Commissioner Chong Releases Proposed Decision in Rulemaking to Implement California’s New Video Franchising Legislation

California Public Utilities Commissioner Rachelle Chong recently released a lengthy proposed decision (“Proposed Decision”) in the Commission’s rulemaking to implement California’s new Digital Infrastructure and Video Competition Act (DIVCA), which phases out the local cable television franchising scheme in California and replaces it with a new state video franchising scheme. This memo summarizes the major features of the Proposed Decision.

Application Process/Eligibility for State Franchise

1. Treatment of Incumbent Operators/Expired Franchises

The Proposed Decision would clarify an ambiguity in DIVCA concerning treatment of locally-issued cable television franchises scheduled to expire prior to Jan. 2, 2008. Pursuant to DIVCA, entities that do not presently hold a locally-issued franchise are eligible to receive state franchises by no later than April 1, 2007. Incumbent cable operators, however, are not eligible to obtain a state franchise until January 2, 2008. DIVCA provides that an incumbent operator whose locally issued franchise is scheduled to expire prior to Jan. 2, 2008, may either renew the local franchise or wait to obtain a state franchise. If the incumbent operator chooses to obtain a state franchise, DIVCA states that the local entity “may extend the [local] franchise on the same terms and conditions through Jan. 2, 2008.” The use of the word “may” raises the question of whether an extension is mandatory or discretionary. The Proposed Decision clarifies that if a renewal agreement is not reached, extension of the local franchise is not discretionary; it happens automatically. Moreover, the Proposed Decision provides that an incumbent cable operator whose franchise is scheduled to expire before Jan. 2, 2008, may apply for a state franchise before that date in order to avoid any lapse in franchise authority.

This proposal will benefit incumbents that have expired franchises or were otherwise experiencing difficult franchise renewal negotiations by allowing a smooth transition into a state franchise.

2. Franchise Area Clarification/Affiliated Entities

The Commission’s Order Instituting Rulemaking (OIR), released last fall, proposed that affiliated entities would be required to obtain a single state franchise issued to one of their parent companies. The proposal's intent was to prevent franchise applicants from evading reporting, build-out, and cross-subsidization requirements; however, it would have various unintended consequence, such as requiring asset transfers and triggering additional tax burdens. For this reason, the Proposed Decision changes the original proposal and would allow affiliated subsidiaries to hold multiple franchises, provided that the applicant attests that: (1) it or its parent assumes responsibility for producing reports for or on behalf of all affiliated California entities; (2) any telephone customers of affiliated entities will be included for the purposes of determining applicability of build-out requirements, and (3) it will refrain from using any rate increases of its or its affiliates’ basic telephone service offerings to reduce costs of video service offerings.

This proposal is beneficial to franchisees by allowing franchises to be organized by traditional political subdivisions and by not artificially triggering asset transfers where franchises are held by affiliated companies.

3. Limited Commission Authority to Review Applications—No Challenges

The Proposed Decision would not permit any protests to an application on the stated grounds that the Commission’s role in reviewing an application is ministerial. As acknowledged by the Proposed Decision, the Commission’s sole role is to determine whether an application is complete. The Commission must determine this within 30 days, and if it does so, it must approve the application within 14 days thereafter. According to the Proposed Decision, a protest of a ministerial act “’would be an idle act and could accomplish nothing.’”

4. Clarification of Incumbent Rights Outside of Existing Franchise Areas

The Proposed Decision confirms that an incumbent cable operator is not considered an incumbent outside of its franchise territory as it exists on Jan. 1, 2007. Thus, cable operators that presently hold cable television franchises in California may begin applying for state franchises in areas outside of their existing service territories as soon as April 1, 2007.

Scope of Commission’s Enforcement and Regulatory Authority

The Proposed Decision interprets the Commission’s enforcement authority broadly. Pursuant to the Proposed Decision, the Commission may suspend or revoke a franchise if it finds: (1) that the holder has failed to comply with any demand, ruling or requirement of the Commission made pursuant to DIVCA, (2) the holder has violated any provision of DIVCA, or (3) a fact or condition exists that would have resulted in denial of a state franchise application had the fact or condition existed at the time the application was made.

The Proposed Decision interprets the Commission’s regulatory authority more narrowly. DIVCA divides regulatory authority between the Commission and local entities. The Commission has authority over provisions on franchising, anti-discrimination, reporting, cross-subsidization prohibitions, and regulatory fees. Local entities have authority to regulate payment of franchise fees, PEG Channel requirements, EAS requirements imposed by the FCC, and federal and state customer service standards. Pursuant to the Proposed Decision, the Commission would have authority to investigate and hold hearings only on matters that fall within its specified regulatory authority. Local entities would have the sole authority to conduct investigations and impose penalties on matters over which they have regulatory authority. The retention of local authority over customer service matters (including the authority to impose penalties) will likely lead to the continuation of aggressive local oversight in this area.

The Commission has no authority to adjudicate customer service complaints. Thus, the Commission’s authority to respond to a customer service violation is limited to suspension or revocation of a state video franchise. Pursuant to the Proposed Decision, the Commission would exercise this authority only in response to a pattern and practice of material breaches established by local entities or the courts. Notably, the Commission would not review individual customer service non-compliance findings or penalties. It would consider only whether prior local or court enforcement actions and penalties warrant suspension or revocation of the franchise.

Bond Requirement

Under the OIR, an applicant for a state video franchise would be required to post a $100,000 bond or to demonstrate adequate assurances of financial, legal and technical qualifications. The Proposed Decision would eliminate the latter option and make a bond mandatory. Moreover, the Proposed Decision would require the amount of the bond to be $100,000 for every 20,000 households in a proposed video service area, with a minimum of $100,000 and a maximum of $500,000.

Local Franchising Entity Regulation of Rights of Way

According to the Proposed Decision, DIVCA tasks local entities with governing the “time, place and manner” of a state franchise holder’s use of the public rights-of-way. The Proposed Decision thus reasons that local entities may issue right-of-way permits, and that these permits may require further security instruments to ensure that a state video franchise holder fulfills locally-regulated obligations. This proposal raises some concern that local entities may seek to expand their regulation of cable operators under an aggressive application of “time, place and manner” authority.

Notice of Entry in Market

Under DIVCA, an incumbent cable operator that is not otherwise eligible to obtain a state franchise becomes eligible when a state franchise holder gives a local entity notice that it is about to begin offering service. Under DIVCA, such notice must be provided to the local entity at least 10 days and no more than 60 days before the provider begins to offer service. Because the notice implicates an incumbent cable operator’s right to obtain a state franchise, and indeed gives a local entity the right to demand that the incumbent do so, the Proposed Decision would require a state franchise holder to give the notice to the incumbent operator, as well as the local entity.

User Fees

The OIR established a total user fee for 2007 of $1 million. The Proposed Decision would apportion the user fee starting in 2008 according to a holder’s gross state video franchise revenues. For 2007, the fee would be apportioned according to the holder’s pro-rata share of households in its video service area. Holders that are issued a franchise at any time during 2007 must pay their portion of the fee for the whole year.

The Proposed Decision states that user fees are not franchise fees because they fall under one of two exceptions to the federal definition of franchise fees. The exceptions include: (1) fees of “general applicability,” and (2) fees incidental to the awarding and enforcing of the franchise. The Proposed Decision declines to amend the franchise application to require applicants to stipulate that user fees shall not be offset from franchise fees owed to local entities. We believe that the Proposed Decision’s analysis on this point is suspect and that the conclusion that the user fee is not a franchise fee could be successfully challenged.

Confidentiality

Pursuant to the Proposed Decision, documents and information submitted as part of an application for a state franchise, including build-out materials, would not be afforded confidential treatment. In fact, the Commission would post video franchise applications and any responses to requests for information on the Commission’s website. With some possible limited exceptions, documents and information submitted in response to reporting requirements also would not be treated as confidential by the Commission.

This proposal sets California apart from other states where ILEC deployment plans have been accorded confidential treatment. This approach should make it more difficult for new video entrants to engage in red-lining without encountering local resistance.

Renewal of State Franchise

The Proposed Decision declines to establish renewal procedures at this time on the grounds that such procedures must comply with federal and state laws and those laws may change between now and when the first renewal comes up in 2017.

The Proposed Decision may appear on the Commission’s agenda no earlier than Feb. 15, 2006, at which time the Commission may adopt, amend, or reject the Proposed Decision. Comments on the Proposed Decision are due no later than 10 days prior to the date on which the decision is agendized—Feb. 5, 2007, at the earliest. Please let us know if you would like our assistance in preparing comments to or have any questions about the Proposed Decision.