New Jersey State League of Municipalities Annual Conference Cable Franchise Renewals in an Era of Changing Technology Atlantic City November 18, 2014 Kenneth S. Fellman, Esq. Kissinger & Fellman, P.C

A few notes about New Jersey cable law: Municipalities conduct renewal and grant consent ordinance State is the ultimate “franchising authority” Municipalities can consolidate/aggregate efforts and resources to negotiate collectively Ascertainment Phase preceding negotiations: optional but important if you are looking to make changes; address new issues

Is there anything different about cable franchising when cable services are provider over IP?

Cable Service Over IP – Not so Different From a cable regulatory standpoint, provision of multi-channel video services over IP platform does not change the fact that the services are still “cable services” as defined in the Cable Act, and therefore subject to cable franchises AT&T’s U-Verse service was a “cable service” and that delivery in IP did not affect its regulatory classification. [Office of Consumer Counsel v. S. New England Tel. Co., 515 F. Supp. 2d 269, (D. Conn. 2007), vacated on other grounds and remanded, 368 F. App’x 244 (2d Cir. 2010).]

Cable Service Over IP – Not so Different IP Video is a format – not a delivery mechanism IP Video may never touch the Internet but rather be delivered over a closed (Cable TV) system

It’s All About the Bandwidth

Negotiation Issues in Franchise Renewals Related to Changing Technology Consideration –Franchise Fee –PEG Fee –In-Kind Services PEG Issues Institutional Network Competitive Equity (operator issue) Kissinger & Fellman, P.C.

Compensation Cable Act – provides: “during any 12 month period the franchise fees paid by the cable operator with respect to any cable system shall not exceed 5% of the operator’s gross revenues derived in such period from the operation of the cable system to provide cable services” 47 U.S.C. §542 New Jersey law limits fee to 2% N.J.S.A. 48:5A-30(a) Kissinger & Fellman, P.C.

“Gross Revenues” Under New Jersey law Limited to subscriber revenues from cable services Puts NJ municipalities at disadvantage compared to compared to other states other states Kissinger & Fellman, P.C.

“Gross Revenues” under federal law Gross revenues can include –late fees, return check fees –revenues from program guides and electronic guides –home shopping revenue –advertising revenue –upgrade and downgrade fees –installation and reconnection fees –converter rental fees and lockout device fees –revenue from Interactive Services to the extent they are considered Cable Services Kissinger & Fellman, P.C.

PEG Fees The term "franchise fee" does not include: –Capital costs which are required by the franchise to be incurred by the cable operator for public, educational, or governmental access facilities 47 U.S.C. § 542 What is a capital cost? –Depreciable asset –Fixed, one-time expense –Land, buildings, construction, equipment –Total cost needed to bring a project to a commercially operable status Kissinger & Fellman, P.C.

Schools and Public Buildings How many free drops are in place today? How many additional outlets are in use? –Has digital conversion occurred? –Is equipment required for every TV set? Existing drops v. new drops –Construction cost allocation for new drops Can operator offset all in-kind costs? –From Franchise fees? –Operator will cite FCC 621 Order Kissinger & Fellman, P.C.

Institutional Networks A communication network which is constructed or operated by the cable operator Used by a city free of charge or at a low cost for voice, video and data transmissions A franchising authority may require I-Net capacity as part of a cable operator’s proposal for a franchise renewal Operators may want to convert I-Nets to: –commercial services contracts - increase profits can the operator “mandate” a commercial contract? Kissinger & Fellman, P.C.

Competitive Equity FCC has preempted “Level Playing Field” language “Competitive Equity” is nothing more than reverse level playing field –Nothing in federal law requires such a provision –Check for state obligation Issues to watch for in proposed language –“Opt-out” provisions that allow operator to avoid franchise obligations without city approval –“Line item veto” – allows operator to unilaterally modify franchise if different than competor’s –Consider “all or nothing” approach operator can have the same terms as the competitor but it must take all requirements – no pick and choose Kissinger & Fellman, P.C.

Negotiations for High Definition (HD) PEG Channels How many channels does current franchise require? What do you have to trade? The issue isn’t IP specific –How much P, E and G programming is occurring? – Does is justify the additional bandwidth for simultaneous SD and HD channels? Kissinger & Fellman, P.C.

HD PEG Channels – new franchises in Denver and Aurora, Colorado Kissinger & Fellman, P.C.

The Denver and Aurora Experience (with Comcast) Aurora: 5 channels; 4 SD and 1 HD –City can activate 1 additional HD channel – At time new HD channel activated, 1 SD channel is returned Denver: 8 channels; 7 SD and 1 HD –City can activate up to 2 additional HD channels – At time new HD channels activated, an SD channel is returned Kissinger & Fellman, P.C.

HD Standards City provides signal in HD digital format to demarcation point at designated point of origination for the HD Access Channel HD signal refers to television signal delivering picture resolution of either 720p or 1080i, or such other resolution in same range that Comcast utilizes for other similar non-sport, non-movie programming channels on cable system, whichever is greater

HD Standards Comcast may not unreasonably discriminate against HD Access Channels with respect to accessibility, functionality and to the application of any applicable FCC rules & regulations, including without limitation Subpart K Channel signal standards Comcast must distribute HD Access Channel signals without degradation

HD Standards Comcast carries all components of HD Access Channel signals from City or designated access provider including closed captioning, stereo audio and other programming elements City responsible for costs of transmission equipment, including HD modulator and demodulator, and encoder or decoder equipment, and multiplex equipment, required for Comcast to receive and distribute HD Access Channel signal, or for cost of resulting upgrades to video return line

HD Standards Expense of acquiring and installing transmission equipment or upgrades to video return line qualifies as capital cost for PEG facilities within meaning of 47 U.S.C.A. Sec. 542(g)(20)(C), and therefore is an appropriate use of revenues derived from those PEG capital fees provided for in franchise Comcast may implement HD carriage of PEG channel in any manner (including selection of compression, utilization of IP, and other processing characteristics) that produces a signal quality for consumer reasonably comparable and functionally equivalent to similar commercial HD channels carried on the cable system

Hold On … Do You Want HD?

Other States; Other Cable Operators Providing HD for PEG CenturyLink – CO, OR, WA, MN Comcast –Portland, Vancouver, East Multnomah County, OR –Seattle, WA –Bellingham, WA –Cambridge, MA Cablevision –New York City Cox –Fairfax County, VA RCN –Chicago

PEG Video on Demand Fixed number of hours of storage and access through the cable operator’s VOD menu May be required to sign cable operator’s VOD license agreement Will want periodic reports from cable operator showing number of views of VOD programming May want provision to increase hours based upon number of views Will want to agree on providing content in format meeting certain specifications Will want provision to engage in good faith efforts to discuss alternatives to including Access programming on any VOD platform as programming distribution evolves

PEG Video on Demand Possibility of cable operator assistance to enhance municipality’s on-line PEG presence Money, or equipment (server, etc.) for on-line programming Free commercial grade broadband service connection to enable delivery of web-based PEG content Municipality may agree to acknowledge cable operator support by displaying its logo on community’s web-based programming

PEG Video on Demand – other VOD franchise communities Cablevision – New York City (25 hours) Cox –Fairfax, County, VA (30 hours) Comcast –Denver, Cambridge, Portland, Vancouver, East Multnomah County, Seattle (on cable system) –Other CO communities (web-based) RCN –Chicago

Kenneth S. Fellman Kissinger & Fellman, P.C