1. CABLE FRANCHISING IN A NEW REGULATORY ENVIRONMENT Colorado Municipal League Annual Conference Snowmass Village June 29, 2007 Kenneth S. Fellman Kissinger & Fellman, P.C. 3773 Cherry Creek N. Dr. Ptarmigan Place, Suite 900 Denver, Colorado 80209 303-320-6100 www.kandf.com

2. Kissinger & Fellman, P.C. www.kandf.com A Brief History of Cable Franchising  Pre-1984 Cable Act:  No federal statute  Some regulatory oversight from FCC  Local Franchising Authorities (LFAs) often granted exclusive rights  LFAs often conditioned franchise grant on provision of unrelated benefits

3. Kissinger & Fellman, P.C. www.kandf.com A Brief History of Cable Franchising  Congress passes 1984 Cable Act, adding Title VI to Communications Act of 1934:  Federal action had been demanded by Cable industry  Local control and local franchising preserved…  Within a federal, statutory framework, establishing limits on local action

4. Kissinger & Fellman, P.C. www.kandf.com A Brief History of Cable Franchising  1992 Cable Act amendments  Implements limited rate regulation  Restricts support for Public, Educational and Government (PEG) access to financial support for capital and equipment  1996 Telecom Act  Further limits rate regulation  Creates Open Video System status to ease regulation and encourage telco competition

5. Kissinger & Fellman, P.C. www.kandf.com A Brief History of Cable Franchising  Post 1996 Act:  Telcos did not make significant efforts to compete with cable companies  Dot com bust after late 1990s – capital dried up  Big telephone companies begin to merge; convergence of technologies  By 2005, new telco cries to eliminate local control in order to spur video competition

6. Kissinger & Fellman, P.C. www.kandf.com Local Authority Under Attack  In Congress  In the state legislatures  At the Federal Communications Commission (FCC)

7. Kissinger & Fellman, P.C. www.kandf.com Local Authority Under Attack  Federal legislation fails in 2006  State laws preempting local franchising pass in 14 states in 2005 & 2006  But state franchising bill killed in Colorado  Meanwhile, lack of action in Congress “empowers” FCC to act

8. Kissinger & Fellman, P.C. www.kandf.com Local Authority Under Attack  FCC opened docket in 2005 to determine if LFAs were acting as “barriers to entry” of companies wanting to offer competitive video programming services  Comments filed by many industry interests, hundreds of local governments and many more supports of access programming  Many industry comments referred to unnamed LFAs; some claims patently false

9. Kissinger & Fellman, P.C. www.kandf.com The FCC Order  Announced on December 20, 2006  3 – 2 vote, along party lines  Not published until March 20, 2007  Effective (in part) on April 20, 2007  Basis for decision – Section 621 of Cable Act: Franchising authorities may not “unreasonably withhold” approval of competitive franchises

10. Kissinger & Fellman, P.C. www.kandf.com The FCC Order “…[This Order] goes out on a limb in asserting federal authority to preempt local governments, and then saws off the limb with a highly dubious legal scheme. It substitutes our judgment as to what is reasonable – or unreasonable – for that of local officials – all in violation of the franchising framework established in the Communications Act.” - FCC Commissioner Jonathan Adelstein

11. Kissinger & Fellman, P.C. www.kandf.com The FCC Order  Local franchising process is inhibiting competitive entry into the video services market  Insufficient record as to whether the state franchising process (where state franchising legislation exists) was similarly problematic  Therefore, no FCC preemption of state franchising practices

12. Kissinger & Fellman, P.C. www.kandf.com The FCC Order  Order address 6 major areas of local authority:  time limits to act on franchise applications  build-out requirements  franchise fees  PEG and I-Net support  authority over mixed use networks  level playing field requirements

13. Kissinger & Fellman, P.C. www.kandf.com The FCC Order  Time Limits to Act  failure to act within 90/180 days amounts to unreasonable denial  (unless state law provides otherwise)  “Shot clock” starts when federal application and locally required info (if any) is received  Federal application requires only minimal info  Federal form still not yet approved by OMB

14. Kissinger & Fellman, P.C. www.kandf.com The FCC Order  If no final action taken in 90/180 days:  FCC deems application approved  Upon terms proposed by applicant  Parties may agree to extend deadline  If denied, can be challenged in court, so…  Document everything that happens in negotiations  Consider local application ordinance

15. Kissinger & Fellman, P.C. www.kandf.com The FCC Order  Build out requirements:  Cable Act: must give company reasonable time to be capable of providing service to all households in the franchise area  FCC interprets this to mean that “unreasonable” build out requirements amount to “unreasonable denial” of franchise  FCC gave extreme (and not very helpful) examples of reasonable/unreasonable requirements

16. Kissinger & Fellman, P.C. www.kandf.com The FCC Order  Build out: what to expect in negotiations  Any requirements company objects to will be claimed to be on FCC’s “seems unreasonable list  Applicants will try to tie all build out requirements to market penetration threshold  Commissioner Adelstein: “Our knee-jerk embrace of everything interested companies say while discounting local elected officials on a matter grounded in local property rights certainly does not inspire a great deal of confidence in the Commission’s ability on the federal level to arbitrate every local dispute in the country and fairly decide who is unreasonable and who is not.”

17. Kissinger & Fellman, P.C. www.kandf.com The FCC Order  Franchise Fees:  Rent for the use of public rights of way  Per Cable Act, limited to 5% of company’s cable related gross revenues  Does not include fees “incidental” to franchise award  FCC’s new interpretation of what is not “incidental” (and thus included in 5% cap):  included free or discounted cable services  this had never before been considered part of franchise fees

18. Kissinger & Fellman, P.C. www.kandf.com The FCC Order  PEG and I-Net Support  Historically negotiated in franchise to meet local needs – over and above franchise fees  FCC says support for “building and construction” outside of 5% cap  Support for salaries to be credited against 5% cap  No reference to capital contributions for equipment – historically outside of 5% cap

19. Kissinger & Fellman, P.C. www.kandf.com The FCC Order  PEG and I-Net Support (cont.)  Unreasonable to impose on new entrant more burdensome PEG carriage obligations than imposed on incumbent cable operator  Tying PEG support to incumbent will likely result in freezing PEG support at current levels, regardless of future community needs  Duplicative I-Net requirements (or obligation to pay comparable value) now impermissible

20. Kissinger & Fellman, P.C. www.kandf.com The FCC Order  Mixed Use Networks  Cannot refuse to award cable franchise based upon issues related to non-cable services  Cannot demand new entrant obtain cable franchise before issuing necessary permits to upgrade its network  New entrant does not need to apply for a franchise until it is ready to provide video service

21. Kissinger & Fellman, P.C. www.kandf.com The FCC Order  Mixed Use Networks (cont.)  Cannot use franchising authority to regulate network beyond provision of cable services  Example in practice: Qwest’s proposed language to exclude the telephone network from any of the police power directives in the cable franchise, so...  Make sure general ROW ordinances contain sufficient provisions to regulate rights of way access and operational issues, regardless of the entity utilizing the ROW

22. Kissinger & Fellman, P.C. www.kandf.com The FCC Order  Level Playing Field Provisions  Appear today in franchises and in some local codes  May only grant competitive franchises upon substantially similar terms and conditions as that of incumbent cable operator  Are now preempted by FCC order  Most Comcast and Bresnan franchises have LPF provisions of some kind

23. Kissinger & Fellman, P.C. www.kandf.com The FCC Order  Application of the Order – only to new entrants  Further rulemaking pending to determine if the preemptory rules and findings should apply to incumbent cable operators, and if so, when  Decision expected in the fall

24. Kissinger & Fellman, P.C. www.kandf.com The Court Challenge  Federal court appeal by multiple local governments, national local government associations, and some in the industry  Appeal pending in 6 th Circuit (Cincinnati)  Briefing to occur between July and October  Local governments have just filed for a stay of the Order  Stay tuned……

25. Kissinger & Fellman, P.C. www.kandf.com and in closing, again from Commissioner Adelstein…

26. Kissinger & Fellman, P.C. www.kandf.com “Instead of acknowledging the vast dispute in the record as to whether there are actually any unreasonable refusals being made today, the majority simply accepts in every case that the phone companies are right and the local governments are wrong.... This is breathtaking in its disrespect of our local and state government partners....”

27. Kissinger & Fellman, P.C. www.kandf.com THANK YOU!