Swamped LFAs Need MSOs to Pay Up

Author:
Publish date:
Updated on

Washington - Operators girding for a trip before local
franchising authorities, part of the wave of upcoming property transfers, should probably
bring their corporate checkbooks to that first meeting.

Legal advisors to the LFAs, who met here to compare notes
last week, indicated that many regulators will ask acquiring companies to reimburse cities
for the cost of regulating the transfers.

"You ought not pay for this out of your money,"
said Tom Creighton, a Minneapolis-based attorney, at litigation and regulation seminar
held by the National Association of Telecommunications Officers and Advisors (NATOA).
"That's bull. This process was not contemplated every six months."

If the company won't pay, LFAs should say no to the
transfer, he advised.

"You have a fiduciary duty to aggressively review
this, and you don't have the resources to do that," he said. He advised cities to
include consulting fees in the franchise agreement, so a city can revoke the agreement
retroactively if the company reneges on the promise to pay.

But keep the fees reasonable, the speakers cautioned. One
bad LFA could get dragged into court, resulting in a negative decision that will impact
all of them, they warned.

Conversely, Joe Van Eaton, another municipal attorney, said
he has rarely gotten a cable company to fund the costs of consultants and auditors. So,
cities should set aside a reserve fund to pay for analysis of the local system before a
transfer or refranchise request is made.

"The less work you do, the weaker your [court] case,
if it comes to that," he said.

Further, communities should step up compliance audits, if
they are not using them already. In the past, cable operators have successfully argued
that cities lose their right to resolve problems which have gone unsolved for years if an
operator has been ordered to leave town. Given sufficient notice, operators will generally
work with cities to correct safety violations. Audits also often reveal fee underpayments,
Van Eaton said.

Another controversial issue going forward will be
determining the amount of revenue from bundled services that will generate franchise fees
to an LFA. For example, if an operator charges $40 for basic cable service and $40 for
local telephony, the assessment is clear. But if the products are bundled together and
sold at a discount, will an operator still pay fees equal to a $40 à la carte purchase?
Or will the provider say the discount was on the cable portion, and pay fees on $30 of the
package?

One conference participant said cities should still demand
a fee equal to the full à la carte price. The $10 discount is a marketing expense and
should be subject to the full fee, he said. Cities that attempt to use that interpretation
should define that rationale in the in the franchise documents, attorneys warned.

The issue of the hour, open access for cable's
high-speed-data platform, garnered some interesting opinions.

Creighton told his peers, "Be careful what you wish
for." Open access could be the rationale for reclassifying Internet provision as a
telephony service, in which case the revenue earned by the category would not be subject
to franchise fees. With industry analysts projecting that Internet services could
represent half of some franchises' earnings within five years, LFAs may be costing
themselves future franchise revenue.

"I'm not advising any clients to force the open-access
issue," he said. Ironically, he had to leave the meeting early to supervise a meeting
between 60 clients and representatives of U S West on that very topic.

Madie Gustafson, senior vice president, franchising and
local government affairs for AT&T Broadband & Internet Services, said 90 percent
of the transfer proceedings of Tele-Communications Inc. to AT&T went smoothly. It only
got contentious when potential competitors interfered. As AT&T proceeds to complete
more system acquisitions, she asked LFAs to "be very careful.whose interests you're
protecting -- it might be our competitors."

Related