Local, State and Federal Cable Franchise Regulation

For more than 50 years, local governments have had a significant degree of regulatory control over cable systems through their franchise agreements with cable companies. In contrast, cities and other local governments have no control over DBS services delivered into their jurisdictions.

The difference in regulatory treatment is due to cable's need for rights-of-way for their network of wires. Local governments control these rights-of-way and often own the utility poles and other infrastructure used for cable television delivery. Thus, cable operators must negotiate franchise arrangements with local governments for access to rights-of-way in exchange for paying franchise fees to the local government and meeting other conditions in the franchise arrangement.

These franchise agreements are based to some extent on the "natural monopoly" regulatory model used with electrical utilities and local telephone companies, because historically the agreements have protected a local cable monopolist from competition in exchange for franchise fees and various service- quality requirements.[*] The franchise agreements typically also contain additional conditions requiring the cable company to provide certain services designated by the local government, including public access channels; funds to assist local citizens or organizations in producing programming for these channels; and studios and equipment for those interested in providing local programming.

Cable television does have some characteristics consistent with other industries that have been regulated as "natural monopolies." Like electrical utilities and phone companies, cable television is dependent on local governments for rights-of-way. Moreover, its network of wires is capital-intensive, a fact that made construction of a second competing network prohibitively costly in earlier times.

Other features of cable television do not lend themselves as well to natural-monopoly regulation, however. Most notable is the fact that competitors have emerged, including the telephone companies that have entered local cable markets and the national DirecTV and Dish Network satellite services. Moreover, cable television also offers highly differentiated products, such as a wide variety of channels, packages and add-on programming. Most industries regulated as natural monopolies offer predominantly undifferentiated products, such as electricity and telephone line access. Indeed, the differentiation of the cable industry's products and the potential for innovations in programming and programming packages led many commentators to criticize monopoly regulation of cable television through local franchise agreements even before DBS and new cable entrants emerged as competitive alternatives to traditional cable systems.[3]

Over time, the role of state and the federal government in regulating local franchise agreements has increased, making the agreements more uniform and reducing local government discretion in regulation of cable television. Practically speaking, the natural monopoly model lost much of its applicability in 1992 when the U.S. Congress prohibited local governments from engaging in exclusive franchise agreements.[4]

Nevertheless, local governments still have significant control over local cable providers due to government control of rights-of-way. Cable companies now pay more than $3 billion per year in franchise fees nationwide.[5]

The State of Michigan has never regulated cable television rates at the state level. Before 1984, the only regulation of cable television prices was by local governments through franchise agreements with cable systems. Any local regulation of prices was largely ended when Congress passed the Cable Communication Policy Act of 1984 to greatly limit the ability of local governments to control cable rates. The 1984 act standardized procedures for cable franchise renewal and limited cable franchise fees to 5 percent of the cable system's gross revenues.[6] The 1984 act also allowed local governments to require that cable systems "provide adequate assurance that the cable operator will provide adequate public, educational, and government access channel capacity, facilities, or financial support." These "public, educational, and government" access channels are the "PEG" stations that Michigan House Bill 5047 and Senate Bill 636 would require cable television companies to finance with extra fee payments. PEG channels are discussed in more depth in the next section.[7]

The first federal regulation of cable television rates was implemented as a result of the Cable Television Consumer Protection and Competition Act of 1992.[8] This legislation occurred during period in which a cable system was subject to non-broadcast competition only in the few municipalities that allowed a second cable system franchise to enter the local market. As noted earlier, the 1992 act prevented local governments from granting a cable company an exclusive monopoly cable franchise. The "must-carry" provisions in the 1992 act required that cable systems carry all local open-air broadcast stations in their area, and the retransmission consent requirements mandated payments to the local stations.

Although these must-carry requirements changed the bargaining leverage in favor of broadcasters, the most noticeable impact for viewers was probably the rapid increase in the number of shopping channels carried on their cable system. Shopping channel programmers took advantage of the must-carry rules and began broadcasting shopping programming on new or existing local stations that had to be carried by the local cable system.

The rate regulation following the 1992 act did not last long. Several significant changes occurred between 1992 and 1996. One was the rise of satellite television as a competitive alternative. The forerunners of the present DirecTV first offered programming via high-power DBS in 1994, and EchoStar's Dish Network became available in 1996. Other DBS services such as Primestar were also launched, but either failed or were absorbed by the surviving DBS services. DBS grew rapidly, aided by the passage of the Satellite Home Viewer Improvement Act of 1999. When the Satellite Home Viewer Improvement Act was passed in 1999, DBS subscribers accounted for less than 8 percent of customers paying for video services. By mid-2005, 27.7 percent were DBS subscribers.[9]

The Telecommunications Act of 1996,[10] which also contained broad restructuring provisions for the telephone industry, mandated that federal regulation of cable rates end by 1999 except for those in the basic tier. The act also allowed telephone companies to provide cable television services in local markets, potentially by delivering television programming over existing telephone lines.[†] Perhaps the most aggressive early attempt by a telephone company to enter the cable television market was launched in 1997 by Ameritech, the Bell operating company in Michigan and the surrounding states.[‡] Within two years of entering the television market, Ameritech had more than 300,000 subscribers, but very few in Illinois, where Ameritech faced a "level playing field law" subjecting new entrants to burdensome and long hearings and local mandates before they could offer service.[11] Ameritech was acquired by SBC, another regional operating company, in 1999, after which SBC sold off Ameritech's two-year-old cable business.[12]

Today, cable and telephone companies are increasingly competing with each other in multiple markets. Cable companies have generally had more success entering telephone markets, while telephone companies continue to face barriers to entry in much of the country due to the cable television franchising requirements.[13] As a result, telephone company entry has continued to occur, but at a slower rate than might otherwise have been expected.[§]

Recently both cable systems and telephone companies began offering "triple play" packages of telephone, television, and high-speed Internet to customers. Cable offers high-speed Internet service through cable modems and their existing wires, while telephone companies offer their high-speed Internet via digital subscriber lines (DSL). As competition to be the provider of multiple services develops, it is increasingly important for telephone companies to clear the hurdles to offering television service. Their two alternatives are to package their telephone and DSL lines either with a cable network of their own or with an existing DBS service. As telecommunications economist Thomas Hazlett has noted, "Telephone carriers can no longer afford not to be in the video delivery business."[14]

Michigan's Uniform Video Services Local Franchise Act of 2006 took effect on Jan. 1, 2007. It significantly changed the nature of future franchise agreement negotiations between local governments and cable television service providers. Before this legislation, franchise contracts could be highly complex. The negotiation of the contract itself was a significant barrier to entry for any telephone company or new cable company considering competing with an established cable company. In addition, contracts contained negotiated terms for (1) access to public easements, rights to lay lines, and other rights needed from local governments in order to build the delivery system; (2) mandatory services the franchise must offer, in the form of programming packages, equipment, or studios for public access channels, or subsidies for local programmers; (3) system design, capacity, and technology mandates; (4) requirements to offer service to all or nearly all customers even when uneconomical to do so; (5) liability protections for the community in the form of insurance or bonding; and (6) taxes, in the form of fees.[15]

The Uniform Video Services Local Franchise Act has greatly simplified the franchise agreement process. Since the act is so new, it is difficult to assess how effective it will be. At least one attorney representing municipal governments has already proclaimed franchise reform a failure, based primarily on the slow rate of entry by new cable providers and lack of evidence of price competition.[¶] Early evidence, however, is that AT&T's "U-verse" service, now available in 160 communities in Michigan, has been expanding rapidly recently, and in response Comcast has lowered its Triple Play package from $134 per month in late 2006 (when franchise reform legislation was passed) to $125 today, with a one-year introductory rate of $99 per month.[16]

As the discussion above shows, the general trend in state and federal regulation has been toward allowing would-be television service providers greater ease of entry into local television and video service markets. The resulting reduction of barriers to market entry has increased competition between television service providers and substantially altered the cable television marketplace that existed when local government franchise agreements first mandated that cable television companies pay fees to provide public, educational and government access channels. Consumers' choices of providers and programming are much greater than they once were, even as local government regulation of cable television service has been restrained.

[*] As noted below, federal law now prohibits local governments from granting a monopoly to a cable television provider.

[†] The act was ending a restriction put in place by the 1984 federal court consent decree that divested AT&T of the seven regional Bell operating companies. As a term of this decree, the Bell companies could not provide information services.

[‡] Following the Bell breakup in 1984, Ameritech was the primary local telephone service company in Michigan, Illinois, Indiana, Ohio, and Wisconsin. In 1999, Ameritech was acquired by another regional telephone company, SBC (formerly Southwestern Bell Company). SBC later was renamed "AT&T" after SBC's acquisition of AT&T in 2005.

[§] Some critics of cable television franchise reform have claimed that new cable service entry is occurring in Michigan at a very slow rate. See, e.g., Jon D. Kreucher, "Still Broken: Michigan's Video Franchising Law 18 Months Later," Michigan Township News, July 2008, 18-24. Entry is occurring, however. See Christina Rogers, "Cable Giant's Competition Benefits Users," Detroit News, July 7, 2008.

[¶] Jon D. Kreucher, "Still Broken: Michigan's Video Franchising Law 18 Months Later," Michigan Township News, July 2008, 18-24. Note that Mr. Kreucher is the attorney representing the City of Saline in a lawsuit to require Comcast to pay the full 2 percent PEG fee under the current franchise agreement.