News

Municipal Penalties Become Rare

11/29/1998 7:00 PM Eastern

Municipal authorities rarely resort to financial penalties
anymore to force cable operators to comply with their franchises.

These days, most local jurisdictions harboring beefs
against their local cable companies find that the threat of fines and liquidated damages,
along with the resulting negative publicity, is enough to spur operators to action.

Conversely, operators have discovered that local officials
would rather extract concessions from a company than risk embroiling themselves in
expensive litigation.

And in the rare cases where fines are imposed, regulators
and consultants said that even if they fail to collect the full amount, fines and
liquidated damages are preferable to the "capital punishment" of franchise
revocation.

"We've always had the remedy, but we haven't
had to use it. Therefore, it's effective," said David Olsen, cable administrator
in Portland, Ore.

The result: a dwindling number of fines being levied
against cable companies.

"It's news when it happens, which tells you that
it doesn't happen very often," said Barry Orton, professor of telecommunications
at the University of Wisconsin-Madison, who moonlights as a municipal consultant.

Of late, most instances where monetary penalties were being
considered involved Tele-Communications Inc., which put its nationwide rebuild program on
hold in 1996 while it considered substituting digital technology for expensive upgrades.

The result has been several cases where the MSO missed
rebuild deadlines, placing itself behind the eight ball with local officials.

"But take the TCI upgrade issue out of the equation,
and the universe of cities fining operators is pretty small," Orton said. "And
now that TCI is actually spending capital again, it's even smaller."

But when necessary, there are better ways of getting
operators' attention, Orton said.

One way is to go after security bonds or letters of credit.

A form of financial insurance, these financial documents
protect cities against companies defaulting on the terms in their franchises. If the
companies fail to perform, the cities get their money. And while daily fines can
eventually add up to thousands of dollars, letters of credit can run well into six figures
and higher.

"That's real money, and it gets their attention,
big-time," Orton said.

Joe Van Eaton, a partner with Miller & Van Eaton, a
Washington, D.C.-based law firm specializing in municipal-cable issues, agreed, noting
that most cable operators would rather address municipal grievances than risk trouble with
financial organizations that guaranteed their performance.

"Nobody wants trouble with their lenders," Van
Eaton said.

Ordinarily, however, it doesn't come to that, mostly
because both operators and cities are usually looking for ways out of the dilemma.

Take the case of Tucson, Ariz., where Cox Communications
Inc.'s acquisition of the local system was threatened by previous owner TCI's
failure to build a promised institutional network.

Cox -- which wanted the system, but which did not want to
build the I-Net -- would have been held financially liable for the job by the city if it
took control of the franchise.

The solution: TCI agreed to build the network at no cost to
the city, allowing the MSO to get out of town and giving both Tucson officials and Cox
what they wanted.

"Everybody thinks that a settlement is preferable to
litigation," Van Eaton said.

Another way that cities have avoided trying to squeeze
fines out of cable companies has been by writing unambiguous franchise agreements that
clearly state what's expected of local operators, along with the financial
consequences of noncompliance.

Once written, however, cities must be prepared to enforce
the terms of the deals, Van Eaton said.

Aurora, Colo., is a case in point. In 1997, after two false
starts at getting TCI to upgrade one of the nation's most antiquated networks, the
city agreed to a third extension that expires next month.

In exchange, it got the right to fine TCI $2,000 per day if
the company failed to meet its next construction deadline. To secure the extension, TCI
agreed to surrender the legal right to contest the fine.

But when TCI recently said that it would miss its Dec. 31
deadline, asking for a 15-month extension, city officials immediately declared that they
were not prepared to "let [TCI] off scot-free." Although settlement talks are
under way, fines are scheduled to begin Jan. 1, potentially costing the MSO more than
$900,000.

"If you want an operator to comply, you must enforce
the provisions in your franchise," Van Eaton said.

One community that has taken that philosophy to heart is
Fort Worth, Texas, which has slapped $25,000 in penalties so far this year on Marcus
Cable, the Dallas-based MSO that Microsoft Corp. cofounder Paul Allen is folding into
Charter Communications Inc.

With its franchise transfer hanging in the balance,
Charter's response to the most recent $10,000 fine levied against Marcus was
predictable: It paid without a whimper.

Meanwhile, the city plans to take an even tougher line in
the future, in hopes that Charter will not fall into the same service trap that snared
Marcus.

The city, along with a consortium of area regulators, said
it will seek franchise amendments containing even higher monetary penalties for
service-related grievances.

"We're saying that our current financial-penalty
structure has not been effective," city spokesman Pat Svacina said. "And
we're not prepared to deal with the new company under those exact same terms."

Elsewhere, competition has been an impetus. In Iowa City,
Iowa, for instance, government officials said it took the specter of competition to
convince TCI to put the community's upgrade on the fast track.

After paying out $45,000 in fines -- at a rate of $250 per
day -- for failing to rebuild its system by this past Feb. 26, TCI suddenly went all-out
earlier this year to get the job done. It followed up by immediately launching "TCI
Digital Cable" and announcing plans to unveil high-speed Internet access by
year's end.

The reason for the sudden burst of activity: the
city's announcement that it planned a referendum on a request by McLeodUSA for a
second cable franchise in Iowa City.

"[TCI] was pulling in crews from everywhere that it
could find," Iowa City cable administrator Drew Shaffer said. "It's obvious
that McLeod got their attention."

The McLeodUSA ballot issue passed with 87 percent of the
vote earlier this month.

Needed or not, regulators said damage clauses will continue
in contracts, even in the competitive age. Cities have recognized that there are short-
and long-term benefits to assessing fines if they become necessary.

Short-term, fines are a source of nontaxable revenue for
the city, said consultant Rusty Monroe of Monroe Telecom. And because they are penalties,
they are usually paid by the stockholders of the offending company, and not passed through
to subscribers -- at least not directly.

If cities don't have enforcement mechanisms, and
violations continue over time, or systems change hands without resolution of disputes,
courts have ruled that cities have "enabled" operators to continue breaking the
law.

"If you don't assess penalties, you're
telling an operator that it's less expensive to violate the franchise and gamble that
it doesn't get caught," Monroe said.

When structured correctly, what might be viewed in business
circles as a penalty can be a win-win situation, Monroe added, citing a recent franchising
situation in Decatur, Ala. New owner Falcon Cable TV Corp. was stuck with violations
dating back to the tenure of TCI, the previous owner. Regulators, on the advice of Monroe,
negotiated a settlement that will bring $400,000 into city coffers over the next four
years. Also, the city will retain for municipal use a part of the plant that Falcon will
rebuild and upgrade.

In return, Falcon got an extended franchise renewal of 12
years. The payment satisfied all liabilities that the operator inherited in the property
swap with TCI. And the new franchise broadened the permissible uses of the plant, giving
Falcon the flexibility to expand into new product areas.

If operators approach penalty situations with a business
point of view, "they can walk away winners, too," Monroe concluded.

Competition helps to push cable operators in the directions
that regulators want them to go, but cities will still need enforcement mechanisms for
issues including customer service, financial and performance audits and equipment pricing,
said Fred Polner, a municipal communications lawyer. Effective competition is still a long
way off, and "enforcement mechanisms certainly get a cable company's
attention," Polner added.

Susan Herman, from the city of Los Angeles'
telecommunications department, agreed: "Liquidated damages are never needed for
companies that are smart, customer-sensitive businesses … liquidated damages are for
the dinosaurs," she said.

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