Posted By: Adrian Herbst, The Baller Herbst Law Group, P.C.
QUESTIONS AND INTRODUCTION
Should a city in a cable service franchise include, or not include, requirements for a cable service provider to comply with build out requirements?
This memorandum is intended to discuss build out requirements and conclusions based on our experience as well as consideration of applicable law, including the most recent FCC Orders that are described below.
In any analysis of build out requirements, a city must also consider a level playing field and equal protection. The contractual obligations of a city in an incumbent franchise may give rise to a challenge of any franchise that may be awarded to a subsequent provider on terms and conditions that are more favorable than the franchise they have. However, as will be noted in this memorandum, recent FCC Orders make it clear that unreasonable build out requirements may not be enforced by a level playing field requirement in a franchise.
The federal Cable Act, including § 621(a)(4)(A) states:
“In awarding a franchise, the franchising authority – (a) shall allow the applicant’s cable system a reasonable period of time to become capable of providing cable service to all households in the franchise area. . . ”
Recent FCC Orders, interpreting the above provision, have made it clear to us that a franchising authority has flexibility with regard to the granting of franchises, build-out requirements and the application of level playing field agreements. The FCC Orders discussed and summarized below make it clear that unless new entrants are given a fair chance to develop market success, the enforcement of build out standards may be a barrier, and level playing field requirements inconsistent with this may not be enforceable.
SUMMARY OF FINDINGS BY THE FCC WITH RESPECT TO WHAT CONSTITUTES “REASONABLE” BUILD OUT REQUIREMENTS
In the FCC’s Report and Order, released on March 5, 2007 (Endnote 1) , the FCC found in part a LFA’s “refusal to grant a competitive franchise because of an applicant’s unwillingness to agree to unreasonable build out mandates constitutes an unreasonable refusal to award a competitive franchise within the meaning of Section 621(a)(1).” (Endnote 2) The FCC’s Second Report and Order, released November 6, 2007, discussed build out requirements and makes clear that the build-out requirements in the First Report and Order are not applicable to incumbents. (Endnote 3)
The FCC defined build out as “requirements that a franchisee deploy cable service to parts or all of the franchise area within a specified period of time.” (Endnote 4) The FCC noted that “the record demonstrated that build-out requirements can substantially reduce competitive entry” (Endnote 5) and that level playing field requirements in local laws or franchise agreements “compel LFAs to impose the same build-out requirements that apply to the incumbent cable-operator.” (Endnote 6) Such level playing field provisions are preempted according to the FCC. (Endnote 7)
As part of a discussion on build-out provisions the issue of “redlining” or discrimination of the basis of income must be included. The practice of redlining, also known as “cherry picking,” is when service providers deploy facilities and services only to the most affluent areas, with less-privileged regions left as a backwater. Section 621(a)(3) of the federal Cable Act states in pertinent part “In awarding a franchise or franchises, a franchising authority shall assure that access to cable service is not denied to any group of potential residential cable subscribers because of the income of the residents of the local area in which such group resides.” (Endnote 8) The FCC notes that the intent of this section is to prevent the exclusion of cable service based on income and does not mandate universal build-out.
Further, the FCC stated in its Order the “statute is thus clear that no provider of cable services may deploy services with the intent to redline…” and therefore the FCC concludes that “nothing in its action today is intended to limit LFAs’ authority to appropriately enforce Section 621(a)(3) and to ensure that their constituents are protected from discrimination.” (Endnote 9) The FCC took note of suggestions to develop anti-redlining practices or programs but declined to require them.
SUMMARY OF FINDINGS BY THE FCC WITH RESPECT TO LEVEL PLAYING FIELD PROVISIONS
The FCC found that “in many instances, level playing field provisions in local laws or franchise agreements compel LFAs to impose on competitors the same build-out requirements that apply to the incumbent cable operator. (Endnote 10) Further, the FCC found that “cable operators use threatened or actual litigation against LFAs to enforce level playing field requirements and have successfully delayed entry or driven would-be competitors out of town.” (Endnote 11) Additionally, the FCC found that level playing field mandates “unreasonably impede competitive entry into the multichannel video marketplace by requiring LFAs to grant franchises to competitors on substantially the same terms imposed on the incumbent cable operators.” (Endnote 12)
The FCC cited comments which claimed that “new entrants face steep economic challenges” and “enters the market in a fundamentally different situation” where it does not have a captive market, but instead “have to win every customer from the incumbent.” (Endnote 13)
1. In the Matter of Implementation of Section 621(a)(1) of the Cable Communications Policy Act of 1984 as amended by the Cable Television Consumer Protection and Competition Act of 1992, MB Docket 05-311, Report and Order and Further Notice of Rulemaking, FCC 06‑180 (released March 5, 2007)(“Report and Order”).
2. Id. at ¶3
3. In the Matter of Implementation of Section 621(a)(1) of the Cable Communications Policy Act of 1984 as amended by the Cable Television Consumer Protection and Competition Act of 1992, MB Docket 05-311, Second Report and Order, FCC 07‑190 (released November 6, 2007)(“Order”)
4. First Report and Order at ¶11
5. Id. at ¶ 32
6. Id. at ¶ 34
7. Id. at ¶5
8. Id. at ¶86
10. Id at ¶34
12. Id at ¶138