Franchise Regulators Are Staying in Business

Author:
Publish date:
Updated on

Cable providers hoping that there will be a wave of
rate-decertification requests in the wake of the sunset of tier-regulatory language in the
Telecommunications Act of 1996 shouldn't hold their breath.

Few municipal regulators said they were ready to give up
even their diminished regulatory roles until they see the bottom-line impact of the recent
round of big acquisitions.

Another factor will be the passage of federal policy to
allow direct-broadcast satellite providers to deliver local broadcast signals in-market.
That would be true competition, many said, and if a bill is passed, that would be a more
appropriate time to bow out as overseers.

Other officials said they would not give up certification
because regulating transfers and refranchises give them "an extra shot" at
negotiating benefits for citizens -- rights they are loath to relinquish.

In fact, recent events indicated that some smaller
communities that eschewed cable regulation in the past may be thinking that this is the
time to start monitoring rates.

Since federal rate oversight expired at the end of March,
the FCC reported being contacted by local officials in West Virginia, Kentucky and
Mississippi. Their question: How do they go about getting certified to regulate basic
cable?

"They didn't leave any names," FCC Cable Services
Bureau spokesman Morgan Broman said. "So we can't do anything until we get something
official. But the feeling was that they were looking into getting certified as a way of
getting some small protection against [higher] cable rates in the future."

NOT IN WEST VA.

Some local officials in West Virginia, however, said they
doubted that any of the state's more than 100 local franchising authorities would be
looking for FCC certification -- not when the state has already asked to be recertified as
the body that will regulate cable rates through its Public Service Commission.

In fact, the town of Morgantown, W.Va., plans to seek
decertification as a cable regulator.

"Why should we go out and spend $6,000 or $7,000 on
consultants if the state's willing to do the job for us?" asked Dan Boroff, city
manager for the community of 27,000 residents.

But even if communities in other states were to seek
decertification by the FCC, it's not guaranteed that they'd get their wish, Broman said.

Under the 1934 Communications Act, as amended in 1984, city
officials would have to provide justification for abandoning all rate regulation.

"And the commission could still order them to keep
right on regulating basic rates," Broman said.

Even though deregulation of the expanded tier has
"emasculated" basic-rate oversight, one expert believes that most communities
won't bother to decertify when simply doing nothing will have the same effect.

"Basic-rate regulation is useless now,"
University of Wisconsin professor of telecommunications Barry Orton said. "But to
decertify would simply mean more FCC paperwork. Why waste the stamp?"

Instead, LFAs are expected to "sit on" the FCC
Form 1240s that operators submit each time they decide to hike basic rates, thereby
allowing the increases to automatically go into effect.

WHY BOTHER AFTER SUNSET?

The rationale: Why invest thousands of dollars on
consultants and hundreds of hours of staff time trying to shave pennies off the cost of
basic cable, especially when the operator will be able to recover the revenue by boosting
the price of now-unregulated expanded tiers?

"The $40 [per-month] cable bill may not change one
iota," said Brian Grogan, a partner with Minneapolis-based law firm Moss &
Barnett. "It's not an enticing idea or one that's going to make a City Council say,
'Let's go ahead and do this.'"

Grogan added, "Why fight to get 25 cents per
subscriber if the operator can get it back by jacking up the cost of expanded basic? You
end up running around the track just so you can run around again."

Grogan counseled that it's better to do nothing than to
decertify. At least cities can keep operators honest as long as they have the authority to
monitor basic rates, equipment and hourly service charges, he said.

"It's like filling out your taxes," he added.
"You know you could get audited. It's that threat that keep you honest."

But despite being body-slammed by the FCC, one jurisdiction
that plans to continue fighting against what it considers unjustified annual basic-rate
increases is Arlington, Texas.

The FCC recently issued an emergency stay of a city order
requiring a 19-cent reduction in Arlington's basic rates for 1998. As a result,
Tele-Communications Inc. (now AT&T Broadband & Internet Services) was allowed to
implement its higher rates while the agency weighed the MSO's appeal.

But even more galling to city officials was the fact that
the agency issued the stay while it failed to rule on two previous appeals filed by TCI
dating back to 1996.

In the meantime, AT&T Broadband has issued its rates
for 1999, which included a 47-cent-per-month jump in the cost of basic cable in rebuilt
areas beginning June 1, and which could mean a fourth appeal being filed with federal
regulators.

A CHANCE TO FLEX MUSCLE

City staffers indicated that after years of squabbling,
local officials are "in no mood" to abdicate their only remaining regulatory
authority.

"In my opinion, the sunset of upper-tier-rate
regulation is more fuel for cities to act as regulators," said Jennifer Howry,
assistant to the Arlington city manager.

"With no rate regulation on expanded basic, it's more
important than ever to take a close look at basic rates and to make sure that costs
associated with expanded basic aren't being attributed to basic service," she added.
"People here are already paying an average of $40 to $50 per month. Our council feels
an obligation to fight for those subscribers."

On a more practical side, another reason for continuing to
fight for implementation of its rate orders is the $2.4 million in refunds that the city's
60,000 subscribers could see if the FCC rules in Arlington's favor.

The bottom line: Regulation is expensive, and doing the
accounting on things like basic rates and equipment charges is a pain in the brain cells,
but most cities intend to keep at it.

Why? "We don't trust 'em," said John Guiste of
Galesburg, Ill., the city's human-resources coordinator and risk manager, who also counts
cable regulation among his duties. His community is served by AT&T Broadband, and it
has a combative past with its predecessor, TCI.

"AT&T messed up by not coming to communities and
seeing what they're taking over," he said. He noted that the same executives that ran
TCI are now AT&T Corp.'s cable honchos, adding, "We've had pretty much all we can
take."

"They're looking for every almighty dollar they can
take out of here," he said, noting that the operator upgraded, but that consumers
have to pay more for a digital tier to take advantage of the improvements.

Instead of backing away from cable, the city wants to
become a competitive provider. Galesburg hired Stanley & Co. of Muscateen, Iowa, to
complete a feasibility study on a plan to build a cable and high-speed-data
infrastructure. The report should be completed in July or August.

Meanwhile, the city will continue to oversee AT&T
Broadband.

"AT&T will get the blame now, and they'll lose
big-time. TCI is a bad apple," Guiste fumed.

BIGGER NOT NECESSARILY BETTER

Even larger communities, which theoretically have larger
staffs to devote to regulation, questioned the effort going forward.

"If regulators issue an order that an operator
disagrees with, [operators] can circumvent the order with expanded-tier costs. The real
question is whether it is still a valuable tool," said Mario Goderich, director of
the consumer-protection division for Miami-Dade County, Fla.

Despite this uncertainty and the cost of regulating going
forward (the county will see seven transfers in the next 10 months), Goderich's
jurisdiction will remain certified.

He also suggested that the transferees might face
additional costs from his department to cover the costs of analyzing system transfers.
Franchise fees, which are meant to cover the costs of regulation, were not designed to
collect enough to pay for the surge in transfer activity.

For instance, the county recently reviewed, and approved
the transfer of, one of its franchises from TCI to AT&T Broadband. A system swap was
already in the works to move that system into MediaOne Group Inc.'s ownership column. But
at that time, MediaOne was going to be bought by Comcast Corp., which has since bowed out
of the transaction, so the system should end up with AT&T, MediaOne's new buyer.

"I can't begin to describe the amount of staff time
this all takes," Goderich said. An application fee, paid by transferees to cover the
extra costs, may be the solution.

A transfer fee is not unprecedented. Indeed, The Sacramento
(Calif.) Metropolitan Cable Commission charged Comcast a $50,000 application fee to review
the transfer of its local franchise from Scripps Howard Cable TV to Comcast just months
ago. According to reports, that system will be swapped to AT&T as part of the
settlement of the attempted Comcast acquisition of MediaOne.

Rich Esposto, the commission's executive director, said an
application fee for a new Sacramento operator "is a given."

TRANSFERS ARE THE KEY

Deregulation in Sacramento is unlikely, Esposto said,
because of the merger mania. The Sacramento franchise expires in 2023, and it has no
reopener dates. Transfers mark the best time to compel operators to agree to strict
customer-service standards and other local requirements.

When the system was transferred from Scripps to Comcast, he
added, the commission had little trouble finding that Comcast met the six local standards
to justify the transfer. A transfer to AT&T Broadband is not quite as simple, he
added.

"The TCI legacy is a strong one," he said.
Additionally, he is concerned that the acquisition -- at a reported $4,000-plus per
subscriber, plus debt from previous corporate acquisitions -- will push up local rates.

"How can I tell my bosses that this is in the public
interest?" he asked.

Other consultants agreed that it is in the best interest of
cities to cling to their diminished rights, no matter how traumatic the process of
continuously changing ownership may be.

Rate regulation is "a phony gift" from the
federal government, while transfer proceedings are the real chance for cities to flex
their muscles, municipal consultant Rick Borten said. But municipalities must work hard to
see through the false promises of new owners.

"[A transfer is like] your spouse saying, 'By the way,
someone else is going to bed with you tonight, but don't worry, things will be even
better,'" Borten added.

While there's little to be gained from trying to regulate
how cable companies treat their customers, cities should refocus on infrastructure
oversight, where the stakes are higher in the converged world, he advised.

"I'm advising a wait-and-see attitude,"
consultant Rusty Monroe added. The regulatory picture could change vastly in the next 12
to 18 months if federal bills pass freeing DBS programmers from local-broadcast-content
restrictions.

Absent that, he said, middle to smaller cities will have to
consider extra fees to help pay for the costs of regulation and transfers. Most need
outside financial analysts to determine if operators' "fully allocated costs"
include deductions for everything up to the paper clips on the CEO's desk, he added.

Jane Lawton, cable administrator for Montgomery County,
Md., and president of the National Association of Telecommunications Officers and
Advisors, argued that forsaking regulation would bring down the wrath of "the
forgotten consumer," who's still waiting for the industry to deliver on the promises
contained in the Telecommunications Act of 1996.

"Consumers are not happy," Lawton said.
"They were promised competition, and it hasn't happened. They were promised new
services, which they haven't gotten. So on the one hand, [federal] rate regulation has
gone away fairly quietly. But on the other hand, people are getting mad very fast."

BIG HIKES IN MONTGOMERY

In Montgomery County, at least, one of the reasons for
consumer discontent is that in the three years since the passage of the 1996 act, cable
rates have jumped 43 percent, including a 7 percent hike scheduled for this July.

"I don't think consumers would be very happy if now,
we turned around and abandoned basic-rate regulation," Lawton said.

Not when industry consolidation threatens even higher rates
in the near-term.

Lawton speculated that disappearing federal regulation of
expanded-basic rates may have encouraged some operators to cut a string of cable-related
deals that have more than doubled the traditional $2,000-per-subscriber benchmark.
Operators may be planning dramatic rate increases to cover the debt they're incurring, she
added.

In Fairfax County, Va., for example, Cox Communications
Inc. recently purchased Media General Inc.'s local cable operations at a per-subscriber
price of some $5,300, or more than what AT&T is offering for 5 million MediaOne
customers nationwide, Lawton said.

"Where is that money going to come from?" she
asked. "How are they going to recoup it? They must be looking at the fact that rate
regulation has gone away. It's looking kind of bleak for consumers."

Related