Policy

Telcos Are Timed Out in Texas

6/03/2005 8:00 PM Eastern

In a state-level development that has been closely watched throughout the cable and financial industries, Verizon Communications Inc. and SBC Communications Inc. failed to convince Texas legislators to let them forego local franchises for their cable services.

The state House of Representatives on May 23 approved a bill that included language centralizing franchise authority at the state level by a voice vote, but the Senate was unable to reach a compromise on the proposal before its session ended Memorial Day weekend.

State Telco Scorecard
How Verizon and SBC have fared in their efforts to widely deploy video without going locality-by-locality for a franchise:
Source: State cable associations, telephone companies.
Virginia
• Franchise deregulation proposal failed to make it out of committee
Texas
• Amendment to state telecom reform bill would have moved franchise authority to state Public Utilities Authority
• House approved, time ran out on state Senate compromise
California
• Verizon proposal would revise state level playing field statute
• Utilities-committee chair discussing alternatives with telcos, cable, cities and power companies
New Jersey
• Verizon confirms it is in talks with authorities to develop a bill which could survive a vote.

SHOT CLOCK EXPIRED

“They weren’t disinterested in competition,” said Verizon spokesman Bill Kula. “The shot clock just ran out on us.”

The bill’s fate is good news for cable operators, and especially for Time Warner Cable, said Sanford C. Bernstein & Co. analyst Craig Moffett. That’s because Time Warner will add to its already significant presence by gaining systems through its joint deal with Comcast Corp. to acquire Adelphia Communications Corp.

Charter Communications Inc. and Comcast also serve multiple communities in the state.

The decision also helps direct-broadcast satellite providers, especially EchoStar Communications Corp., as Texas-based SBC will continue to rely on its Dish Network to provide video for its three-product bundle until legislative issues are resolved on its own video product.

Given SBC’s strength in its home state — and its close relationship with the Public Utilities Commission — Lehman Brothers analyst Vijay Jayant added that Texas was where the telco had its best shot at changing franchising policy.

The issue arose as state legislators attempted to revise telecommunications policy, part of a state regulatory overhaul. The video issues were amended to a bill addressing continued oversight rules for PUC.

Analysts say the bill failed this session because of cable’s team-building with municipalities, which feared they’d lose control of local revenue and their regulatory power.

Texas Cable & Telecommunications Association chairman Tom Kinney, president of Time Warner Cable Austin, said the bill’s failure was a victory for all Texans.

“Phone companies don’t need incentives in order to invest in Texas,” he said in a statement. “We welcome competition, but companies should not ask the Texas Legislature for special treatment in order to compete.”

The telco-backed franchising revamp fomented a pitched public-relations battle between them and the cable industry. Cable operators filled their channels with spots accusing SBC of fighting to be able to “choose who gets digital technology.”

They cited an SBC report to investors in which it indicated it would initially target “high-value customers.”

WHERE SCENE SHIFTS

The legislative battleground now shifts elsewhere. Verizon has proposed a bill in California that would relieve the telco of the state’s level-playing-field rules. That would guarantee Verizon could launch its video product without a mandate that it do so outside its telephone footprint.

Verizon’s idea hit stiff opposition from the state’s cable companies and has been held up in its first committee hearing.

Assemblyman Lloyd Levine (D-Van Nuys), chairman of the Utilities and Commerce Committee, has convened weekly meetings with interested parties, including cable and telephone companies, city representatives and even representatives of Sempra Energy of San Diego, which has surfaced as a potential video player.

Levine has shown an interest in a holistic approach to telecommunications competition and an interest in balancing fees and taxes, said California Cable Telecommunications Association president Dennis Mangers. These meetings, he added, could result in taxes on direct-broadcast satellite service — one of cable’s agenda items.

“We’re working very proactively to see Verizon doesn’t succeed [with its initial proposal],” Mangers said.

Levine has expressed interest in hammering out a proposal for a committee vote by July 15, though that date is tentative, Mangers said.

New Jersey will also join the regulatory fight. Verizon is talking to authorities there, Kula confirmed, and trying to craft a proposal that could survive a legislative vote.

But Kula admitted it may be a tough sledding to get New Jersey legislators focused on a Verizon bill. Voters there will elect a new governor this year and policy-makers may be distracted by politics. Verizon would take the lead in this fight, since SBC does not serve the state, but Pacholczyk said his company might support a bill if it proposed a statewide franchising arrangement that included fees for municipalities.

The real war should take place in the nation’s capital. Lobbyists for both telcos are making the rounds in Washington, D.C., to promote franchising reform as part of discussion on any overhaul of federal telecommunications policy.

But it’s unlikely there will again be a skirmish in Texas. The legislature meets every two years, so the next opportunity for a bill would be in 2007, too far in the future for companies which say they need relief from anti-competitive policies now.

SLOW GOING AHEAD

The telephone companies expressed dismay at the Texas Legislature’s failure to approve cable franchise-reform policy this session, but both companies said that will not stop their video plans.

“Competition for video services will occur much slower without a statewide video franchise,” Verizon Southwest Region president Steve Banta said in a statement. But his company remains firmly committed to the video business, he added.

Verizon intends to deploy more than 4 million feet of fiber-optic plant in Plano, with system upgrades also planned for Garland, Denton and Irving. Plans call for offering video in those communities by the end of 2006.

Verizon has begun a test of its video services to its employees in Keller, Texas, which officials said will be the commercial launch market for its FiOS product. Verizon has four other video franchises in the Dallas and Fort Worth area, and contract negotiations are underway in 17 other communities, according to the TCTA.

Two other franchises were granted in California and Florida.

Verizon spokesman Kula said the company’s technology tests, which began in May, are going well. The company is on track for a fall commercial launch in Keller and other markets, he said.

MISPLACED CONCERNS

SBC and Verizon said the concerns of the cities of Texas were misplaced. SBC spokesman Dave Pacholczyk said cities are now losing revenue due to consumer defections to the direct-broadcast satellite providers, who are not taxed locally like cable operators. Telco-TV licensing would have actually brought the localities some money, as the franchise fees SBC paid the state would have been remitted to cities, he said.

SBC continues to argue that its Internet-based video product, part of its Project Lightspeed fiber buildout, does not affect the local infrastructure and does not require franchising. But the company wants its operating authority at least clarified and oversight limited to a single, statewide agency.

Verizon is seeking franchises for its video digital subscriber line service, but wants to speed the process by shifting regulatory oversight to state agencies.

WHAT’S SO LEVEL?

Pacholczyk criticized the cable industry’s arguments that the telcos must compete on a level playing field, subjected to the same local rules as incumbent video providers. Those same cable companies expect special treatment as they more into the telephone business, he said, and are asking for breaks to get their new business of the ground.

“When we have zero wireline share, we’re not a competitive provider. As a new [video] entrant, we deserve a lighter touch,” he said.

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