Ops Report Telephony Hang-Ups

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The cable industry has proudly crossed over the 1.5 million-customer mark for local telephone service, but system operators said future growth could become harder to achieve if local hang-ups over certification keep getting in the way.

Insight Communications Co. had hoped to deploy telephony service in Lexington, Ky., in January, in partnership with AT&T Corp. But the MSO has needed to wait for local certification, which could come as soon as this month.

Insight hasn't disclosed specific problems that Lexington regulators had with the application, and city officials have not returned calls to discuss the situation. But in general, local governments are concerned that they won't get what they see as their fair share of the revenues from new services introduced by cable operators, said Insight executive vice president Kim Kelly.

And Kelly said she's concerned the situation may get even more complicated in the future. That's partly because of uncertainty raised by a March Federal Communications Commission declaration, which deemed that Internet access over cable was an interstate "information service," and not a cable service that a cable franchise.

As cable operators move beyond what Insight now offers — circuit-switched telephony — and toward Internet Protocol-based phone service, local governments are wary of losing what they now have: the right to demand some payment for use of publicly owned rights-of-way.

Local burdens "at best are frustrating, and at worst, are unfair to consumers," Kelly said.

"As telecommunications become more competitive, we should be able to enjoy less regulation," she said. "But we're concerned we're actually heading in the other direction."

VIEW FROM COX

"Most local governments embrace" cable telephony, said John Spalding, vice president of regulatory affairs and assistant general counsel for Cox Communications Inc., the cable-phone leader with about 516,000 voice customers as of March 31. "They see it as true competition, a real value to constituents. So in most [places], there is no regulatory burden.

"But there are some roadblocks," he added. "Some cities and counties want a separate telecommunications franchise. We view it as an unnecessary third tier of regulation."

Some localities have attempted to place burdens on Cox that were so onerous, the operator walked away. Spalding declined to name specific cities, because Cox still does cable business in those jurisdictions.

For cable operators who see themselves as delivering on a key promise of the 1996 Telecommunications Act — providing a real choice in wired local telephone service — the delays are starting to get annoying.

But the 1996 act also affirmed local governments' right to demand reasonable compensation for cable operators' use of public rights-of-way as they expanded into telephony. Operators and governments have found they sometimes disagree over what's reasonable.

HOT BUTTONS

The areas of dispute fall into fall into two broad categories — aesthetics and local franchising — said National Cable & Telecommunications Association senior director of regulatory affairs Rick Cimerman.

Aesthetically, the generators used to restore phone service in the event of an electrical outage tend to run afoul of what locals consider attractive. Municipalities are loath to allow large green boxes to sprout up throughout town, and worry about the liability associated with natural gas-fueled backup power sources.

"The irony is, typically, these are the same facilities the phone companies have in place," Cimerman said.

Cablevision Systems Corp. provided service on 13,120 residential lines in Long Island, N.Y. as of March 21. A spokesman said the MSO hasn't experienced any of the franchising or fee issues faced by other cable-telephony operators, because it's presently "holding back" on further deployments until Internet-protocol telephony launches, probably later this year.

On the franchise side, local governments want to make sure they don't lose a potential revenue stream, in the form of the percentage of total revenue generated by an operator's telephone business.

Operators say they'd prefer to instead pay a small fee for use of publicly owned rights-of-way — something they're used to paying when adding new plant to accommodate new services.

Cox has been able to negotiate the majority of its deals without a separate franchise for the telephony side of the business. And in most cases, Cox doesn't pay a fee. But when it does, the fee is based on a percentage of revenue and not on the amount of linear feet of plant in rights-of-way, spokeswoman Laura Oberholmen said.

Of course, cable operators also like to point out that local incumbent phone companies don't pay franchise fees at all.

CITIES: NO 'SPECIALS'

Speaking up for the cities, consultants and legal advisers indicate cable operators sometimes want special treatment just because they're proposing to compete for local phone service.

"Cable is unwilling to consider the possibility that we have to plan for competition," said attorney Joe Van Eaton of the Washington firm of Miller & Van Eaton, which advises cities. "It's astounding how much special treatment the cable industry wants."

As an example, he described negotiations between one client — a city with strict requirements for placing cable underground — and overbuilder RCN Corp.

Van Eaton said city officials offered to walk streets with the company to determine where it was simply unfeasible to run wires underground, and where waivers could be granted for aerial plant. The city waited for one year for RCN to agree. In the meantime, the capital markets turned south and RCN pulled back from the project.

"That was the company's choice," Van Eaton concluded.

Cable operators aren't thinking globally when they dismiss aesthetic issues, consultants added. Those "Volkswagen-sized vaults" are bad enough, officials said. But when you have multiple providers, cities are faced with the prospect of a whole row of curbside boxes.

That's why cities might slow deployment, looking for joint trenching possibilities and other co-location opportunities, Van Eaton said.

"You aren't going to sell a lot of services if you drive down property values in the neighborhoods in which they serve," he added.

Operators hope more states follow Michigan's example. It recently passed legislation that essentially dealt local governments out of contentious issues such as setting right-of-way fees.

A state agency will be established to set and collect fees from telephone providers, and cable operators will get a credit against their local franchise fees that should offset the state ROW assessment on the telephony part of the business.

For now, the only national intercession on local telephony barriers comes from the FCC.

A year ago, said Cox's Spalding, his company complained to the FCC about permit delays and other restrictions on natural gas-based backup power. The agency responded, in writing, that cities shouldn't unreasonably restrict deployment.

Cox was able to use that letter to go back to the cities and negotiate "more reasonable" terms, Spalding said.

A National Association of Regulatory Utility Commissioners (NARUC) committee also is looking at model legislation aimed at reducing local barriers to entry, an effort applauded by cable operators.

But for now, Insight and its partner remain idle in Lexington as the MSO works through the local regulatory process. Systems under the Insight-AT&T partnership have been able to offer phone service in Columbus, Ohio; Evansville, Ind., and Louisville, Ky., where it has carried calls for more than a year and now claims 15,000 phone customers. A service launch is planned in Anderson, Ohio, this fall.

Insight sees phone services as a key driver of cable growth and wants the industry to make it a priority to resolve these local hang-ups, Kelly said.

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