BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
AB 2242 - Strickland Hearing Date: June
29, 2004 A
As Amended: June 14, 2004 non-FISCAL
B
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DESCRIPTION
Current law authorizes local governments to grant cable
franchises.
Current law authorizes local governments to grant
additional franchises after a public hearing to discuss
specified issues. The additional franchises must serve the
same geographic area as the original franchise. Such
service shall be within a reasonable time and in a sequence
which doesn't discriminate against lower income or minority
residents. The additional franchises must also contain the
same public, educational, and governmental access
requirements as the original franchise.
This bill changes the requirements of an additional
franchise if it's given to a telephone corporation or its
affiliate. Under this circumstance, the additional
franchise only has to serve the area within that telephone
corporation's service area and doesn't have to meet all of
the requirements applied to cable companies.
BACKGROUND
Current law requires any additional cable franchises to
serve the same geographic area as the original cable
franchise. This law ensures competition is fair in that a
new cable operator can't cherry pick the best customers and
exclude those who may not be as cost-effective to serve.
Under this law, there have been few areas with multiple
cable operators. (Sacramento, with multiple cable
operators, is an exception made possible because current
law does not apply as a result of a settlement of a legal
dispute involving the original franchise.) Competition
for cable service comes primarily from satellite television
services, such as DirecTV and the DISH network, which
collectively have about 25% of the market.
For many years, the traditional telephone companies have
tried to improve their networks so they can carry not just
telephone calls, but also much more data-intensive
television programming so they can compete with cable
operators. Simultaneously, the cable operators have been
improving their networks and now offer telephone and DSL
service, albeit on a limited basis. Everyone is trying to
get into everyone else's market and while competition may
be marginal now, technological improvements are advancing
the day when there will be widespread competition.
Today's hottest offering is the Triple Play: telephone
service, high-speed Internet service, and video service.
Because of limitations in its telephone network, SBC offers
the Triple Play by bundling the DISH satellite television
service with its own telephone and Internet service. But
technological advances are improving telephone networks so
they can also carry video service. Verizon believes it's
figured out the technology and has announced its intention
to invest in the appropriate fiber optic plant and
switching equipment.
Cable franchises are offered for discreet areas, typically
a city or county, though the city of Los Angeles is split
into 14 separate franchises. Telephone companies, such as
Verizon, have defined service areas which were created
before cable franchise boundaries were created. Current
law, which requires additional cable franchises to serve
the same geographic area as the original franchise, makes
it much more expensive for companies like Verizon to
provide cable service if Verizon's service area doesn't
cover the entire cable franchise area. Current law means
Verizon would have to build on spec and install new
facilities in areas where it has no customers. To avoid
that, this bill relaxes the requirement that a new
franchise must exactly overlay the geographic area of the
original franchise.
Television service regulation depends on how it is
provided. Cable television providers must obtain a
franchise from the local government and pay a franchise
fee. Satellite television service, because it doesn't use
any local property, is not required to obtain a franchise
and pay a franchise fee. SBC's DISH satellite television
service did not require a franchise, and therefore no
franchise fee is paid.
COMMENTS
1.New Bill . Prior to June 14, this was a bill by
Assemblyman Vargas dealing with voting rights on a city-
or county-authorized disaster council.
2.More Competition . Rates for most cable television
services are unregulated, pursuant to federal law. While
competition from other video providers and other sources
of news and entertainment theoretically keep prices in
check, cable rates have risen 56% since 1996, much higher
than the inflation rate, and customers are required to
pay for channels they don't want.
Satellite television has provided some competition, and
with the ability to also offer local stations, it has
become a more formidable competitor to the point where it
now serves 25% of the cable television market.
This bill, by relaxing a significant entry barrier for
telephone companies, holds the promise for more cable
competition. Making it easier for telephone companies to
offer television service over the telephone network has
several additional positive effects. First, because the
telephone network must be upgraded to provide television
service, this bill will increase investment in
infrastructure and provide for more widespread
availability of advanced communications services, such as
high speed Internet access.
Second, because a franchise is required, local government
will benefit from increased franchise fees should
customers switch from satellite to land-based services.
Third, as the telephone company threat to cable operators
becomes more viable, cable operators will have the
incentive to invest more money in their infrastructure
and perform better.
3.Putting Cable Companies At A Disadvantage . Current law
requires telephone companies to let cable companies use
the "excess space" on their poles and in their conduits
at statutorily established rates. The telephone company
can require the cable company to move its facilities if
the telephone company needs to use the space. Right now,
the practical application of that law is limited to cases
where the phone company is expanding its phone service,
but this measure creates a circumstance where the
telephone company can boot its competitor's cable
facilities off of its poles so it can replace them with
its own cable facilities. Once telephone companies also
become cable companies, disputes over who is entitled to
use the excess space are inevitable.
Under this bill, not only will the telephone companies
not have to serve the same geographic area as the cable
company, they won't necessary have to serve customers
under the same conditions. The bill does require a new
franchise granted to a telephone company to adhere to the
same public access and non-discriminatory service
offering requirements as the original cable franchisee.
However, it doesn't require other terms of the franchise
to be identical to those of the original cable franchise,
such as the level of franchise fees, what revenues are
included in the provision of franchise fees, and customer
service requirements.
4.Cherry Picking . This bill bars cherry-picking within a
local franchise, but not among local franchises. For
example, if Verizon served an affluent city and a poor
city each under separate franchises, Verizon could choose
to provide video service only in the affluent city.
While this raises questions of equity, it may well be
true that this same cherry-picking occurred when the
original franchises were awarded. No company was
required to provide cable service in any particular city
because those were decisions made by the cable operator,
though if a company was providing service to a city, it
was required to serve the entire city, not just a portion
of it.
The greater cherry picking danger lies with the fact this
bill applies to existing telephone companies. Nothing in
this bill prevents a new telephone company from being
created to serve only a particular geographic area,
thereby allowing it to cherry-pick cable customers, too.
While it is hard to envision how this could occur,
because this bill opens the door to cherry-picking, this
question may be worth considering further.
5.Ability To Cross-Subsidize Service . There is the
potential for the telephone company to cross-subsidize
its cable service with money from its telephone services
if there is insufficient competition in the telephone
service markets or inadequate regulation of
non-competitive telephone services.
6.Definition Unclear . The definition of "service area" in
this bill, found on Page 3, Line 34, is inapplicable.
Public Utilities Code Section 230.3, which this bill
references as the area where a telephone company would be
allowed to provide cable television services, defines
"service areas" as the local access and transport areas
used to delineate between local and long-distance calls
pursuant to the 1984 AT&T Divestiture agreement. The
intent of this bill is to allow telephone companies to
offer cable television services in the telephone
company's franchised area as it's defined in the
company's tariffs on file at the California Public
Utilities Commission (CPUC).
7.What Areas of California Would Be Affected? In Northern
California, there is relatively little city-splitting by
telephone companies, so as a practical matter, telephone
companies would have to offer cable services to the same
geographic area where the cable companies are currently
providing services. However, in Southern California SBC
and Verizon share non-overlapping service areas in the
greater Los Angeles area. A brief review of the service
area maps indicates a significant number of cities -
including Torrance, Redondo Beach, Rancho Palos Verdes,
Long Beach, Fountain Valley, Pasadena, and Redlands - may
be affected by this bill.
PRIOR VOTES
Assembly Floor (76-0)*
Assembly Governmental Organization Committee(23-0)*
* Votes based on a previous, unrelated version of the bill.
POSITIONS
Sponsor:
San Diego Unified Port
Support:
Verizon
Oppose:
Adelphia Communications
California Cable and Telecommunications Association
Comcast Cable
Time Warner Cable
TURN
Randy Chinn
AB 2242 Analysis
Hearing Date: June 29, 2004