced or even eliminated. First, Second, ...Thirteenth Report and Order on Rate Regulation, benchmarks, cost of service showings. Very confusing. Sad days.
Cable operators received a benefit when Section 624(e), 47 U.S.C. 544(e) was amended by the 1992 Cable Act. The revision instructed the FCC to establish minimum technical standards for operation and signal quality which could be incorporated into a local franchise, but, absent waiver, the LFA could not require more strict technical standards. Notwithstanding the FCC's newly adopted technical standards, LFAs (and their consultants) continued to use the traditional franchise renewal system upgrade as a vehicle to dictate technical standards and technologies, even while cable operators clustered and integrated their systems across franchise boundaries in an effort to reach the critical mass and concentration needed for more efficient and expanded services.
C. 1996: On February 8, 1996, the Telecommunications Act of 1996 became law, establishing a policy framework that encouraged competition and lessened the burden of regulation. The 1996 Act was designed to accelerate the private sector's deployment of advanced telecommunications and information technologies, and sought the entry of efficient, competing service providers into all telecommunications markets. The ultimate goal was the creation of robust competition to supplant traditional governmental regulation.
Congress limited the authority of the FCC and LFAs to regulate cable rates [§623, 47 U.S.C. 543], expressly stating its intention to let the market control rates as well as services. Regulation of cable programming services (CPST) were ended as of March 31, 1999. Local rate regulation was restricted to basic tier services and only until there was effective competition. This provided both the incentive and the means for cable operators to exponentially improve the quality and capabilities of their networks.
While the incumbent local exchange carriers continue to stifle competitors by dogged resistence to effectively interconnect their networks and unbundle network elements (a story for another day), cable television operators have rapidly deployed hybrid fiber optic / coaxial systems capable of reliably providing analogue and digital video, data, high speed Internet access and voice communications.
One of the most important clarifications of the 1996 Act was amendment of §624 [47 U.S.C. §544], particularly subsection (e), removing any notion that LFAs can subject cable operators to piecemeal, parochial technical standards and equipment requirements.
The FCC preempted state regulation of technical standards in 1974, codified in 1984, but with a liberal waiver policy to meet specific, demonstrated needs at both state and local levels. Prior to 1996, section 624(e) provided that:
A franchising authority may require as part of a franchise (including a modification, renewal, or transfer thereof) provisions for the enforcement of the standards prescribed under this subsection. A franchising authority may apply to the Commission for a waiver to be impose standards that are more stringent than the standards prescribed by the Commission under this subsection.
The 1996 Act replaced this language with the following:
No state or franchising authority may prohibit, condition, or restrict a cable system's use of any type of subscriber equipment or any transmission technology. [47 U.S.C. § 544(e)].
Although the legislative history indicates that Section 624(e) is intended to prohibit all regulation in the general areas of technical standards, customer equipment, and transmission technology, the FCC adopted a narrower view.
In 1998, the FCC reiterated that Section 624(e) "eliminates the authority of franchising authorities to interfere with a cable operator's choice of subscriber equipment and transmission technology to be used in its cable system." [TCI Cablevision of Oakland County, Inc., Order on Reconsideration, 13 F.C.C.R. 16400, ¶ 14 (1998)].
D. 1997: Section 253 of the 1996 Act prohibits states or local authorities from erecting legal barriers to entry to telecommunications markets that would frustrate the 1996 Act's explicit goal of opening local markets to competition. Section 253(c) restricts LFAs' authority to that necessary to "manage the public rights of way." As the FCC has interpreted it, this merely allows LFAs to govern the
tasks necessary to preserve the physical integrity of streets and highways, to control the orderly flow of vehicles and pedestrians, to manage gas, water, cable (both electric and cable television), and telephone facilities that crisscross the streets and public rights-of way . . . [Other] matters include coordination of construction schedules, determination of insurance, bonding and indemnity requirements, establishment and enforcement of building codes, and keeping track of various systems using the rights-of-way to prevent interference between them.
In the Matter of TCI Cablevision of Oakland County, Inc., 12 F.C.C.R. at 21441, ¶ 103. (citations omitted). The FCC has indicated that it will read Section 253 narrowly:
Our concern is that some localities appear to be reaching beyond traditional rights-of-way matters and seeking to impose a redundant "third tier" of telecommunications regulation which aspires to govern the relationships among telecommunications providers, or the rates, terms and conditions under which telecommunication service is offered to the public. For example, the Troy Telecommunications Ordinance contains provisions that, among other things, require franchisees to interconnect with other telecommunications systems in the City for the purpose of facilitating universal service, provide for regulations of the fees charged for interconnection, and mandate "most favored nation" treatment for the City under which a franchisee providing a "new service, facility, equipment, fee or grant to any other community . . . within the State of Michigan" shall provide the same to the City of Troy. Such Ordinance provisions will be difficult to justify under section 253(c) on the grounds that they are within the scope of permissible local rights-of-way management authority or other traditional municipal concerns such as police, fire, building code enforcement or other public safety concerns. . . . Given the likelihood of such local requirements impeding competition and imposing unnecessary delays on new entrants, attempts to impose a redundant "third tier" of regulation at the local level will be met with close scrutiny by the Commission.
TCI Cablevision, 12 F.C.C.R. at 21441 ¶ 105.
The Commission interpreted the 1996 Act such that it preempts all barriers to the provision of interstate and intrastate telecommunications services, and the FCC determined that Congress intended to preempt purely intrastate and franchising issues. The Commission set the framework in its decision Classic Telephone, Inc., Petition for Preemption of Local Entry Barriers, 11 F.C.C.R. 13082 (1996), for analyzing future challenges to local barriers to entry under Section 253. In particular, the Commission held that
- Rights-of-way "management" functions are limited to enumerated, ministerial construction and oversight issues, and could not justify outright denials of franchises. Id. at ¶ 39;
- Consumer protection authority, even if properly delegated from the state to municipal levels, could not be imposed in a discriminatory manner or stand as grounds for denying franchises if consumers can be protected through enforcement and service quality requirements. Id. at ¶¶ 37-38.
- Finally, the marketplace-not regulators-will determine who will provide telecommunications services such that preemption of local barriers under Section 253 will be liberally used by the Commission to further the goal of full and open competition. Id. at ¶ 25.
Cable operators' competitors in the telecommunications industry were relieved of local regulations of the type imposed upon cable system operators community by community.
E. 1999: On March 29, 1999, the FCC released its "Cable Reform Order" which implemented, inter alia, the amendment to 624(e) [Implementation of Cable Act Reform Provisions of the Telecommunications Act of 1996, Report and Order, CS Docket No. 96-85, FCC 99-57]. The Cable Reform Order prohibits LFAs from establishing their own technical standards, but nonetheless allows them to enforce the FCC's national technical standards pursuant to their franchising authority, narrowly interpreting the prohibition to avoid additional responsibility at the Commission level.
The FCC's Cable Reform Order recognizes the following LFA authority: (1) to establish and enforce franchise provisions concerning facilities and equipment related to Public, educational and governmental ("PEG") channels and for educational and governmental use of channel capacity on institutional networks [§611, 47 U.S.C. §531; (2) to ensure access to cable services throughout the franchise area, regardless of the income levels of potential residential subscribers [§621(a)(3), 47 U.S.C. §541(a)(3)]; (3) to require adequate assurance of the cable operator's financial, technical and legal qualifications to provide cable service [§621(a)(4), 47 U.S.C. §541(a)(4); (4) to require telecommunications service or facilities solely as part of an institutional network operation [§621(b)(3)(D); (5) subject to §624 limits on technical standards, to specify requirements in a franchise renewal proposal [§626(b)(2), 47 U.S.C.§546(b)]; (6) to establish and enforce customer service requirements [§632(a)(1), 47 U.S.C. §552(a)(1)]; and (7) to establish and enforce construction schedules and other construction-related performance requirements [§632(a)(2), 47 U.S.C. §552(a)(2)]. [Cable Act Reform Order at ¶ 142]
III. The Future of Cable Regulation
I would respectfully submit that the only item listed in the FCC's litany of LFA rights and powers that is inherently a local regulatory concern is the last one, dealing with safety codes, construction requirements, and management of public rights-of-way. Such rules can be applied to cable operators as to others in a competitively neutral, non-discriminatory manner. Standards for listed items 2, 3, and 6 above can be set at a national or state level. Public, educational and governmental programming obligations, service over "institutional networks" and traditional franchise renewal obligations unique to cable system operators should be eliminated. Such services can be voluntarily retained if seen by the cable system operator as a benefit to local marketing.
The next step in regulatory reform should limit local authority, and recognize that cable system operators are engaged in a competitive environment with multiple technological platforms, involving a wide array of services, and played out on a national stage. Market forces will determine what customers want and receive, subject to policy oversight at the national (and perhaps state) level, but freed of the historical legacy of patchwork local controls.
A. Competition: According to the FCC's Annual Assessment of the Status of Competition in Markets for the Delivery of Video Programming (CS Docket No. 99-230, FCC 99-418), although cable subscribers increased 2% from 1998, there now are over ten million DBS subscribers, an increase of approximately 39% since the 1998 Report. DBS represented a 12.5% share of the national MVPD market in June 1999 and continues to grow at a rate faster than cable. SMATV subscribership increased 54% since the 1998 report, with the industry representing an approximately 1.8% share of the national MVPD subscribership as of June 1999.
In addition, LEC competitors and overbuilders have challenged leading cable MSOs with delivery of video and high speed Internet in many communities. Cable operators (including Cox, Time Warner and AT&T) are now providing local and long distance telephone services in their cable markets.
Cable has become the leader in providing "broadband" connections to the Internet through its initiative and investment, both awakening the LECs who slept on DSL technology and triggering the most recent analysis of cable system uses and the regulatory definition of "cable service." However, in broadband Internet access too, cable television is subject to intense competition. Broadband and traditional dial up Internet access are competitors, and cable holds only a 9% share of Internet subscribers. Even if one considers the nascent broadband service as a separate market, cable providers hold only a 71 % share, with DSL adding subscribers at a rapid pace, and satellite high speed services (e.g., DirecPC) being rolled out on a national basis, with two way high speed transmission available early in 2001.
B. Reconsidering Regulatory Authority: Because the telephone networks and cable systems originally were designed to provide different services, they differ not only in technology but also in the regulatory structures devised to govern the specific services each network originally supported. Satellite services now competing with both are subject to yet another set of rules, but not being terrestrial present fewer issues to local governments. Notwithstanding the convergence of services now underway (as envisioned by the 1996 Act), communications law retains the "stove piped" or compartmentalized structure created for a different time and purpose.
Recognizing the difficulty in continuing this segregation in the face of direct competition (especially in Internet access) across platforms, the U.S. General Accounting Office in October 2000 released a report to the Senate Subcommittee on Antitrust, Business Rights and Competition and Committee on the Judiciary entitled Technological and Regulatory Factors Affecting Consumer Choice of Internet Providers. Among its suggestions was to amend the Communications Act to:
...ensure that both existing and emerging services provided over different networks are regulated in a comparable manner, while also recognizing the historical, commercial and regulatory structure of the respective communications network sectors, and each network's technological capabilities.
This suggests that regulatory authority should be held at a sufficiently high level to enable the industries to receive comparable consideration. This does not mean perfect symmetry in licensing, taxing and regulation, but fairness. As Chairman Kennard said at the Voice Over Net Conference on IP Protocol Telephony, "We have to distinguish between treating the same differently and treating that which is different the same."
Local regulation of cable systems and operators grew out of the industry's development from local operators re-transmitting off-air signals to local customers. The inherently local flavor has long waned, and in the place of "Community Antennae Television" we have high capacity fiber optic networks moving bytes over long distances and providing all manner of communications service.
- In the 1970s, municipal exaction of exorbitant franchise fees was curtailed, later codified in the 1984 Cable Act.
- Attempts to control programming and services were ended in 1984.
- Rate regulation was stopped in 1984, re-instituted briefly in 1992, and then removed again in 1996 in recognition of competition's role in controlling the market place.
- Authority to dictate technical standards and technology was removed in 1996.
- Rights of way management has been limited to traditional police and public safety functions.
It is time to recognize that cable television is no longer a local community pet. While it can provide services a community enjoys, it should not be required to as a condition of competing in the marketplace with other companies not so burdened. Such slavish devotion to precedent ignores changed circumstances.
Public, educational and governmental requirements should be phased out. If the community wants to maintain such capacities, it can use revenues derived from the tax base, or from legitimate ("reasonable") fees collected in a non-discriminatory and competitively neutral manner for use of-rights-of way. Public access programming (rarely watched and of spotty quality at best) is rapidly being replaced by the Internet as the means by which voice is given to the many. Funding requests for PEG programming facilities have expanded to paying for virtual networks by which schools can conduct distance learning -- a worthy educational goal, but not one the cost of which should be borne by only a portion of the community benefitted. Institutional networks -- originally contemplated as using excess channel capacity and considered to be part of the "cable system" under current regulations -- have become a means by which LFAs attempt to acquire entire telecommunications networks at the cost of the cable operator. There is no legal basis -- 47 U.S.C.§541(b)(3)(D) notwithstanding -- to demand that a cable operator either construct a dedicated network or, more objectionable, merely pay to have the LFA acquire one. Minimum customer standards can be set nationally, but will soon be redundant, since it is competition that actually sets the standards. When one eliminates these items, local cable regulation as we have known it is neither necessary nor appropriate.
IV. Conclusion
The time has come to reconsider local regulation of cable system operators. The increasing importance of the Internet, the convergence of communication services across platforms, the competition among players within and between industries, the geographical scope upon which cable systems now spread, and the progressive restriction of local control all argue for a major rethinking of why local regulation of cable systems should extend beyond competitively neutral and non-discriminatory rights-of-way management.