Washington -- To the alarm of cities and cable operators
alike, a federal court in Chicago has probably made it possible for a new breed of cable
operator to arise -- yet apparently with none of the regulatory burdens that traditional
That's entirely possible based on the 2-1 ruling handed
down Dec. 7 by the U.S. Court of Appeals for the Seventh Circuit, which numerous cities
and the cable industry had asked to review a June 1998 order by the Federal Communications
In a nutshell, the court agreed with the FCC that no
franchise is required in the case of a company that distributes video programming to
subscribers by relying on the distribution facilities of an unaffiliated phone company.
The court said the separation of ownership between the
content packager and the phone company meant that the programmer was not required to
obtain a franchise, even if the phone company's wires occupy public rights of way. In
cable law, use of public rights of way typically triggers the franchise requirement.
The city of Chicago and other cities are expected to seek a
rehearing by the entire Seventh Circuit, said Washington, D.C.-based attorney Joe Van
Eaton, who argued the case on behalf of the cities and local regulatory bodies.
Dan Brenner, senior vice president for law and regulatory
affairs at the National Cable Television Association, said the impact of the case couldn't
be known instantly without some idea of the amount of fiber telephone companies are making
available to third parties seeking distribution leases.
"It's hard to know. One of the questions you have to
ask is: To what extent have phone companies created platforms that work for third
parties?" he said.
The controversy started in 1997, when Entertainment
Connections Inc. sought a franchise exemption from the FCC.
Based in East Lansing, Mich., ECI is a
satellite-master-antenna-television operator with about 1,600 subscribers who reside in
apartment buildings with about 100 units each.
SMATV operators typically install headend equipment on
roofs and serve subscribers without having to access municipal ways and conduits. But
companies that can link buildings with fiber and cut back on headends can trim costs and
branch out to serve smaller properties.
Hoping to do just that, ECI decided to interconnect its
buildings by leasing "supertrunking" facilities supplied by Ameritech Corp., the
state's dominant local phone company. When they uncovered ECI's distribution change, East
Lansing and Meridian Township, Mich., insisted that the company obtain a franchise.
After reviewing ECI's petition, the FCC agreed with the
company, reasoning that the ownership separation between ECI and Ameritech was complete,
and in no way could ECI be considered a user of East Lansing's or Meridian's rights of
"It seems incontrovertible that in some important and
historical sense of the word, it is reasonable to conclude that ECI has not 'used' the
public rights of way," the court said in an opinion signed by Judges William J. Bauer
and Terence T. Evans.
Without a franchise, ECI or any company doing business the
same way can compete free of must-carry, public-access and leased-access rules that take
channel space on traditional cable systems. Nor would ECI have to collect the typical 5
percent franchise fee that goes into city coffers.
"What we are going to see is a form of cherry-picking,
and it's going to be a problem," Van Eaton said.
Washington, D.C.-based cable attorney Frank Lloyd said if
the ECI model is widely replicated around the country, cities would rebel and put a lot of
pressure on the FCC to reverse its decision.
"The cities will go totally bananas about it because
of all of the revenues they'll be losing," said Lloyd, a partner with Mintz, Levin,
Cohn, Ferris, Glovsky and Popeo.
The cable industry, he added, won't like the fact that it
has to comply with the nitty-gritty of local regulation while facing all sorts of
competitors -- multichannel-multipoint-distribution service, direct-broadcast satellite
and other ECIs of the world -- that don't face the same restrictions.
"If that's true, and the cable operator is still stuck
there with all of these obligations, the cable operator is going to start saying, 'Hey,
wait, we want a level playing here,'" Lloyd said. "What it really shows is the
absurdity of putting franchises on cable operators because we've got so many unfranchised
ECI attorney Deborah Costlow said the company's decision to
rely on Ameritech was intend to promote competition to cable. By cutting down on the
number of headends, ECI could trim its per-subscriber costs and economically serve small
"All this does is reduce cost and allow service to
smaller buildings, which increases competition," she said. "If [cable] really
has a beef with this decision, they should talk to Congress about it."
Lloyd said it was possible that cable operators could use
the ECI decision to their advantage by making changes in corporate structure.
"An RCN [Corp.] or anybody else could restructure
their operation so that there are two separate entities -- a programming entity and
transport entity -- that appear to deal at arm's length with each other," he added.