Rancho Palos Verdes City Council
   

MAY 16, 2006 AB 2987 “The Digital Infrastructure and Video Competition Act of 2006” (NUNEZ) MAY 16, 2006 AB 2987 “The Digital Infrastructure and Video Competition Act of 2006” (NUNEZ) MAY 16, 2006 AB 2987 “The Digital Infrastructure and Video Competition Act of 2006” (NUNEZ)

TO: HONORABLE MAYOR AND CITY COUNCIL MEMBERS

FROM: DIRECTOR OF FINANCE & INFORMATION TECHNOLOGY

DATE: MAY 16, 2006

SUBJECT: AB 2987 “The Digital Infrastructure and Video Competition
Act of 2006” (NUNEZ)

RECOMMENDATION

Consider taking a position on AB 2987, “The Digital Infrastructure and Video Competition Act of 2006” (Nunez).

BACKGROUND AND DISCUSSION

Video services include satellite (known as Direct Broadcast Satellite or DBS),
fiber optic cables, traditional phone lines (using internet based technologies know as IPTV), fixed wireless, and even through a cell phone. Currently, video service providers (i.e. Verizon, AT&T) must enter into a franchise agreement with the City in order to provide service to the community. The current franchisee, Cox Communications, is the only video service provider at this time. With the rapid advancement of technology, other telecommunications and telephone providers have begun a push to enter the market to provide video services via direct fiber connections to the home. The construction of direct fiber infrastructure will require a significant investment by the providers, and has been the subject of intense debate as to whether the new technology is subject to the same franchising requirements as cable.

Assembly Speaker Nunez has introduced AB 2987, which would make sweeping reforms to the current franchising process. The bill, if passed, would create a statewide franchise that applies to all video providers, cable or otherwise, that is managed by the California Department of Corporations. Cities would no longer be able to negotiate their own individual franchises.

Opposition by the League of California Cities

The League of California Cities (the “League”) has a number of concerns with AB 2987 (Nunez) and currently opposes the bill in its current form. Staff has pasted the concerns cited on the League’s website below:

“Build Out of Telecommunications Services. We are concerned that the build out provisions in AB 2987 will not ensure that video services will be equally available throughout a community. The bill allows video service providers three years to build out video service, and to self-define the area they will service.

While they are prohibited from discriminating on the basis of income, they could gerrymander their service area and thereby avoid low-income areas. Local governments will not have the authority to challenge the adequacy of the service area "footprint."

Some areas may only be provided satellite or "another alternative technology" - an option provided in the bill when the video service provider is not able to physically build out service to all areas of their service area footprint. The League is concerned that these alternatives may not be comparable to service offered in other parts of the service area.

Consumer Protection and Customer Service. The bill effectively pre-empts local government from adopting and enforcing customer service standards for those operators who have received a statewide franchise. This would create a two-tiered customer service standard, with local cable operators subject to local customer service standards, and new statewide franchisees exempt from these standards.

Video Services to Libraries and Schools. Currently, most local franchises require cable companies to provide services to schools and libraries. This bill would eliminate that obligation. As a result, children and community members who can't afford the services at home will lose access to these advanced broadband services.

PEG Channels and PEG Support. Local agencies would lose control over the determination of the number of public, education and government (PEG) channels needed to properly meet a community's needs.

Public Rights-of-Way. It is not clear that local communities would retain their full control over access to local right-of-way. The League believes that the taxpayers' investment in the public right-of-way must be protected with clear city authority over access to the right-of-way.

Revenues. AB 2987 does not ensure that cities will be "kept whole" in regard to franchise revenues. While the bill upholds a city's ability to impose a utility user tax, local agencies appear to be prohibited from imposing other local fees and taxes, such as business license taxes, encroachment permit fees and building permit fees.”

Franchise Fee Issues

Staff has pasted several significant franchise fee and utility user tax revenue provisions of the proposed legislation below:

“…(b) The state-issued authorization fee shall be a percentage of
the holder’s gross revenues, …as
follows:

(b)(1) If there is an incumbent cable operator [Author’s Note: i.e. Cox Communications], 5 percent of the holder’s gross revenues or the percentage applied by the local entity to the gross revenue of the incumbent cable operator, whichever is lesser.
(b)(2) If there is no incumbent cable operator [Author’s Note: i.e. Cox Communications] or upon the expiration of the incumbent cable operator’s franchise, a local entity may, by ordinance, set the percentage applied to the gross revenues of all cable operators and video service providers, provided that the fee shall not exceed 5 percent of gross revenues and shall be applied equally to all cable operators and video service providers in the local entity’s jurisdiction.
(c) No local entity or any other political subdivision of this
state may demand any additional fees or charges or other
remuneration of any kind from the holder of a state-issued
authorization other than as set forth in this section and may not
demand the use of any other calculation method or definition of
gross revenues. However, nothing in this section shall be
construed to limit a local entity’s ability to impose utility user
taxes under other applicable provisions of state law.…”

The Assembly Committee Analysis includes the following “Comments”:

“The intent of the authors is to capture all of the revenue that is collected through franchise fees today and guarantee that the local governments can continue to collect the same amount of revenue in the future. Local governments are concerned that certain aspects of the definition of gross revenue in the bill may reduce the amount of money they can collect and are concerned that the language that prohibits them from collecting an additional franchise is written too broadly and may limit their ability to collect other fees such as businesses license fees. The authors state that this is not their intent.”

The fiscal impact resulting from this proposed bill is not determinable at this time. Even if the City would remain revenue neutral regarding franchise fees from video providers, it appears as though permit revenue may be excluded by AB2987.

Services That Do Not Require A Franchise

The Assembly Committee Analysis, dated April 24, 2006, included the following explanation of video services that do not require a franchise:

“DBS (satellite TV) providers do not use the public rights-of-way to provide service. Consequently, they do not have to obtain a local franchise. Without a franchise, they do not pay franchise fees, they do not offer PEG channels, and they do not provide I-network support. The local governments have no authority to impose these requirements on DBS providers. AT&T and Verizon both have agreements with DBS providers to co-brand their products so that AT&T and Verizon can bundle their telephone and Internet products with the DBS. Under current state law AT&T and Verizon can continue to offer their services in this manner. The state does have jurisdiction to require these providers to pay similar fees as the other video providers and provide PEG channels.

Internet technologies can also be used to provide video services. Today anyone with a broadband Internet connection can download recent television shows from the major networks or subscribe to live broadcast from channels like CNN and ESPN. Additionally, AT&T is planning to use the same technologies that make the Internet work to deliver video over their existing telephone network (IPTV). In the instances where people used the Internet to view video, no franchise is required. AT&T has
currently asked the Federal Communications Commission (FCC) to determine if their IPTV service is exempt from local franchise requirements. While to date there is no specific ruling on IPTV from the FCC, the FCC has made a distinction in regulatory approaches for using the internet to provide voice service and using IP-based technologies over a company's own network. Unlike situations where a company uses the Internet to make voice calls, the FCC found that when a company uses IP-based technology over its own network that service should be treated as a traditional phone service. <1> Depending on how the FCC rules on these matters, the state may have authority to require IPTV to have a franchise agreement.

PEG Programming

The Assembly Committee Analysis, dated April 24, 2006, included the following “Comments” regarding PEG programming:

“The bill then requires a new entrant to pay a pro-rata share of any on going cash obligations the incumbent operator has to support the production of PEG programming. If the incumbent does not have any ongoing expenses, but instead provides in kind support such as producing shows themselves, the new entrant will have no obligation to provide either cash or in-kind production support. If there is no local franchise or after the incumbent's local franchise expires, all video providers will be
obligated to pay a 1% fee or the pro-rata share they paid under the prior franchise agreement to support PEG programming.

Opponents of the bill argue that these provisions could result in less monetary support of PEG programming. The intent of the authors and of this language is to insure that the PEG obligations that are required today are maintained. The difficulty comes in devising a way to support PEG when the market switches from one provider to multiple providers without
requiring each company to provide separate, redundant production facilities. The bill tries to address this by requiring all companies to provide cash contributions in support of PEG and then allows the local governments to either produce the PEG programming themselves, or contract out for the services. Depending on the existing franchise agreements this mechanism could result in a reduction in PEG contributions over time in some areas, but would also result in an increase in contributions in other areas.

Summary – AB 2987 – Press Release Issued By The Bill’s Co-Author, Assemblyman Nunez, Dated April 24, 2006

In a Press Release issued by the Bill’s co-author, Assemblyman Nunez, dated April 24, 2006 AB 2987 would:

- “Streamline the current, outdated city-by-city video franchise process;
- Guarantee local governments continue receiving fees up to 5 percent of gross revenues earned in the locality, just as they always have;
- Ensures local governments continue receiving the same public, education and government channels for community programming in schools and libraries;
- Reaffirms local government control over time, place and manner of access to public rights-of-way;
- Preserves local government ability to impose utility user taxes under existing provisions of California law;
- Establishes existing customer service and consumer protection statues as the uniform standards throughout the state; and
- Prohibits discrimination based on income by extending to new entrants the same anti-discrimination law that applies to cable companies.”

Update - Assembly Committee Passes AB 2987

The following passage is posted on the website of the League:

“On April 24, 2006, the Assembly Utilities and Commerce Committee passed on a 10-0 vote (with one member not voting) AB 2987, authored by Assembly Speaker Fabian Núñez and committee chairman Lloyd Levine (D-Van Nuys).

The vote to move the bill out of committee came after a lengthy hearing of more than two hours. During that time, supporters and opponents argued about whether the measure would achieve its stated goals of promoting competition in video services, providing consumers with more choice, lowering prices, speeding the deployment of new communication and broadband technologies, creating jobs and benefiting the California economy.

The committee action was not unexpected, particularly given the influence of the two authors. In meetings with the Speaker's staff, the League had received a receptive hearing of some, if not necessarily all local agency issues and concerns. The League staff was informed that the bill would likely be placed on the Assembly Appropriations Suspense File (reserved for bills with significant fiscal impacts).

During its time on the suspense file, concerns raised by local agencies and others would be considered. These concerns include: build-out provisions (protection against red-lining), consumer protection, maintaining public, education and government (PEG) programming and stations, institutional (INET) services for schools, libraries and other governmental buildings, definition of gross revenues and other issues.”

Additional Information Regarding AB 2987

Staff has attached the following for review and consideration by members of the City Council:

- Copy of AB 2987:The Digital Infrastructure and Video Competition Act of 2006” (Nunez)
- Notice of Opposition to AB 2987 by the League of California Cities, dated April 13, 2006;
- Letter of Opposition by the California Contract Cities Association, dated April 24, 2006;
- Assembly Committee Analysis, dated April 24, 2006;

Similar Pending Federal Legislation

HR 5252 (Cope Bill), Communications Promotion and Enhancement Act of 2006 also proposes to create a national franchise, purportedly to expedite the provision of video and Internet services to local communities. The bill would allow current providers who operate under a local franchise (i.e. Cox Cable) to shift to the national franchise if a competitor began offering service in the same service area. The House Energy and Commerce Committee conducted a mark up of HR 5252 and the measure passed out of the Committee. The National League of Cities opposes HR 5252 and cites on their website that the proposed legislation would:

- “Eliminate local control of the cable franchise process where ALL residents get service and set up a national franchise system that will allow a new provider to “cherry-pick” customers.
- Allow an incumbent cable operator to abandon their current local franchise as soon as the new national franchise holder begins service to one subscriber in the service area.
- Turn the FCC into a national right of way management authority, when it has no knowledge or experience in such matters. The rights of way only can be managed locally.
- Not provide sufficient local enforcement authority over the management of rights-of-way or on consumer protection matters.
- Reduces revenues from the five percent cable franchise fee by excluding certain revenues currently included in the revenue base.
- Limits revenues for public, educational, and governmental (PEG) channels and institutional networks for local government needs such as fire, police, and other governmental communications.
- Change the Internet from a fast super highway with equal access for all users, to one where some customers get the fast lane and others get the slow lane.”

The League urges cities to call their Representatives and ask for a "NO" vote unless the bill is amended to meet these concerns. The full House is expected to take this measure up soon.

The Benton Foundation, created to promote a vision and policy alternatives for the digital age, advocates HR 5252 and cites on their website that the proposed legislation would:

- “Create a nationwide approval process for pay-TV services. By streamlining this system, these companies will be able to offer new TV services in many areas while protecting local interests. Cable providers will also be eligible to participate in this streamlined system once they face local competition.
- Require Internet-based telephone services to offer 9-1-1 capabilities while ensuring Internet telephone providers have access to all necessary 9-1-1 infrastructure and technology.
- Clarify the FCC authority to prevent Internet service providers from blocking or degrading any content or applications delivered over the public Internet.
- Preserve municipalities’ right to collect up to a five percent fee from pay-TV providers.
- Allow cities and towns to develop their own broadband networks.”

On Monday May 1, Senate Commerce Committee Chairman Ted Stevens (R-Alaska) introduced S.2686, the Communications, Consumer's Choice, and Broadband Deployment Act of 2006. The legislation, which consists of 10 separate titles, aims to reform existing communications laws to promote competition, cost savings for consumers, and the speedy deployment of broadband services to all Americans. Co-Chairman Daniel Inouye (D-Hawaii) co-sponsored the bill.

DISCUSSION

Based upon direction from the City Council whether to support or oppose AB 2927, The Digital Infrastructure and Video Competition Act of 2006 in concept, Staff will monitor it and prepare the necessary letter of support, or opposition, for the Mayor’s signature.

FISCAL IMPACT

The fiscal impact resulting from this proposed bill is not determinable at this time. Even if the City would remain revenue neutral regarding franchise fees from video providers, it appears as though permit revenue may be excluded by AB2987.

Respectively submitted,

Dennis McLean
Director of Finance & Information Technology

Reviewed by,

Les Evans
City Manager

Attachments:
Copy of AB 2987:The Digital Infrastructure and Video Competition Act of 2006” (Nunez)
Notice of Opposition to AB 2987 by the League of California Cities, dated April 13, 2006
Letter of Opposition by the California Contract Cities Association, dated April 24, 2006;
Assembly Committee Analysis, dated April 24, 2006