1. CABLE FRANCHISING AND PEG CHANNELS IN A NEW REGULATORY ENVIRONMENT 3CMA Annual Conference Fort Collins, Colorado August 3, 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  To fully understand the Order’s impact on PEG, one must understand a bit about franchise fees  A franchise is a grant of authority to an entity to use public property -- without the grant, no authority exists  Franchise fees are analogous to rent for the use of the public rights of way

14. Kissinger & Fellman, P.C. www.kandf.com The FCC Order – Franchise Fees  Franchise Fees:  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):  free or discounted cable services – this had never before been considered part of franchise fees  Certain PEG-related support

15. Kissinger & Fellman, P.C. www.kandf.com The FCC Order - PEG  PEG support has historically been negotiated in franchises 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

16. Kissinger & Fellman, P.C. www.kandf.com The FCC Order - PEG  Commission has set the stage for future disputes and possibly litigation  Capital/depreciable investments: cameras, lighting, playback equipment, editing decks – traditionally supported by PEG fees  Have always been considered outside 5% franchise fee cap

17. Kissinger & Fellman, P.C. www.kandf.com The FCC Order - PEG  Unreasonable to impose on new entrant more burdensome PEG carriage obligations than imposed on incumbent cable operator  While not finding this to be the only reasonable way to impose PEG support, Order noted “pro rata cost-sharing approach is a reasonable means of meeting the provision of adequate PEG facilities.”

18. Kissinger & Fellman, P.C. www.kandf.com The FCC Order - PEG  Not clear how pro rata share to be calculated, particularly if the incumbent cable operator made up front or periodic lump sum grants of PEG support  Tying PEG support to what is imposed on the incumbent will likely result in freezing PEG support at its current levels, regardless of the future community needs

19. Kissinger & Fellman, P.C. www.kandf.com The FCC Order - PEG  At renewal, franchising authorities assess community needs  Negotiate new franchise to meet the demonstrated local needs at that point in time  Per Order, competitive provider cannot be required to provide more PEG support than provided by the incumbent operator  If same rule applied to incumbents, at the time of renewal, incumbent can demand no additional PEG requirements be imposed  Conflicts with Congressional authority to obtain PEG support in franchise to meet local cable related needs

20. Kissinger & Fellman, P.C. www.kandf.com Arguments Made by Local Governments in FCC’s Further Notice  Demonstrated history of modifying PEG obligations to meet existing local needs in franchise renewals  Agreements to activate additional channels: Greenwood Village (2001), Broomfield (2003), Englewood (2002), Northglenn (2001), Arvada (1995)  Addressing local PEG needs through financial contributions: Thornton (development of studio-2001), Louisville (capital equipment upgrades-2006)

21. Kissinger & Fellman, P.C. www.kandf.com Other Impacts on Access  In communities with public access – will make competition for limited financial resources much stiffer  Incumbent cable companies less likely to be supportive of PEG because it is seen as “one more cost” impacting their ability to compete

22. Kissinger & Fellman, P.C. www.kandf.com Current Status of 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

23. Kissinger & Fellman, P.C. www.kandf.com Current Status of the FCC Order  Order has been appealed to federal court  Local governments’ motion for stay was denied, but may be reconsidered  The new “shot clock” governing timing to act on new franchise applications going into effect this week

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

25. 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....”

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