RECENT DEVELOPMENTS IN CABLE AND TELECOMMUNICATIONS

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1 Paul M. Valle-Riestra Senior Assistant City Attorney City of Walnut Creek 2004 City Attorneys Department Spring Meeting San Diego RECENT DEVELOPMENTS IN CABLE AND TELECOMMUNICATIONS I. INTRODUCTION. The past decade has witnessed dramatic changes both in the telecommunications industry and in local authority to regulate telecommunications. This local authority is increasingly under attack by the industry, the courts and State and Federal legislative and regulatory bodies. This paper will provide an overview of local government authority to regulate telecommunications companies and highlight some of the recent developments. This paper will not cover wireless telecommunications issues; these issues will be covered by another speaker on today s program, Bill Sanders. A more in-depth discussion of some of these and many other telecommunications issues is available in the book Telecommunications by Paul Valle-Riestra (Solano Press 2002), which can be ordered online at II. OVERVIEW OF LOCAL AUTHORITY. Local authority to regulate telecommunications and the installation of facilities within the public rights-of-way varies considerably, depending upon the type of telecommunications service involved. Federal and California law create a patchwork of different regulatory categories that apply to different telecommunications services. Local authority largely depends upon the extent to which Federal and California law have, in each regulatory category, limited local authority. These regulatory categories include cable service, open video service, telecommunications service (including telephone service), information services and private lines. In the modern world, these regulatory categories make little sense. Many telecommunications providers now offer a variety of voice, video and data services via an integrated system. Increasingly it is difficult to distinguish between types of services or to fit a particular service into a particular regulatory category. Nevertheless, it is likely that these regulatory categories will remain in place for many years to come. Each of the categories of telecommunications services will be described in greater detail below. Generally cities have broad authority to regulate cable services and the

2 installation of cable facilities, including requiring cable companies to obtain a franchise and pay franchise fees. City authority to regulate open video service is also broad, although somewhat more limited than authority over cable service. City authority over telephone companies is limited by California and Federal law, which collectively preempt the regulation of telephone service and franchising requirements while largely preserving local authority to regulate the time, place and manner of telephone line installation. Local authority over information services is unclear. City authority to regulate telecommunications services that don t fit into any of these regulatory categories appears to be quite broad. III. CABLE SERVICE. A. GENERAL LOCAL AUTHORITY Cities have broad authority to regulate both cable services and the installation of cable facilities within public rights-of-way. Prior to providing cable service, cable operators must obtain a franchise from the city within which they operate. 47 U.S.C. 541; Government Code et seq. Cities are authorized to adopt customer service standards (47 U.S.C. 552; 47 C.F.R ), collect franchise fees of up to 5% of the operator s gross revenues (47 U.S.C. 542; Govt. Code 53066(c)), enforce Federal Communications Commission regulations that (nominally) limit rates for basic cable service (47 U.S.C. 543; 47 C.F.R et seq.), require the cable operator to set aside channels for public, educational and governmental ( PEG ) access uses (47 U.S.C. 531), require the cable operator to provide equipment and facilities for the production of PEG programming (47 U.S.C. 541(a)(4)(B), 544(b)), require the cable operator to provide an institutional network (typically telecommunications lines used to link government facilities) (47 U.S.C. 541(b)(3)(D) and 544(b)(1)) and to regulate construction (47 U.S.C. 552(a)(2)). Federal law grants State and local governments the authority to franchise cable systems. Federal law defines a cable system as a facility consisting of transmission lines and equipment designed to provide cable service to multiple subscribers. (47 U.S.C. 522(6)). Cable service is defined as (A) the one-way transmission to subscribers of (i) video programming, or (ii) other programming service, and (B) subscriber interaction, if any, which is required for the selection or use of such video programming or other programming service. 47 U.S.C. 522(6). Other programming service is defined as information that a cable operator makes available to all subscribers generally. 47 U.S.C. 522(14). The federal grant of authority to State and local governments to franchise cable systems does not include cable systems that serve subscribers without using any public right-of-way. 47 U.S.C. 522(7). Generally any use, however minor, of the public rightof-way will suffice, including merely crossing a public street. In re Definition of a Cable Television System (1990) 5 F.C.C. 7638, The Supreme Court has described this conclusion as [c]onsistent with the plain terms of the statutory exemption. F.C.C. v. Beach Communications, Inc. (1993) 508 U.S. 307, 311. Two other courts have stated 2

3 that crossing a public right-of-way constitutes use. See Liberty Cable Co. v. City of New York (S.D.N.Y.) 839 F.Supp. 191, 195, aff d, 60 F.3d 961 (2d Cir. 1995), cert. denied, 116 S. Ct (1996); Channel One Systems, Inc. v. Connecticut Dept. of Pub. Util. Control (D. Conn. 1986) 639 F. Supp. 188, 199. However, a divided court in Guidry Cablevision v. City of Ballwin (8 th Cir. 1997)117 F.3d 383, held that the mere crossing of a street was insufficient to require a franchise under the Communications Act. In certain situations, merely leasing capacity in a third party s telecommunications lines located within a public right-of-way to deliver signals to an otherwise private cable system does not constitute use of the public right-of-way. City of Chicago v. FCC (7 th Cir. 1999) 199 F.3d 424; City of Austin v. Southwestern Bell Video Systems (1999) 193 F.3d 309. Even in situations where cities are not authorized by Federal law to regulate a system because it does not use the public rights-of-way, a city may nevertheless have independent authority to regulate the system under its police powers. See e.g. City of Dallas v. FCC (5 th Cir. 1999) 165 F.3d 341. B. FRANCHISE RENEWALS Many California cities are currently negotiating renewals of franchises with their cable operators. Comcast, the nation s largest cable operator, has recently begun taking a much harder line at the bargaining table. This has been particularly evident in San Jose, where Comcast has filed a lawsuit seeking to sidetrack the process that could lead to a denial of the franchise renewal. Before addressing the Comcast lawsuit, the following is background information about the renewal process. 1. Franchise Renewal Process. One of the purposes of Title VI of the Communications Act is to 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. 47 U.S.C. 521(5). The Communications Act sets forth fairly detailed procedures for the renewal of cable franchises. 47 U.S.C These procedures are intended to protect cable operators from arbitrary and unfair actions by franchising authorities (130 Cong. Rec. H12,241 (daily ed. Oct. 11, 1984) and contemplate that a cable operator whose past performance and proposal for future performance meet the standards established by this section be granted renewal (House Committee on Energy and Commerce, Report on Cable Franchising Policy and Communications Act of 1984, H.R. Rep. No. 934, 98 th Cong., 2d Sess. 72 (1984)). However, these procedures do not establish a presumption of renewal. (Compare earlier versions of the 1984 Act, e.g. see Options for Cable Legislation: Hearings on H.R and 4229 Before the Subcomm. On Telecommunications, Consumer Protection and Finance, H.R. Rep. No. 73, 98 th Cong., 1 st Sess. (1983) (statement by United States Conference of Mayors.) 3

4 Franchises can be renewed either through the formal renewal process (i.e. by following the detailed formal procedures under the Communications Act) or through the informal process (i.e. by not following the detailed formal procedures). a.. Formal Process. A franchising authority may, on its own initiative during the 6-month period which begins with the 36 th month before the franchise expires, commence the formal renewal process. Alternatively, the cable operator may trigger the commencement of the formal renewal process by submitting during that 6-month period a written renewal notice requesting the commencement of the proceeding. In the latter case, the franchising authority must commence the proceeding within 6 months after the date the notice is submitted. If the proceeding is neither timely requested by the cable operator nor commenced by the franchising authority on its own initiative, the cable operator may not invoke the formal renewal procedures. 47 U.S.C. 546(a). The formal proceeding must afford the public in the franchise area appropriate notice and an opportunity to participate for the purpose of identifying the future cablerelated community needs and interest and reviewing the performance of the cable operator during the then-current franchise term. 47 U.S.C. 546(a). The Communications Act does not specify the manner in which the franchising authority must review past performance or identify future cable-related community needs and interests. The manner of determining these matters rests in the discretion of the franchising authority. Union CATV, Inc. v. City of Sturgis (6 th Cir. 1997) 107 F.2d 434 Frequently franchising authorities use some combination of surveys, focus groups, meetings with community leaders, assessment of plans by community organizations, recommendations from cable commissions and public hearings. Upon completion of this initial stage, the cable operator may submit a proposal for renewal on its own initiative or at the request of the franchising authority. The franchising authority may establish a deadline for submittal of the proposal. The proposal must contain such material as the franchising authority may require, including but not limited to proposals for an upgrade of the cable system. 47 U.S.C. 546(b). The franchising authority s request for proposals may also include requirements for facilities and equipment, but generally may not include requirements for particular video programming or information services. 47 U.S.C. 524(b)(1). The franchising authority may also require a proposal to designate channel capacity public, educational, or governmental use, and to designate channel capacity on institutional networks (typically networks connecting public buildings) for educational or governmental use. 47 U.S.C. 531(b). Upon the submital, the franchising authority must provide prompt public notice of the proposal. Within four months after submission of the proposal, the franchising authority must either renew the franchise or issue a preliminary assessment that the franchise should not be renewed. In the latter situation, the franchising authority may, on its own initiative, and must, at the request of the cable operator, commence an 4

5 administrative proceeding. The franchising authority must provide prompt public notice of the proceeding. The cable operator must be afforded adequate notice of the administrative proceedings. The cable operator and the franchising authority, or its designee, must be afforded a fair opportunity for full participation, including the right to introduce evidence, to require the production of evidence, and to question witnesses. A transcript must be made of the proceeding. 47 U.S.C. 546(c). If a franchising authority designates a hearing officer to take evidence and conduct the hearing, the franchising authority may nevertheless reserve the right to make the final decision. Cablevision of the Midwest, Inc. v. City of Brunswick (N.D. Ohio 2000) Case No. 1:99 CV1442 (unreported decision currently available online at The administrative proceeding is for the purpose of considering whether (1) the cable operator has substantially complied with the material terms of the existing franchise and with applicable law; (2) the quality of the operator s service has been reasonable in light of community needs, 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; (3) the operator has the financial, legal and technical ability to provide the services, facilities, and equipment set forth in the proposal; and (4) the 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 Legislative History provides guidance in applying these four factors: The first of these considerations, whether the operator has substantially complied with the material terms of the franchise, does not require that the operator meet each and every specific provision of a franchise. A cable franchise commonly extends for a period of 15 years, or longer, during which time the franchising authority and the operator may modify the franchise, including, perhaps, determining that certain provisions need not be met at all. The extent to which the franchising authority has explicitly or implicitly concurred with such variations from the franchise terms should be taken into account in assessing the operator s compliance with this provision. The second criterion assesses whether the quality of the operator s service has been reasonable in light of community needs. The service encompassed by this provision is not the quality or level of particular programming services or other cable services which the operator has provided. The quality of the operator s service does refer to the services associated with day-today operation (e.g., response to consumer complaints, signal quality, billing). The assessment made on this 5

6 criterion should consider the operator s performance over the life of the franchise, unless the franchise has been transferred with the franchising authority s consent. In that case, the applicable period of consideration would be the period in which the franchise was held by the operator seeking renewal. The final criterion is whether the equipment, facilities, and services proposed by the operator are reasonable in light of the future cable-related community needs and interests, taking into account the cost of meeting such needs and interests. Indicators of consumer satisfaction, such as subscriber surveys, may be a key factor in construing community needs and interests. Similarly, in assessing the costs under this criteria [sic], the cable operator s ability to earn a fair rate of return on its investment and the impact of such costs on subscriber rates are important considerations. Finally, it is not intended that this criteria [sic] requires the operator to respond to every person or group that expresses an interest in any particular capability or service. Rather, the operator s responsibility is to provide those facilities and services which can be shown to be in the interests of the community to receive in view of the costs thereof. House Committee on Energy and Commerce, Report on Cable Franchise Policy and Communications Act of 1984, H.R. Rep. No at 74 (1984), reprinted in 1984 U.S.C.C.A.N At the completion of the proceeding, the franchising authority must issue a written decision granting or denying the proposal for renewal based on the record of such proceeding and stating the reasons therefore. The franchising authority must transmit a copy of the decision to the cable operator. 47 U.S.C. 546(c). Any denial of a proposal for renewal that has been submitted in compliance with the franchising authority s requirements shall be based on one or more adverse findings made with respect to the four factors described in the previous paragraph. A franchising authority may not base a denial on the first two factors (i.e. failure to comply with the franchise and applicable law or failure to provide reasonable service in light of community needs) if any of the following are shown: (1) the franchising authority failed provided the operator with notice and an opportunity to cure, (2) the franchising authority waived its right to object, or (3) the cable operator gave written notice of a failure or inability to cure and the franchising authority failed to object within a reasonable time after receipt of the notice. 47 U.S.C. 546(d). The city itself must provide clear, formal notice specifying the operator s failure, although the notice need not be in writing. Rolla Cable System, Inc. v. City of Rolla (E.D. Mo. 1991) 761 F.Supp. 6

7 1398 (holding that letters from the city administrator and a city council member indicating their displeasure with the operator s service were insufficient). The notice does not need to be given within any particular time after the cable operator s breach or failure to provide reasonable service, provided that the cable operator is given an opportunity to cure. In Cablevision of the Midwest, Inc. v. City of Brunswick (N.D. Ohio 2000) Case No. 1:99 CV1442 (unreported decision currently available online at the city adopted a resolution notifying the cable operator of its failure to provide the required amount of local origination programming over a period of many years, and giving the cable operator 30 days to cure. The cable operator sent letters in response, but the city manager sent a reply letter indicating that the city was dissatisfied with the response. The city ultimately denied the franchise renewal one and one-half years later. The court held that the notice was timely and upheld the city s determination that the operator had ample opportunity to cure the breach. The court further held that the city had not waived its right to object to the breach by remaining silent for a number of years. Finally, the operator argued that it had effectively notified the city of its failure to cure and that the city manager s letter was insufficient to constitute an objection to that failure as required by the statute. The court rejected this argument, holding that an objection to an operator s notice of a failure to cure need not be as specific as the city s requisite initial notice to the cable operator of a breach or failure to provide reasonable notice. The fourth factor, i.e. whether the 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, is often the most contentious issue when a franchising authority considers a denial. The House Committee Report noted that it is not intended that [this factor] requires the operator to respond to every person or group that expresses an interest in any particular capability or service. Rather, the operator s responsibility is to provide those facilities and services which can be shown to be in the interests of the community to receive in view of the costs thereof. House Committee on Energy and Commerce, Report on Cable Franchise Policy and Communications Act of 1984, H.R. Rep. No at 74 (1984), reprinted in 1984 U.S.C.C.A.N [I]n assessing the costs [under this factor], the cable operator s ability to earn a fair rate of return on its investment and the impact of such costs on subscriber rates are important considerations. Id. Any cable operator whose proposal for renewal has been denied by a final decision or has been adversely affected by a failure of the franchising authority to act in accordance with the formal renewal procedural requirements may seek relief in State or Federal court. The court must grant appropriate relief if it finds that (1) any action of the franchising authority, other than harmless error, is not in compliance with the procedural requirements of this section; or (2) in the case of a denial, the operator demonstrates that each of the adverse findings of the franchising authority are not supported by a preponderance of the evidence, based on the record of the administrative proceeding. Accordingly, even if the cable operator is unable to demonstrate that a single finding is not supported by a preponderance of the evidence, the denial must be upheld. 47 U.S.C. 546(e). 7

8 In reviewing a denial of a franchise renewal, courts will pay great deference to the franchising authority s decision. In Union CATV, Inc. v. City of Sturgis (6 th Cir. 1997) 107 F.3d 434, the city denied a franchise renewal based on the fourth factor discussed above, i.e. that the operator s proposal was not reasonable to meet the future cable-related community needs and interests. The operator then challenged the denial in court. Federal law provides that the court may grant relief to the cable operator if it finds, among other things, that the operator has demonstrated that the city's adverse finding is not supported by a preponderance of the evidence in the record. 47 U.S.C. 546(e)(2)(b). The operator argued that this section requires the court to determine first whether Union has demonstrated that the City s identified needs and interests are not supported by a preponderance of the evidence, and second whether Union has demonstrated that the City s finding that Union s renewal proposal is not reasonable to meet the City s needs and interests is not supported by a preponderance of the evidence, excluding any needs that the court has found not to be supported by the evidence. Id. at 439. The court rejected this argument, holding that the preponderance of evidence standard applies only to the determination of whether the operator s proposal was reasonable to meet community needs and interests, and not to the identification of those needs and interests. In reviewing whether a proposal not satisfying an identified need is reasonable, a court must necessarily evaluate the relative importance of the need to balance it against the cost of providing the need. It is not possible for a court to determine whether an identified need is unreasonably costly without considering the value of that need. This does not mean, however, that the district court is required to engage in a de novo review of the franchising authority's identification of its cable-related needs and interests. We do not believe that Congress intended the federal courts to exert such a degree of control over franchising authorities. The granting of a cable franchise is a legislative act traditionally entitled to considerable deference from the judiciary. See Communications Sys., Inc. v. City of Danville, 880 F.2d 887, (6th Cir. 1989). Nothing in the Cable Act suggests that Congress intended to eliminate judicial deference to a municipality's legislative acts. While the Cable Act establishes federal standards governing the renewal of cable franchises, Congress made clear that the Act "preserve[s] the critical role of municipal governments in the franchise process." H.R. REP. NO , at 19, reprinted in 1984 U.S.C.C.A.N. at The House Report states: It is the Committee's intent that the franchise process take place at the local level where city officials have the best understanding of local communications needs and can require cable operators to tailor the cable system to meet those needs. However, if that process is to further the purposes of this legislation, the provisions 8

9 of these franchises, and the authority of the municipal governments to enforce these provisions, must be based on certain important uniform Federal standards that are not continually altered by Federal, state or local regulation. H.R. REP. NO , at 24, reprinted in 1984 U.S.C.C.A.N. at The Cable Act recognizes that municipalities are best able to determine a community's cable-related needs and interests. The city council's knowledge of the community gives it an institutional advantage in identifying the community's cable needs and interests. It would be inappropriate for a federal court to second-guess the city in its identification of such needs and interests. Id. at 441. We conclude, therefore, that judicial review of a municipality's identification of its cable-related needs and interests is very limited. 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. However, the review is not limited to the rational basis review ordinarily applied to legislative decisions. The statute requires reversal of decisions by the franchising authority that could not have been based on a preponderance of the evidence. The House Report notes that the preponderance of the evidence standard to be applied on judicial review is the standard commonly used in civil proceedings and not the standard "used in the traditional court review of municipal decisions." H.R. REP. NO , at 75, reprinted in 1984 U.S.C.C.A.N. at Judicial review is, thus, similar to the review of a jury verdict on a motion for a judgment as a matter of law under FED. R. CIV. P. 50. See, e.g., Tarrant Serv. Agency, Inc. v. American Standard, Inc., 12 F.3d 609, 613 (6th Cir. 1993) (in considering motion under FED. R. CIV. P. 50, a court must not substitute its judgment for that of the jury, but instead must view evidence in light most favorable to nonmoving party, giving that party the benefit of all reasonable inferences, and must grant the motion if reasonable minds could not come to a conclusion other than one in favor of the movant). We believe that Congress intended that courts would give a franchising authority a degree of deference comparable to that owed a jury. In applying these standards, the court held that a preponderance of the evidence supported the city s determination that the operator s proposal for a franchise renewal was not reasonable to meet the community s cable-related needs and interests. 9

10 b. Informal Process. Without following the formal procedure, a cable operator may submit a proposal to renew a franchise at any time. The franchising authority may, after giving the public adequate notice and opportunity for comment, grant or deny the proposal at any time. Under the informal process, the franchising authority is not subject to the same limits on the bases upon which it can deny the renewal, nor is it subject to the four-month time limit for acting on formal proposals. While the cable operator can still seek judicial review of a decision to deny a renewal following an informal process, presumably the standard of review would be more liberal than for a formal denial, i.e. whether the decision is supported by substantial evidence. The denial of a renewal following an informal procedure does not affect any other action on a renewal proposal that is submitted in accordance with the formal process. 47 U.S.C. 546(h). If the cable operator and the franchising authority agree to follow an informal process, the operator submits a proposal, and subsequent negotiations last more than four months, the operator cannot simply invoke the formal process and claim that the franchising authority has violated the four-month deadline. Frontiervision Operating Partners v. The Town of Naples (D. ME 2001) Docket No P-DMC (unpublished). 2. Comcast v. San Jose. Turning to the San Jose case, the City went through the formal process of conducting a community needs assessment, issuing a request for renewal proposals ( RFRP ) and considering Comcast s proposal. The City Council found that the proposal was inadequate to address community needs, preliminarily denied the renewal and authorized the City Manager to commence the requisite administrative hearing. The City selected a hearing officer and established a set of rules for conduct of the hearing. Comcast objected to the rules and ultimately filed a complaint for injunctive and declaratory relief in federal court (Comcast of California II, L.L.C. v. City of San Jose). The complaint alleged: (1) the RFRP included illegal conditions that unlawfully burdened Comcast s right to free speech; (2) the rules for the hearing violated Comcast s procedural due process rights; (3) the RFRP and the rules violated the Federal Cable Act; (4) the RFRP, by requiring Comcast to incur costs to construct an institutional network linking city buildings that would ultimately be passed through to subscribers, violated Proposition 13, and (5) the rules violated the San Jose Municipal Code by providing for the hearing to be conducted before a hearing officer rather than the City Council. Comcast then filed a motion for a preliminary injunction, seeking to stop the commencement of the administrative hearing. However, the court denied the motion. The court ruled that Comcast s claims under the Federal Cable Act were not ripe, since the City had not denied Comcast s application for a renewal and Comcast had not yet been adversely affected. As for Comcast s claims under the First and Fourteenth Amendments, the court found that Comcast had not demonstrated probable success on the merits and the possibility of irreparable harm. 10

11 If the court ultimately reaches the merits of the complaint, the case has the potential to set new law on some significant issues. In recent years there has been tacit agreement between local government and the cable industry that a certain level of funding will be provided by cable operators to support community access channels and that operators will construct institutional networks (i.e. telecommunications lines connecting city facilities). However, in recent dealings with a number of cities, Comcast has made it clear that it wants to significantly lower the bar in what it provides to cities. As a result, the San Jose case will be closely watched by many cities. C. FRANCHISE TRANSFERS Over the past few years, many cities have reviewed the transfer of cable franchises, most notably when TCI was acquired by AT&T and when Comcast acquired AT&T s cable unit. Recently there have been rumors of possible additional transfers in California, including the possibility of some Adelphia systems being transferred. A recent case, Charter Communications v. County of Santa Cruz, was quite favorable toward local agencies and their authority to review proposed transfers. The Santa Cruz case is discussed below following some general background information about transfers. 1. Authority to Review. It is quite common for either the cable franchise itself, the company that holds the franchise, or the company that owns that company, to be sold or otherwise transferred during the term of a franchise. Local authority to approve or disapprove such a sale, transfer or change in control (collectively transfer ) depends entirely upon the terms of the local agency s franchise ordinance and the applicable franchise agreement. California law is silent on the issue of transfers. Federal law does not directly require that transfers be approved by the local franchising authority, but it does recognize that a local agency may impose such a requirement and imposes some procedural requirements. 47 U.S.C. 537(e); 47 C.F.R If the franchise ordinance and franchise agreement are silent on the issue of transfers, the local agency may nevertheless be able to review a transfer based on its general police powers. (See discussion of local agency authority above.) In such a situation, the local agency s authority will be clearer if it adds a provision to its franchise ordinance establishing a process for reviewing transfers prior to conducting the review. 2. Reasons for Reviewing Transfers. Local agencies often want the right to review transfers for several reasons. First, different cable operators have different strengths, weaknesses, corporate philosophies and business practices. A cable franchise is generally granted in part based on these aspects of the cable operator, so the franchising authority may be similarly concerned when the franchise is transferred to another operator. The franchise agreement itself is generally a personal contract with the cable operator. It is common for other personal contracts to include provisions noting that the contract is entered into based on the unique qualifications of the company providing the services and giving the other party the right 11

12 to approve or disapprove any transfer of the contract. Second, the review of a transfer provides an opportunity for the local agency to require the cable operator to cure any violations of the franchise agreement, such as underpayment of franchise fees, violations of technical and construction requirements or customer service violations. In the same vein, the local agency may want to ensure that the transfer does not clean the slate of past violations, thereby making it difficult to obtain relief or to raise the violations during subsequent renewal negotiations. Third, the review of a transfer may be an opportunity to impose conditions on the transfer necessary to ensure that the operator meets community needs and interests. 3. What Constitutes a Transfer? As discussed above, the authority to review a transfer is based largely on the local franchise ordinance or franchise agreement. Accordingly, whether a particular transaction by the cable operator constitutes a transfer subject to local review depends largely on the franchise ordinance or agreement. In its simplest form, a transfer involves the sale of a cable system together with the rights granted in the franchise agreement to another company. However, some local ordinances define transfers more broadly to include such things as the sale of the company (or a controlling interest therein) which owns the cable system, the sale of a controlling interest of any entity which, either directly or through affiliates, owns the cable system, any other change in control of the cable system, or any change in the entity which effectively manages the cable system. Many of the more recent transfers are only subject to local review under these broader definitions. For example, when Comcast acquired AT&T Broadband, it didn t directly purchase each of the cable systems under AT&T s control; instead, it obtained control of a corporation which, through many levels of corporate affiliates, owned cable systems. 4. Application for Approval. Under Federal law, if a local franchise requires local approval of a transfer, the applicant must submit a completed FCC Form 394 to the local agency together which such information as is required by the local agency. 47 U.S.C. 537(e); 47 C.F.R (a). Form 394 includes information about the nature of the transfer together with the legal, technical and financial qualifications of the transferee. Federal law does not specify any limits on the type of additional information that may be required by the local franchising authority. Federal law provides that the local franchising authority must act within 120 days from the date of submission of the Form 394 and the additional information required by the franchising authority. If the franchising authority fails to render a final decision on the request within 120 days, the request will be deemed granted unless the requesting party and the franchising authority agree to an extension of time. 47 U.S.C. 537(e); 47 C.F.R Under federal law, the franchising authority must question the accuracy or completeness of the Form 394 within 30 days of receipt. If the franchising authority fails 12

13 to do so, the information contained in Form 394 will be deemed accepted unless the cable operator has failed to provide any additional information reasonably requested by the franchising authority within 10 days of such request. 47 CFR To the extent permitted by their franchising ordinance or agreement, franchising authorities can also require the cable operator to submit additional information above and beyond the Form 394. Subject to limitations discussed below, federal law does not limit the type of information that can be requested. The legislative history relating to the provision authorizing the FCC s transfer regulations provides, The Committee intends that the FCC regulations will be designed to ensure that every franchising authority receives the information required to begin an evaluation of a request for approval of a sale or transfer. Such information may include detailed financial information showing the effect of the transfer or sale on rates and services; the contracts and agreements underlying the sale or transfer; information concerning the legal, financial and technical qualifications of the transferee; and information concerning the transferee s plans for expanding (or eliminating) services to subscribers. The amendment is not intended to limit, or give the FCC authority to limit, local authority to require in franchises that cable operators provide addition information or guarantees with respect to a cable sale or transfer. The subsection also is not intended to limit, or give the FCC authority to limit, a franchising authority s right to grant or deny a request for approval of a sale or transfer, in its discretion, consistent with the franchise and applicable law. House Report No , 102 nd Cong., 2d Session, (1992). The FCC regulation relating to transfers (47 CFR ) is a purely procedural regulation, not a substantive regulation. In particular, while Form 394 only provides information relating to the legal, technical and financial qualifications of the proposed transferee, franchising authorities are not limited to seeking additional information about these qualifications. A franchising authority has broad authority to request information necessary to evaluate a transfer application. Charter Communications, Inc. v. County of Santa Cruz (9 th Cir. 2002) 304 F.3d 927, 932. A request for additional information unrelated to the Form 394 does not toll the 120-day review period. In other words, if the operator submits a complete and accurate Form 394, the 120-day review period begins to run regardless of other requests for additional information. While there is no specific deadline under federal law, the cable operator must respond promptly to a reasonable request for additional information. In the Matter of Implementation of Sections 11 and 13 of the Cable Television Consumer Protection and Competition Act of 1992, FCC Report and Order at 85-86, FCC , MM Docket No (1993); In the Matter of Implementation of Section 11 and 13 of the Cable Television Consumer Protection & Competition Act of 1992, FCC Memorandum Opinion & Order on Reconsideration of the First Report & Order at 52, FCC 95-21, MM Docket (1995). If the request for additional information is reasonable in part and unreasonable in part, the operator need not respond to the unreasonable part, but must nevertheless respond to the reasonable part of the request. Ibid. at 33. While the 120-day review period is not tolled simply by a request for additional information, arguably it is tolled if the operator fails to promptly respond to the request. In the Matter of Implementation of Section 11 and 13 of the Cable Television 13

14 Consumer Protection & Competition Act of 1992, FCC Memorandum Opinion & Order on Reconsideration of the First Report & Order at 52, FCC 95-21, MM Docket (1995) ( Thus, the cable operator is on notice that information requirements may exist in three locations and that the submission of all such information is necessary for the franchise authority to be bound by the 120-day time period. ) Alternatively, a franchising authority presumably can deny a transfer if the operator fails to respond to a request for additional information that is reasonable in scope and time. Charter Communications, Inc. v. County of Santa Cruz (9 th Cir. 2002) 304 F.3d 927, Bases for Denial. With one exception, federal law does not specify or limit the bases upon which a local agency may deny a transfer. Under Federal law, a franchising authority may not prohibit the ownership or control of a cable system by any person because of such person's ownership or control of any other media of mass communications or other media interests. Nevertheless, this restriction does not prevent a franchising authority from prohibiting the ownership or control of a cable system in a jurisdiction by any person (1) because of such person's ownership or control of any other cable system in such jurisdiction; or (2) in circumstances in which the franchising authority determines that the acquisition of such a cable system may eliminate or reduce competition in the delivery of cable service in such jurisdiction. 47 U.S.C. 533(d). A franchising authority cannot deny a transfer based on the refusal of the transferee to agree to conditions that are beyond local authority to impose. The FCC has noted, in exercising their transfer jurisdiction, franchising authorities may not seek to circumvent the Commission s authority over rate regulation, franchise fees or other matters. In the Matter of Implementation of Sections 11 and 13 of the Cable Television Consumer Protection and Competition Act of 1992, FCC Report and Order at 39 n. 38, FCC , MM Docket No (1993). With the foregoing exceptions, federal law does not limit the bases upon which a city can deny a transfer. In particular, cities are not limited to basing a denial on the transferee s inadequate legal, technical and financial qualifications. For example, franchising authorities can deny a proposed transfer on the basis of its negative impact on subscriber rates. Charter Communications, Inc. v. County of Santa Cruz (9 th Cir. 2002) 304 F.3d 927, 934. In Charter Communications, Inc. v. County of Santa Cruz (9 th Cir. 2002) 304 F.3d 927, the County denied a transfer based upon the operator s failure to provide additional information, refusal to agree to a rate freeze, refusal to pay the cost of hiring a consultant to prepare a financial analysis, and refusal to pay a transfer mitigation fee. The County s franchise ordinance did not set forth grounds upon which a transfer could be denied, but stated that approval of a transfer could not be unreasonably withheld. The trial court held that the County had indeed unreasonably withheld approval. The trial court found that the information requests were unreasonable in scope and time and that the rate freeze was beyond the scope of the County s authority. The trial court also found 14

15 that the requirements to pay the consultant costs and the transfer mitigation fee improperly violated the 5% cap on franchise fees. However, the Ninth Circuit Court of Appeals reversed. The Court held that the review of a cable franchise transfer is a legislative decision entitled to deference by the courts. The Court held that a denial of a transfer should be upheld if any one of the stated bases for denial is supported by substantial evidence. The Court held that at least two of the bases stated by the County (i.e. the failure of Charter to demonstrate financial qualifications and the concern over subscriber rate stability) were proper bases for denial. 6. Conditions of Approval. Federal law also generally does not limit or specify conditions upon which a transfer can be approved, with one exception. The Communications Act provides that a franchising authority cannot require a cable operator to provide any non-cable telecommunications facilities other than institutional networks, as a condition of... a transfer of a franchise. 47 U.S.C. 541(b)(3)(D). This provision as added by the 1996 Act makes clear that a local franchising authority may require a cable operator to provide institutional networks as a condition of the... transfer of a franchise. Implementation of Section 302 of the Telecommunications Act of 1996, Open Video Systems, Third Report and Order and second Order on Reconsideration, CS Docket No , par Local agencies may impose institutional network requirements and other conditions of approval to the extent authorized by their local franchise ordinance and franchise agreement. A franchising authority cannot require conditions that are beyond local authority to impose. The FCC has noted, in exercising their transfer jurisdiction, franchising authorities may not seek to circumvent the Commission s authority over rate regulation, franchise fees or other matters. For example, a franchising authority may not delay a transfer or impose conditions on a transfer authorization that would impinge upon the Commission s statutory authority. In the Matter of Implementation of Sections 11 and 13 of the Cable Television Consumer Protection and Competition Act of 1992, FCC Report and Order at 39 n. 38, FCC , MM Docket No (1993). In addition, under the First Amendment, any condition should also be based upon a legitimate governmental interest. However, a cable operator that voluntarily enters into a franchise agreement that provides for the franchising authority to approve a franchise transfer will be deemed to have waived its right to claim that a denial of a transfer violated its First Amendment rights. Charter Communications, Inc. v. County of Santa Cruz (9 th Cir. 2002) 304 F.3d 927, 935. With the foregoing exceptions, federal law does not limit the conditions that a city can impose on a transfer. Federal law does not explicitly limit the authority to impose conditions on a transferee that would provide additional public benefits beyond those provided by the transferor, as opposed to conditions intended to ensure that the transfer would not cause negative impacts on current services. For example, federal law does not indicate whether a franchising authority could require a transferee to provide PEG facilities that were not required under the existing franchise. However, as noted above, 15

16 federal law does explicitly authorize a franchising authority to require a transferee to provide an Institutional Network. Thus federal law does not establish a blanket rule prohibiting conditions which provide enhanced public benefits above and beyond the existing franchise. In the absence of any federal limitation, it appears that cities may have authority to the extent consistent with their own franchise ordinances and agreements to impose such conditions. IV. TELECOMMUNICATIONS/TELEPHONE SERVICE A. GENERAL LOCAL AUTHORITY Cities are preempted from regulating telecommunications and telephone services, although they retain limited authority to impose time, place and manner regulations on access to public rights-of-way. In limiting local authority over various matters, federal law uses the term telecommunications while California law uses the term telephone. Telephone may be a more limited term than telecommunications, but California law does not precisely define the term telephone. Some of the implications of this distinction are discussed below. The Federal Telecommunications Act of 1996 added 47 U.S.C. 253, which both preserved and preempted local authority over the use of public rights-of-way by telecommunications providers. As discussed below, the scope of this section has been frequently litigated, with the trend being to narrow the scope of local authority. On the state level, local authority over access to public rights-of-way by telephone companies is primarily governed by Public Utilities Code section 7901, which has been in place in one form or another for about 150 years. While there have been few cases in recent years interpreting section 7901, late last year the court in Williams v. City of Riverside narrowly construed local authority under section This and other cases are discussed below. B. FEDERAL LIMITS SECTION 253 Due to restrictions under federal law and some unfavorable court decisions, cities need to be very careful about requirements imposed upon telecommunications companies, including application requirements. The discussion below includes some general background as well as types of requirements that the courts have found to be invalid under section 253. Note that generally cities in California have not franchised telephone companies due to preemption of franchising authority pursuant to Public Utilities Code section However, it is possible that cities have the authority to franchise certain non-telephone telecommunications companies (see discussion under State Limits below). Cities also 16

17 may apply time, place and manner regulations to telephone facilities under State law. As a result, cities in California need to be aware of the limitations under section General. Federal law both limits and preserves the authority of State and local governments to manage public rights-of-way by imposing regulations on telecommunications providers. In particular, 47 U.S.C. 253 (entitled Removal of barriers to entry ) provides in part as follows: (a) In general No State or local statute or regulation, or other State or local legal requirement, may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service. * * * (c) State and local government authority Nothing in this section affects the authority of a State or local government to manage the public rights-of-way or to require fair and reasonable compensation from telecommunications providers, on a competitively neutral and nondiscriminatory basis, for use of public rights-of-way on a nondiscriminatory basis, if the compensation required is publicly disclosed by such government. Subsections 253(a) and (c) have a number of key terms, the interpretation of which affects the scope of local authority to regulate. These terms include (1) prohibit or have the effect of prohibiting ; (2) telecommunications service ; (3) manage the public rights-of-way ; (4) fair and reasonable compensation ; and (5) competitively neutral and nondiscriminatory. Each of these issues is discussed below (with the exception of issues relating to compensation, which may be a moot issue in California depending upon the outcome of the Riverside case discussed below). a. Telecommunications Service. By its own terms, Section 253 only applies to telecommunications service. Telecommunications service is defined as the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used. 47 U.S.C. 153(51). The term telecommunications means the transmission, between or among points specified by the user, of information of the user s choosing, without change in the form or content of the information as sent and received. 47 U.S.C. 153(48). Thus Section 253 does not impact any authority of a city to regulate anything other than telecommunications services, including cable service, information service or the provision of dark fiber. 17

18 b. Is Subsection 253(c) a Limitation On, or a Safe Harbor for, Local Regulations? Subsection 253(a) generally preempts local regulations that prohibit or effectively prohibit the ability of an entity to provide telecommunications services. Subsection 253(c) generally provides, Nothing in this section affects the authority of a city to manage public rights-of-way or require certain compensation. If Subsection 253(c) is interpreted as a safe harbor, a regulation that falls within the terms of Subsection 253(c) would not be preempted even if it effectively prohibited an entity from providing telecommunications services. Under such an interpretation, in order for an entity to argue that a local regulation is preempted, the entity would have to show both that the regulation violated Subsection 253(a) and did not satisfy the safe harbor requirements of Subsection 253(c). In other word, to be preempted, the regulation must prohibit or effectively prohibit the entity from providing service, and the regulation must go beyond managing the public rights-of-way and requiring certain compensation. On the other hand, if Subsection 253(c) is interpreted as a limitation on local authority, a regulation would be preempted if it violates either Subsection 253(a) or Subsection 253(c). In other words, a regulation which goes beyond managing the public rights-of-way and requiring certain compensation would be preempted even if it didn t otherwise prohibit or have the effect of prohibiting the provision of service. The plain language of the statute suggests that Subsection 253(c) is a safe harbor. Subsection 253(c) begins with the phrase Nothing in this section shall affect the authority of a city to manage the rights-of-way or require compensation. The quoted phrase indicates that Subsection 253(c) is an exception to the prohibition of Subsection 253(a) rather than an additional limitation. The legislative history of Subsection 253(c) also suggests that it was intended as an exception to the general prohibition of Subsection 253(a). The remarks of Senator Hollings during the Senate debate indicates that Subsection 253(c) was added in response to the concerns of mayors who were concerned about the breadth of Subsection 253(a) and were seeking preservation of local authority. 141 Cong. Rec. S8174 (daily ed. June 12, 1995); see also remarks of Senator Gorton, 141 Cong. Rec S8306 (daily ed. June 14, 1995). Further, the FCC concludes that Subsection 253(c) was intended as a safe harbor. See the FCC s Suggested Guidelines for Petitions for Ruling Under Section 253 of the Communications Act, 63 Fed. Reg. 66,806 (1998); In the Matter of TCI Cablevision of Oakland County, Inc., Petition for Declaratory Ruling, Preemption and Other Relief Pursuant to 47 U.S.C. 541, 544(e), and 253, Memorandum Opinion and Order, CSR-4790, FCC (released September 19, 1997), par. 101; In the Matter of Classic Telephone, Inc., Petition 18

19 for Preemption, Declaratory Ruling and Injunctive Relief, Memorandum Opinion and Order, CCBPol (released October 1, 1996). Most courts have concluded that Subsection 253(c) is a safe harbor rather than a limitation on local regulations. The Ninth Circuit has held that Subsection 253(c) is a safe harbor without any detailed discussion of the issue. City of Auburn v. Qwest Corporation (9 th Cir. 2001) 260 F.3d The court in BellSouth v. Town of Palm Beach (11 th Cir. 2001) 252 F.3d 1169 held that Subsection 253(c) is a safe harbor based on the statute s plain meaning, legislative history and administrative interpretation by the FCC. The courts in Cablevision of Boston, Inc. v. Public Improvement Commission of the City of Boston (1 st Cir. 1999) 52 F. Supp. 2d 756, vacated 243 F.3d 928 (2001), TCG New York, Inc. v. City of White Plains (S.D.N.Y. 2000) 125 F. Supp. 2d 81, 87, PECO Energy Co. v. Township of Haverford (E.D.Pa. 1999) 1999 WL (unpublished; available online at and Qwest Corporation v. City of Portland (D. Or. 2002) 200 F.Supp.2d 1250 also held that Subsection 253(c) is a safe harbor. Other courts have held that Subsection 253(c) is an independent limitation on local regulations. See Bell Atlantic-Md., Inc. v. Prince George s County (D. Md. 1999) 49 F. Supp. 2d 805, 814, vacated (for improperly reaching federal issues when the case could potentially be resolved based on state law) 212 F.3d 863 (4 th Cir. 2000)); AT&T Communications v. City of Dallas (N.D.N.Y. 1998) 8 F. Supp. 2d 582, 591; TCG Detroit v. City of Dearborn (E.D. Mich 1997) 16 F. Supp. 2d 785, aff d, 206 F. 3d 618 (6 th Cir. 2000). In AT&T Communications of the Southwest, Inc. v. City of Dallas (N.D. Tex. 1999) 52 F. Supp. 2d 763, 770, vacated as moot, 243 F.3d 928 (2001), the court declined to resolve the issue. c. Prohibiting Service. As discussed above, Subsection 253(a) preempts local regulations which prohibit or have the effect of prohibiting the ability of any entity to provide any... telecommunications service. Several court and FCC decisions have addressed the issue of what constitutes a prohibition or effective prohibition, but have reached somewhat inconsistent results. In City of Auburn v. Qwest Corporation (9 th Cir. 2001) 260 F.3d 1160, the Ninth Circuit Court of Appeals addressed whether the telecommunications ordinances of several Washington cities prohibited or had the effect of prohibiting the provision of service. The court held that the following requirements, taken together, have the effect of prohibiting the provision of service: a lengthy, detailed application form, application fees, a requirement for a public hearing, consideration of discretionary factors that have nothing to do with use of the right-of-way, regulation of transfers of ownership, the charging of fees, a 19

20 reservation of discretion to grant, deny or revoke a franchise, and the authorization of civil and criminal penalties for violations. Id. at Significantly, the initial opinion of the court held that each of the city requirements at issue individually constituted an effective prohibition. However, the court subsequently amended its opinion to provide that taken together, the requirements constituted an effective prohibition. Thus any of the requirements at issue by themselves apparently would have not constituted an effective prohibition. The precise line that cities cannot cross (i.e. the precise combination of requirements that would cause an ordinance to be invalid) is not defined by the decision. In Qwest Communications Corp. v. The City of Berkeley (N.D. Ca. 2001) 146 F.Supp.2d 1081, the City s ordinance required telecommunications carriers to submit an extensive application, including any information the city deems necessary, and, unless the carrier is a common carrier, to obtain a franchise or license. The City was required to conduct a public hearing and reserved discretion to grant or deny use of rights-of-way based on an open-ended set of criteria. Violations of the ordinance subjected carriers to criminal and civil sanctions and termination of the carrier s right to use the rights-of-way. The court granted Qwest s motion for a preliminary injunction, finding in part a substantial likelihood that Qwest would prevail with its argument that the ordinance violates section 253(a). Taken individually, many of the requirements under the Ordinance have the effect of prohibiting entry of telecommunications services providers. Viewed in its totality, the Ordinance creates a substantial barrier to entry. As with the Auburn court, the court did not draw a bright line concerning exactly which requirement or combination of requirements would cross the line of invalidity. See also Qwest Communications Corp. v. The City of Berkeley (N.D. Ca.) 255 F.Supp.2d On the other hand, long delays in approving applications and broad, unfettered discretion to deny an application may by themselves constitute a prohibition of service. TCG New York, Inc. v. City of White Plains (2d Cir. 2002) 305 F. Supp. 2d 81. In Qwest v. City of Santa Fe (D. N.M. 2002) 224 F. Supp. 2d 1305, the court held that a telecommunications ordinance violated section 253(a) because it gave the City essentially unfettered discretion to deny applications based on vague standards. The court also held that the City s combined requirements of a lease payment, an appraisal fee, a dedication of fiber and a requirement for additional fiber to be deployed would result in an increase in costs to the carrier, which in turn constituted a prohibition of entry. Other courts have provided guidance concerning regulations that may not be considered prohibitions of service. In Qwest Corporation v. City of Portland (D. Or. 2002) 200 F.Supp.2d 1250, the court held that the following requirements did not constitute an actual or effective prohibition: a requirement to obtain a franchise, a franchise provision allowing either party to terminate on 180 days 20