BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 2987| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 2987 Author: Nunez (D) and Levine (D), et al Amended: 8/28/06 in Senate Vote: 21 SENATE ENERGY, U.&C. COMMITTEE : 9-0, 6/29/06 AYES: Escutia, Cox, Alarcon, Battin, Dunn, Dutton, Kehoe, Murray, Simitian NO VOTE RECORDED: Bowen SENATE APPROPRIATIONS COMMITTEE : 13-0, 8/17/06 AYES: Murray, Aanestad, Alarcon, Alquist, Ashburn, Battin, Dutton, Escutia, Florez, Ortiz, Poochigian, Romero, Torlakson ASSEMBLY FLOOR : 77-0, 5/31/06 - See last page for vote SUBJECT : Cable and video service SOURCE : Author DIGEST : This bill enacts the Digital Infrastructure and Video Competition Act of 2006. Senate Floor Amendments of 8/28/06 authorize the Public Utilities Commission (PUC) to impose non-discriminatory fee to pay for its activities in the same way that public utilities pay fees to the PUC. The PUC is required to commence accepting applications for a state-issued video franchise by April 1, 2007. Holders of franchises must CONTINUED AB 2987 Page 2 report specified information to the PUC annually, and the PUC shall make such information publicly available pursuant to the existing rules. The Division of Ratepayer Advocates within the PUC is authorized to advocate on behalf of video customers under specified circumstances. The amendments require local governments to either approve or deny encroachment permits for the construction of video facilities within 60 days. ANALYSIS : Current law authorizes local governments to grant franchises to provide cable television service. In awarding a franchise the local government must assure that access to cable service is not denied to any group of customers because of their income. Franchise fees may not exceed five percent of gross revenues. The local franchising authority may require the franchise to provide channel capacity for public, educational, or governmental use. Current law requires any competitor to an existing cable operator to provide service to the same entire area as that operator. This bill replaces the local franchising process with a state process. The backdrop for this legislation is the development of technologies that allow telephone companies to provide television service over their telephone networks. More competition should keep cable television prices from rising and result in new services that combine telephone, internet and cable television capabilities. However, this welcome development comes with a few strings attached. The biggest is that the telephone companies don't want to negotiate individual cable franchises with the hundreds of local governments, which have been delegated the jurisdiction to issue the franchise from the state. Instead the telephone companies seek the simplicity and ease of a single state-issued franchise whose parameters are established in statute. When local governments originally granted cable franchises decades ago they were almost exclusively monopolies. Today AB 2987 Page 3 the market for cable service is much different. Satellite providers are viable competitors, capturing nearly one-third of the market. Technological advances will soon make it possible to view television from other wireless providers like cell phones. Internet-based video service is already widely available. And of course new entrants must compete with the existing cable operators. It is this much more competitive market which provides the public policy rationale for this bill. Unlike the local franchising process, the state-franchising process is intended to be largely ministerial. The give-and-take which characterizes local franchise negotiations is replaced with statutorily established requirements for franchise fees, build-out requirements, anti-discrimination requirements, Public, Education and Governmental (PEG) channel obligations, customer service standards, and privacy requirements. Administering the state franchising process is the Public Utilities Commission. The provisions of the bill are intended to encompass telephone companies and their affiliates offering cable service. This bill is not intended to alter the regulatory requirements for offering telephone service. Non-discrimination/Build-out Commitments/Technology . Under a typical local franchise, the cable company must build out virtually the entire local community, except for high-cost areas. (Los Angeles is an exception, having divided itself up into 14 non-overlapping franchise areas.) This requirement has not been applied to new competitors under this bill, except under limited circumstances. Requiring a complete build out of an entire city, much less the telecommunications company's entire telephone foot print, is probably an unfair burden due both to the engineering/cost constraints and to the differing competitive circumstances. Telecommunications companies wish to build their cable networks in a sort of overlay to their existing telephone network. The telephone networks consist of linked computer sites. From each site telephone lines spread out into neighborhoods like tree branches. These branches are designed for engineering efficiency and therefore do not coincide with political boundaries. This contrasts with cable networks which, because they are AB 2987 Page 4 locally franchised, are designed and built to coincide with the local franchisor's political boundaries. Most relevantly, as noted above the new competitors face much more competition than the original cable operators faced, making an initial requirement to build out the telecommunications company's entire foot print unrealistic and unreasonable. This does not mean that there should not be any buildout requirement. California has an interest in promoting the widest possible availability of these services so that the greatest possible number of customers may benefit. Indeed a goal of this bill is for all Californian's to have access to the most technologically advanced cable and video services. The authors have negotiated buildout commitments from each of the two largest telecommunications companies. Those commitments, 25 percent of customers offered video service within two years, and 40 percent within five years for Verizon, and 35 percent within three years and 50 percent within five years for AT&T, reflect the different technology and installation hurdles faced by each company. While well short of 100 percent, these requirements are far more than either company has agreed to in any other state. The same can be said for the anti-discrimination language. While discrimination in the offering of video service is barred, the law is difficult to enforce without numerical targets. This bill again goes beyond other state and federal franchising proposals by establishing a specific test for ensuring that discrimination is not occurring for the two largest telephone companies in California. That test, which is that within three years at least 25 percent of the households being offered video service are low income, and 30 percent within five years, is measurable and enforceable. While the authors expect the companies to live up to these requirements, they are not absolute. After two years the telecommunications company can seek a waiver of any of these anti-discrimination and buildout requirements. The waiver can be granted if the franchising authority finds that the company cannot meet the requirements because of circumstances outside of its control and has made AB 2987 Page 5 substantial and continuous effort to meet those requirements. The second waiver mechanism is that the five year buildout requirement, 40 percent for Verizon and 50 percent for AT&T, does not apply until two years after at least 30 percent of households with access to their video service subscribe for at least six months. This bill allows for some flexibility in the technology that can be used to meet these requirements, but explicitly excludes satellite-based technology. Fee or Tax . Local governments have raised concerns that the structure of this bill may be found to be unconstitutional because it could be seen either as a tax, rather than a fee, or as a state tax assessed for local purposes. Legislative Counsel disagrees with both concerns, as do the bill sponsors, and has opined that the bill establishes a franchise fee, which is a rent, for use of the right-of-way. The state franchise fee is set at five percent though local governments may reduce that fee if they wish. Local Control over the Right of Way . This bill preserves local control over the right of way by giving local government the same rights over the installation of video equipment as they have over telephone equipment. This means that local government has control over the time, place, and manner in which such equipment is installed. Public, Educational and Governmental (PEG) Access . Current law authorizes local franchising authorities to negotiate channel set-asides for PEG access as well as support for PEG operations. Some local franchising authorities have also negotiated institutional networks (I-nets), which are communication networks used by local governments for their own communications purposes. This bill grandfathers in the existing PEG channel requirements, and authorizes all local franchising authorities to receive three PEG channels. In addition the state of California is authorized to establish a PEG channel for state purposes. All local governments are authorized to impose via ordinance a one percent fee for PEG purposes. Those four percent of local governments that impose a fee for PEG support through their current AB 2987 Page 6 franchise higher than one percent are authorized to impose that same level of fee after the franchise expires, but not to exceed three percent. Gross Revenues . A key dispute in this bill is the definition of gross revenues upon which the franchise fee is based. The intent of the bill is to keep local governments whole. Local governments argue that the gross revenues definition in the bill falls short of that intent and suggest several additional categories of revenues which should be included. The cable operators contend that those additional categories of revenues are not currently counted as revenue in any of the franchises of the major cable operators and would therefore increase franchise fees to local government. Cross-subsidy Protection . Competition is unfair if one competitor can use the profits of a relatively uncompetitive business to subsidize its entry into a relatively competitive business. This anti-competitive behavior hurts customers because it creates an unlevel playing field, making it more likely that competition will be neither robust nor durable. Most telecommunications markets are competitive; competition keeps a lid on rate increases and so provides a check against anti-competitive cross subsidy. But the market for basic residential telephone service is not very competitive. While there is some substitution of cellular service for basic residential service, and there are a few competitors, such as Cox Cable, by and large there is little competition. This bill deals with the potential for cross-subsidization by freezing rates for basic residential telephone service at current levels until 2009, with the PUC authorized to raise those rates to reflect inflation increases. Additionally, this bill prohibits all telephone companies from raising the price of basic telephone service to finance the cost of providing cable service. Privacy . The major telecommunications companies have been accused by whistle-blowers of sharing customer information with federal authorities without a warrant, raising privacy concerns. Federal lawsuits have resulted. Heightening those concerns are very recent press reports that AT&T will AB 2987 Page 7 keep track of their video customers' viewing habits and that those customer records are business records owned by AT&T. This bill subjects new cable competitors to the same state and federal privacy standards as are imposed on the existing cable operators. Transition Period . The bill provides for a transition period until January 1, 2008 during which competitors can seek a state franchise but incumbent cable operators cannot. During that period incumbent cable operators may continue to operate under their existing local franchises, renew their expired franchises, and otherwise continue to operate, maintain, and upgrade their systems. After that time a cable operator may seek a state franchise once a competitor has been granted a state franchise or after the local franchise expires. Customer Service Standards . California established minimum state-wide cable customer service standards more than ten years ago. This bill makes those state standards, as well as existing federal standards, a part of the state franchise. The penalties for a material breech of those standards, which are statutory, have been raised to $500/day. No Vested Right . Locally-issued franchises are contracts which cannot be altered until their term expires. This bill preserves the right to amend the statute and therefore the terms of the state-issued franchise. There has been no objection to this provision. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: Yes Fiscal Impact (in thousands) Major Provisions 2006-07 2007-08 2008-09 Fund Cable franchising $1,000 $1,000 $1,000 Special AB 2987 Page 8 SUPPORT : (Verified 8/28/06) Academic Uprise Actiontec Electronics, Inc. African American Business Council African American Historical and Cultural Museum Alcatel Alliance for Community Media American Federation of State, County and Municipal Employees American G.I. Forum American Heart Association Anaheim Chamber of Commerce Arriba Juntos Asian Americans for Community Involvement Asian American Resource Center Asian Business Association Asian Business Council Asian Pacific American Legal Center of Southern California Asian Pacific Islander American Public Asian American Resource Center Affairs Association Community Education Foundation Asians for Corporate and Community Action AT&T California Bakersfield Homeless Center Bank of the West Beaumont Chamber of Commerce Black Business Association Black Women Organized for Political Action Boys and Girls Club of Auburn Boys and Girls Club of Fontana Breakthru Brotherhood Crusade Burton, Kevin Fruitvale School District Trustee Cabrillo Economic Development Corporation California Black Chamber of Commerce California Building Trades Council California Business Roundtable California Chamber of Commerce California Commission on APIA Affairs California Consumers United AB 2987 Page 9 California Hispanic Association on Corp. Responsibility California Hispanic Chamber of Commerce California Labor Federation California Small Business Association California State Conference of the NAACP CSU, Chico, Center for Economic Development CSU, Sacramento, College of Business Administration California Video & Technology Choice Camarillo Health Care District Campbell Union High School Dist. Capitol Claims Services Castle and Cooke Center for Accessible Technology Center for Fathers and Families Central American Resource Center Central City Association of LA Central Labor Council of Fresno, Madera, Tulare & Kings Counties Charles Industries, Ltd. CHARO Community Development Chico Economic Planning Corp. Chris Bernal Tax Services Citizens Against Regulatory Excess City of Firebaugh Colton Chamber of Commerce CWA, District 9 CWA, Local 9333 CWA, Local 9404 CWA, Local 9408 CWA, Local 9412 CWA, Local 9415 CWA, Local 9416 CWA, Local 9417 CWA, Local 9421 CWA, Local 9423 Computer Technologies Program Community Union, Inc. Congress of California Seniors Consumers Federation of California Consumers First Inc. Create-N-Animate Culver City Chamber of Commerce Deaf and Hard of Hearing Svc. Center Delano Union Elementary School District Board of Trustees Developmental Disabilities Service Organization, Inc. AB 2987 Page 10 Disabled Sports USA - FAR WEST Dunham, Sarah - Career Counselor, University of California, Berkeley Edmund G. Pat Brown Institute of Public Affairs El Centro de Amistad El Concilio del Conduado de Ventura El Granito Foundation Elder Help of San Diego Elizabeth Peterson Group, Inc. Federal Technology Center Fiber-to-the-Home Council Filipino American Chamber of Commerce of Solano County Fontana Herald News Fresno Center for New Americans Friends Unlimited Gardena Valley Chamber of Commerce Gateway Chambers Alliance - Los Angeles Global Energy & Technology, Inc. Greater Huntington Park Area Chamber of Commerce Greater Los Angeles African American Chamber of Commerce Greenlining Institute Habitat for Humanity, Fresno County Halsa Inc. Hammerhead Systems Inc. Harbor City/Harbor Gateway Chamber of Commerce Hartnell College Henry Mayo Newhall Memorial Health Foundation Hispanic Association of Communication Employees of AT&T Hispanic Chamber of Commerce of Contra Costa County Hispanic Chamber of Commerce of Marin Hispanic Chamber of Commerce of Orange County Hispanic Chamber of Commerce of Stanislaus County Hollywood Chamber of Commerce Huntington Park Chamber of Commerce Information Technology Consortium Inland Action, Inc. Inland Empire African American Chamber of Commerce Intel International Brotherhood of Electrical Workers Irvine Chamber of Commerce Irvine Valley College Foundation ITC Joanne David on behalf of Haven Hills Kern County Taxpayers Association AB 2987 Page 11 Korean Health, Education, Information & Research Center La Casa de San Gabriel Community Center Lao Khmu Association Latino Community Roundtable, Stanislaus County Latino Council of Marin Latino Journal League of United Latin American Citizens Lighthouse Computer Group Los Angeles Area Chamber of Commerce Materus McMillin Homes Mexican American Opportunity Foundation Microsoft Corporation Milpitas Chamber of Commerce Minerva Networks, Inc. NAACP - Fresno Branch NAACP - Hercules, Pinole, & Rodeo NAACP - Lake Elsinore Branch NAACP - Los Angeles NAACP - Monterey Peninsula Branch NAACP - San Gabriel Valley Branch NAACP - Vallejo Branch National Council on Aging National Tax-Limitation Committee National Taxpayers Union Networking Everyone w/ Technology Society for the Blind New Beginnings Academy New Economics For Women Novato Chamber of Commerce OASIS Observer Newspaper Ocean Park Community Center Paint Your Heart Out, Inc. Pasadena Chamber of Commerce Pets Are Wonderful - Los Angeles Pittsburg Chamber of Commerce Plaza Development Partners, LLC Polaris Group Poway Chamber of Commerce Powers, Robert President Health Corp. Printing Consultants Project Amiga AB 2987 Page 12 Rainbow/PUSH Coalition RBD Communications Rio Hondo Boys and Girls Club RJ Martin Insurance Agency Roberts Family Development Center RSVP Volunteers Sacramento Black Chamber of Commerce Sacramento County Taxpayers League San Anselmo Chamber of Commerce San Bernardino Community College District San Diego East County Chamber of Commerce San Fracisco Chamber of Commerce San Joaquin Valley Black Chamber of Commerce San Jose Silicon Valley Chamber of Commerce Santa Ana Chamber of Commerce Santa Ana Education Foundation Santa Monica Chamber of Commerce Self-Help For the Elderly Sempra Energy Senior Community Centers Serving God's People Shasta County Board of Supervisors - Patricia Clarke, District 5 Social Concerns of Southern CA South Bay Latino Chamber of Commerce Southeast Asian Community Center State Association of Electrical Workers State Building and Construction Trades Council of California Suscol Intertribal Council Telamon Telecommunications Industry Association Thoma Electric Thousand Oaks-Westlake Village Regional Chamber Torrance Area Chamber of Commerce TriNet Communications, Inc. Tri-Valley Business Council Tulare County League of Mexican-American Women United Way of Butte and Glenn Counties United Way of Northern California United Way of San Joaquin County USC, Annenberg School for \Communication Ventura County Economic Development Association Ventura County Taxpayers Assn. AB 2987 Page 13 Verizon Vietnamese Community of Pomona Valley Video Access Alliance Vital Link Volunteers of America of Southwest California Watts/Century Latino Organization West Fresno Healthcare Coalition Western Region Puerto RicanCouncil Westside Council of Chambers of Commerce Women's Council of Realtors World Institute On Disability Youth Violence Prevention Council of Shasta County Yuba Sutter Economic Development Corporation OPPOSITION : (Verified 8/28/06) AARP Adelphia Communications Artelias S. Guyton & Associates Business Women for the Environment California Contract Cities Association California Library Association California State Association of Counties California State University , Monterey Bay, Chief Information Officer Calaveras County Community Television Charter Communications, LLC Charter Communications - Inland Empire Cities of Alameda, Antioch, Arcadia, Arcata, Arroyo, Azusa, Bakersfield, Banning, Bellflower, Belmont, Benicia, Berkeley, Blue Lake, Brea, Brentwood, Buena Park. Calabasas, Calistoga, Campbell, Capitola, Carlsbad, Carpinteria, Carson, Cerritos, Chico, Chino, Chino Hills, Claremont, Clayton, Cloverdale, Clovis, Colusa, Commerce, Compton, Concord, Coronado, Costa Mesa, Cotati, Covina, Culver City, Cupertino, Cypress, Daly City, Del Mar, Diamond Bar, Downey, Duarte, El Cajon, El Segundo, El Dorado Hills, Elk Grove, Emeryville, Encinitas, Escondido, Fairfax, Fairfield, Fort Bragg, Fortuna, Foster City, Fountain Valley, Fremont, Fresno, Garden Grove, Gardena, Gilroy, Goleta, Grover Beach, Hollister, Hughson, Huntington Beach, Imperial Beach, Inglewood, Irvine, La Canada Flintridge, La Mesa, La Mirada, La Palma, La Quinta, La Verne, Lafayette, Laguna Hills, Lake AB 2987 Page 14 Forest, Lakeport, Lakewood, Larkspur, Lathrop, Laverne, Lemon Grove, Lincoln, Live Oak, Livermore, Lomita, Lompoc, Long Beach, Lynwood, Manhattan Beach, Manteca, Maywood, Menlo Park, Merced, Mill Valley, Millbrae, Mission Viejo, Modesto, Monrovia, Monterey, Monterey Park, Moorpark, Moreno Valley, Morro Bay, Mountain View, Mt. Shasta, Murrieta, Nevada City, Norwalk, Novato, Oakland, Oceanside, Ontario, Orange, Pacific Grove, Pacifica, Palm Desert, Palmdale, Palo Alto, Palos Verdes Estates, Paramount, Pasadena, Petaluma, Pinole, Pismo Beach, Pittsburg, Pleasant Hill, Pomona, Porterville, Poway, Rancho Cordova, Rancho Cucamonga, Rancho Mirage, Rancho Palos Verdes, Red Bluff, Redding, Redlands, Redondo Beach, Redwood City, Rohnert Park, Rolling Hills Estates, Rosemead, Roseville, Salinas, San Bernardino, San Clemente, San Diego, San Dimas, San Jose, San Gabriel, San Juan Capistrano, San Leandro, San Luis Obispo, San Marcos, San Mateo, San Pablo, Santa Ana, Santa Barbara, Santa Cruz, Santa Fe Springs, Santa Maria, Santa Monica, Santa Rosa, Sausalito, Scotts Valley, Seal Beach, Sebastopol, Sierra Madre, Solana Beach, Soledad, Sonoma, South Lake Tahoe, South San Francisco, Stanton, Stockton, Suisun City, Sunnyvale, Thousand Oaks, Torrance, Tracy, Tustin, Upland, Vacaville, Ventura, Visalia, Vista, Walnut, Walnut Creek, West Covina, West Hollywood, Whittier, Woodland, Yreka, Yuba City, and Yucaipa City/County Association of Governments of San Mateo County City/County of San Francisco Community Media Access Partnership Counties of Contra Costa, Monterey, Nevada, Sacramento, San Bernardino, Santa Barbara and Santa Cruz El Dorado Hills Community Svc Dist. Foundation for Taxpayers and Consumer Rights Las Virgenes-Malibu Council of Governments League of CA Cities League of CA Cities LA Division League of CA Cities, City of Morro Bay Livermore City Council Jim Madaffer, Councilmember Marin Telecommunications Agency Marine County Board of Supervisors Mayors and Council Members Association of Sonoma County Judith Mitchell, Councilmember AB 2987 Page 15 Monterey County Board of Supervisors Monterey County Mayors' Association Public Access Television of Calaveras County Public Cable Television Authority Gloryanna Rhodes, Mayor, City of Lathrop Rohnert Park City Council Sacramento County Board of Supervisors Sacramento Metropolitan Cable Television Commission San Diego County Board of Supervisors San Mateo County Telecommunications Authority Santa Barbara Channel Santa Clara County Board of Supervisors Santa Rosa Community Media Center Sutter Medical Center of Santa Rosa Towns of Apple Valley, Fairfax, Truckee, and Windsor Urban Counties Caucus Ventura Council of Governments ARGUMENTS IN SUPPORT : Proponents argue that telephone company entry into cable markets should be welcomed as a way to help lower prices, improve service quality and spur innovation. Proponents argue that revising existing cable franchising laws is necessary. They argue to promote competition, the state should establish a state-issued franchise authorization process that allows market participants to use their networks and systems to provide video, voice, and broadband services to all residents of the state. ARGUMENTS IN OPPOSITION : Opponents argue this is a complex issue that deserves full public review. They argue that the bill sacrifices the interests of consumers and their communities. Opponents argue the bill (1) makes customer cherry-picking legal (they fear this will increase the digital divide), (2) provides a one-size-fits-all approach to the PEG/I-Net issue (will cause many communities to lose their right to activate PEG access channels that are in current franchise), (3) will make customer standards difficult to enforce (the bill includes several provisions that undermine enforcement efforts), (4) there is a public safety risk with the expiration of local emergency service notifications, (5) creates a new state bureaucracy to perform a local function (they argue the franchise should be issued at the local level, and (6) AB 2987 Page 16 provides a one-sided abrogation of local contracts. ASSEMBLY FLOOR : AYES: Aghazarian, Arambula, Baca, Bass, Benoit, Berg, Bermudez, Blakeslee, Bogh, Calderon, Canciamilla, Chan, Chavez, Chu, Cogdill, Cohn, Coto, Daucher, De La Torre, DeVore, Dymally, Emmerson, Evans, Frommer, Garcia, Goldberg, Hancock, Harman, Haynes, Jerome Horton, Shirley Horton, Houston, Huff, Jones, Karnette, Keene, Klehs, Koretz, La Malfa, La Suer, Laird, Leno, Leslie, Levine, Lieber, Lieu, Liu, Matthews, Maze, McCarthy, Montanez, Mountjoy, Mullin, Nakanishi, Nava, Negrete McLeod, Parra, Pavley, Plescia, Richman, Ridley-Thomas, Sharon Runner, Ruskin, Saldana, Salinas, Spitzer, Strickland, Torrico, Tran, Umberg, Vargas, Villines, Walters, Wolk, Wyland, Yee, Nunez NO VOTE RECORDED: Nation, Niello, Oropeza NC:cm 8/28/06 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****