You asked for background on the Department of Public Utility Control's (DPUC) recent actions regarding AT&T's U-Verse service and suggestions on legislative options in the wake of a federal court decision that requires AT&T to obtain a cable franchise in order to provide its U-Verse service in the state.

SUMMARY

A federal court has ruled that, under federal law, AT&T must obtain a cable franchise in order to provide its U-Verse service in the state. U-Verse provides video, voice, and data transport services. The court held that federal law preempts a decision to contrary issued by DPUC in 2006.

Subsequent to the court decision, DPUC ordered AT&T to (1) apply for a cable franchise by December 31, 2007, (2) cease marketing its service, and (3) cease deploying additional facilities in the state that are intended solely to transmit or distribute video programming until AT&T obtains a franchise. The order permits AT&T to continue (1) serving its existing video subscribers and (2) deploying facilities that are intended for transmitting or distributing voice or data services. AT&T has sought a declaratory ruling in Hartford Superior Court to overturn DPUC's ruling.

The legislature could wait and see how the courts ultimately rule on the appeal or whether AT&T files a franchise application under current law. Or it could amend PA 07-253 to provide that the certificates that the act authorizes constitute a cable franchise. Alternatively, the legislature could amend Connecticut's cable franchising law (CGS § 16-331 et seq. ) to facilitate the entrance of new participants in the cable market. These options include (1) reduce filing requirements for applicants for cable franchises, (2) requiring DPUC to act on applications on an expedited basis, (3) modifying requirements that a cable company “build out” its franchise within a specified time, and (4) subjecting companies that seek to compete with established cable companies to less regulation.

BACKGROUND

Initial DPUC Decision

In 2006, the parent company of the Southern New England Telephone Company (at that time SBC Communications, Inc. , subsequently AT&T) announced plans to offer video products in Connecticut. DPUC initiated a proceeding (docket 05-06-12) to investigate the terms and conditions under which these video products could be offered in the state. DPUC issued its decision on June 7, 2006. It concluded that the Southern New England Telephone Company d/b/a SBC Connecticut had satisfactorily demonstrated that from a regulatory perspective its planned Internet Protocol-based video product was distinguishable from cable television service. In forming this conclusion, DPUC analyzed the Internet Protocol-based video product as proposed by SBC in light of the federal and state definitions of what constitutes a cable service. In essence, DPUC found that SBC's planned service is merely another form of data stream transmitted like other data over the Internet, and as such would not be subject to cable franchising requirements.

Appeal and Legislation

The Office of Consumer Counsel (OCC) and the New England Cable and Telecommunications Association (NECTA), which had been parties to the proceeding, appealed to the federal court. They asserted that U-Verse was a “cable service” offered buyer a “cable system” by a “cable operator”, as these terms are defined in federal law, and therefore under federal law AT&T would need a cable franchise to provide the service.

While the case was under appeal, the legislature passed and the governor signed PA 07-253. The act requires companies, other than cable companies and their affiliates, that provide video programming to obtain “certificates of video franchise authority” from DPUC. It subjects the companies that obtain these certificates (“providers”) to some of the requirements that apply to cable companies, notably those regarding public access and consumer protection. But the providers are not subject to other requirements that currently apply to cable companies, including obtaining and renewing a franchise for a specified number of years and being subject to rate regulation. Once a provider enters the territory of a cable company, the act allows the cable company to apply for a new certificate in lieu of its existing franchise certificate. The cable company is generally subject to the same application requirements and DPUC review as a provider. Once DPUC grants the new certificate, the cable company becomes subject to a similar type of regulation as the provider. Among other things, this means that it will no longer need to have its franchise renewed and its rates will not be subject to DPUC regulation. The act also made a number of related changes, including changes to the taxation of the affected companies.

Federal Court Decision

On July 26, 2007, the federal court for the district of Connecticut issued its ruling in Office of Consumer Counsel v. Southern New England Telephone Co. --- F. Supp. 2d ----, 2007 WL 2175083 D. Conn. ,2007. The court concluded that the U-Verse service being offered by AT&T constitutes a “cable service” being offered over a “cable system” by a “cable operator,” as those terms are defined in federal law. Accordingly, the court held that federal law preempted the DPUC's conclusions to the contrary and its concomitant determination that AT&T need not comply with the franchising requirement in 47 U. S. C. § 541 and associated regulations. AT&T moved for reconsideration, but the court denied this motion on October 2, 2007.

AT&T Application and DPUC Decision

On October 1, 2007, the Southern New England Telephone Company d/b/a AT&T Connecticut applied to DPUC for a certificate of video franchise authority under PA 07-253. On October 11 and 12, 2007, the Attorney General and OCC, respectively, submitted their comments. The attorney general stated:

pursuant to the controlling ruling of the United States District Court for the District of Connecticut, AT&T is an unfranchised cable company illegally providing cable service in Connecticut. AT&T is therefore not a lawfully operating video service provider nor is it a franchised cable company seeking to provide competitive service outside its franchise area. Instead, AT&T is a third category – a cable company that is unlawfully operating without a franchise.

(Docket 07-10-04, Attorney General's Comments, p. 3)

On October 15, 2007 DPUC issued a decision rejecting AT&T's application because the department found that AT&T is not eligible to apply for a certificate of video franchise authority under the act. DPUC noted that the act provides that:

DPUC held that this language is clear and unambiguous and does not allow entities or persons who are providing cable service in the state to apply for a certificate of video franchise authority. Under the federal court's ruling, AT&T is a cable company. DPUC noted that:

The Decision of the United States District Court for the District of Connecticut is binding on the Department and AT&T. As a state administrative agency, the Department must defer to the higher authority of the judiciary. The Department notes that the Court did not stay the effect of its decision, nor was an injunction issued. Until such time as the United States District Court's decision is overruled or stayed, the Department is obligated to follow the law.

(Docket 07-10-04, p. 4)

DPUC ordered AT&T to (1) apply for a cable franchise by December 31, 2007, (2) cease marketing its service and (3) cease deploying any additional facilities in the state that are intended solely to transmit or distribute video programming until AT&T obtains a franchise. The order permits AT&T to continue (1) serving its existing video subscribers and (2) deploying facilities that are intended for transmitting or distributing voice or data services. AT&T has sought a declaratory ruling in Hartford Superior Court to overturn DPUC's ruling.

LEGISLATIVE OPTIONS

The legislature could wait and see how the courts ultimately rule on the appeal or whether AT&T files a franchise application under current law. Or it could (1) amend PA 07-253 to treat the certificates it authorizes as a cable franchise or (2) take various steps to modify Connecticut's cable franchising law to facilitate the entrance of new participants in the cable market.

Amending PA 07-253

As noted above, PA 07-253 allows entities other than cable companies to provide video programming services if they obtain a certificates of video franchise authority. Certificate holders are subject to certain laws that affect cable companies, notably those dealing with consumer protection and public access television. These provisions operate independently of the cable franchising laws.

Under the act, DPUC must limit its review of the certificate application to whether it provides the information the act requires. DPUC may not conduct a contested case but may submit written questions to the applicant and require written answers regarding the information provided. DPUC may accept written comments and replies from the applicant, OCC, the attorney general, and other interested companies, organizations, and individuals. The comments must be limited to the issue of whether the application complies with the act's filing requirements.

DPUC must issue a certificate within 30 days after notifying the applicant that its application is complete. The certificate must provide a grant of authority to (1) provide video service as requested in the application and (2) use and occupy the public rights-of-way to deliver this service, subject to state law. The certificate must also include a statement that the grant of authority is subject to lawful operation of the video service by the applicant or its successor.

Under 47 USC §, 522, a franchise is an authorization to construct or operate a cable system. The franchise can be designated as a certificate, among other things. The legislature could amend PA 07-53 to provide that (1) the provisions described above apply to all entities, including cable companies; and (2) the certificate constitutes a cable franchise. As noted above, federal law requires that cable companies as defined by federal law obtain franchises, but imposes few specific requirements on franchising authorities. It is unclear whether the certification provisions of PA 07-253 would comport with federal law.

Reducing Franchise Application Requirements

Alternatively, the legislature could amend CGS § 16-331 to make it easier for AT&T or other companies to obtain a franchise, in order to promote competition in video services. Under current law, DPUC must consider 14 factors in setting the length of a cable company's franchise (the franchise term is important to cable companies because it affects their ability to obtain financing for their systems). The legislature could reduce the scope of this review, either for applicants seeking to compete with existing cable companies or for all applicants. The legislature could also modify or eliminate the need for an applicant to conduct a community needs assessment if it is entering an area already served by a cable company.

Require DPUC to Act on Applications on an Expedited Basis

DPUC typically takes 12 to 18 months to review and approve a cable franchise, according to DPUC staff. However, DPUC took only eight months to approve a statewide cable franchise for SNET Personal Vision.

The legislature could require DPUC to issue a decision in a franchising case within a certain period, perhaps allowing a short extension of the deadline with the applicant's consent. Alternatively, it could deem an application approved if DPUC did not issue a decision within a certain period. These deadlines could be adopted in conjunction with changes in the application requirements, as described above. For example, the community needs assessment typically takes three months or more to complete.

Modify “Build Out” Requirements

DPUC has required cable companies to build out their systems so that all residents in the franchise area can subscribe to cable within five years of the franchise being granted. (Virtually all of the state has been built out by the incumbent cable companies. ) The legislature could modify this requirement for companies seeking to enter the video service market, either by giving them more time or requiring them to serve nearly all (for example, 95%) rather than all, of the area. The legislature could also modify requirements as to how companies must build out their systems. Simultaneously, the legislature could require that the deployment plan be subject to DPUC review and approval to prevent “cherry-picking” i. e. , a company only serving affluent or densely populated areas.

Subjecting New Entrants to Less Regulation

Federal law severely limits the ability of DPUC and other franchising authorities to regulate cable rates. They may only regulate the rates for basic service (generally just the broadcast networks plus access channels) and must regulate these rates in accordance with Federal Communications Commission (FCC) regulations that are very specific. Moreover, franchising authorities cannot even regulate basic service rates if a cable system is subject to “effective competition. ”

The legislature could automatically exempt services provided by new entrants to the video market from rate regulation. Under federal law (47 CFR § 76. 905) a cable system is considered to be subject to effective competition if, among other things, fewer than 30% of the households in its franchise area subscribe to its service; the proposed provision would eliminate the need for the new entrant to petition FCC to demonstrate that it met this criterion.

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