July 8, 2010
STATE REGULATION OF THE TELECOMMUNICATIONS
AND CABLE INDUSTRIES
By: Kevin E. McCarthy, Principal Analyst
You asked for an overview of how Connecticut regulates the telecommunications and cable industries and whether other states take a significantly different approach.
Connecticut has largely deregulated the telecommunications and cable industries, which are increasingly providing the same services. The legislature began deregulating the telecommunications industry in 1994 by encouraging competition and reducing rate regulation. Legislation adopted in 2005 allowed telecommunications companies to enter the video services market without having to obtain a time-limited franchise or being subject to rate regulation. It also extended similar provisions to cable companies, effectively ending franchising and rate regulation for these companies.
Most states have a broadly similar regulatory regime for telecommunications companies, although several, most recently Illinois, have gone further than Connecticut in deregulating these companies. In contrast, most states regulate the cable industry at the local level and continue to require cable companies to be franchised and subject to rate regulation, to the limited extent permitted by federal law.
Historically, the telecommunications and cable companies provided distinct services and were subject to different regulatory regimes at both the federal and state levels. However, in recent years the distinctions between the two types of companies have blurred, with telecommunications companies providing video services and cable companies providing voice services. Many companies offer “triple play” packages that combine cable, high-speed Internet, and voice service for a fixed monthly price.
Federal law preempts state regulation in many aspects of telecommunications, most notably rate regulation of wireless service and the provision of telecommunications services using voice over internet protocol technologies, which companies such as Vonage and many cable companies use. Federal law also governs key aspects of the wholesale landline telecommunications industry, such as interconnection agreements. On the other hand, federal law does not preempt state consumer protection laws.
Federal law significantly limits the ability of states to regulate cable TV rates. Under federal law, cable franchising authorities (in Connecticut, the Department of Public Utility Control- DPUC) can only regulate rates for the basic service tier (primarily the broadcast and public access channels) and related equipment fees for this tier; they cannot regulate the rates for other tiers that include channels such as ESPN and HBO. Franchising authorities must regulate basic service rates in accordance with regulations adopted by the Federal Communications Commission (FCC), which are very detailed. Finally, the franchising authorities' ability to regulate basic service rates ends once the FCC determines that a cable TV company is subject to effective competition, as defined by federal law. FCC had made this determination for several Connecticut cable TV franchises prior to 2007, and thus these franchises were not subject to any rate regulation.
Federal law also precludes franchising authorities from requiring that a specific channel be carried on a cable company's basic service tier. Franchising authorities can enforce agreements in franchises regarding “broad categories” of programming. As the FCC notes, “in general, the decisions concerning what services to offer and on which tier to offer those services, are within the discretion of the cable operator [company]” www.fcc.gov/cgb/broadcast.html.
REGULATION IN CONNECTICUT
PA 94-83 substantially deregulated the landline telecommunications industry in Connecticut, two years before the passage of broadly similar federal legislation. Connecticut's legislation was substantially amended in 1996 and 1999, in part to respond to concerns that competition in the local service market was not developing rapidly enough.
PA 94-83 established a presumption in favor of competition for local and in-state long-distance telecommunications services. It prohibited DPUC from restricting competition in either type of service, unless it found that this would violate the act's goals or the laws regarding competition.
Under CGS § 16-247f, adopted as part of PA 94-83, telecommunications services are classified as competitive, emerging competitive, and noncompetitive. Certain services, such as “800” services, were deemed to be competitive and the act established a procedure for reclassifying other services. PA 94-83 exempted competitive services from traditional rate of return rate regulation. It encouraged DPUC to implement alternative forms of regulation, such as price indexes, for other services and DPUC has subsequently done so.
CGS § 16-247f also provides for rapid DPUC approval of tariffs for competitive and emerging competitive services. For emerging competitive services, a tariff goes into effect 21 days after it is filed, unless DPUC takes action to the contrary. For competitive services or services with a maximum and minimum rate, the period is five days. Companies can offer promotional rates for competitive or emerging competitive services after providing DPUC three days' notice.
The law has been amended several times since 1994. PA 96-266 established procedures that a telecommunications company must follow to confirm that a person wishes to switch local service to the company, in order to prevent “slamming”. PA 99-222 required telephone companies to unbundle their services, such as switching, and offer them to other telecommunications companies on an unbundled basis. It also required DPUC to adopt quality of service and performance standards for telecommunications companies.
In 2007 Connecticut passed PA 07-253, which was designed to promote cable competition by allowing telecommunications companies to provide video services without having to obtain a time-limited franchise or being subject to rate regulation. The act also has parallel provisions allowing cable companies to obtain certificates subject to similar conditions in lieu of their franchises. In effect, the act has eliminated rate regulation and franchising in the cable industry. It also effectively ended the “build-out” requirement of prior law, which required cable companies to wire their entire service territories (this only affected the northwest corner of the state, since the cable companies had wired the rest of the state before the act's passage). However, the act continued to require cable companies to comply with community access and consumer protection provisions of prior law and extended similar requirements to the telecommunication companies that provide video services. OLR report 2009-R-0417 provides a history of cable regulation in Connecticut and at the national level.
REGULATION IN OTHER STATES
Most states' regulation of the landline telecommunications industry is similar to Connecticut's with regard to larger telecommunications companies. However, many states use traditional rate of return (ROR) regulation for smaller companies, particularly those serving rural areas. Under ROR regulation, the state public utility commission sets a company's rates at a level that allows it to recover its prudently incurred costs and pay a commission-authorized rate of return on its stock and debt.
Several states, most recently Illinois, have gone beyond Connecticut in deregulating telecommunications service. Legislation passed this year in Illinois (PA 96-0927) reduces state regulation of traditional landline residential telephone service. It permits telephone companies to seek a declaration of competitiveness for all of its areas in the state. As soon as all of the areas are declared competitive, the company would no longer be subject to (1) rate regulation or (2) other forms of regulation by the Illinois Commerce Commission (the equivalent of the DPUC), with the exception of certain customer service standards and the packages required to be provided under the act.
In order to take advantage of this option, the company must agree to various customer service quality standards. For example, the company must agree to waive 50% of installation charges if the installation does not occur at the scheduled time. If the installation is not completed within 10 days of the scheduled date, the company must waive 100% of the charge and provide a $20 per day credit until the service is installed. In addition, the company must provide three low-cost basic service calling plans for residential landline consumers: basic (an access line and 30 local calls), extra (an access line and unlimited local calls) and plus (an access line, unlimited local calls, and the customer's choice of two services such as call waiting, caller ID, or voicemail). The act requires the price of these packages to remain constant for the next three years.
The act also reduces the access charge telephone companies impose on long-distance and wireless providers to access the company's facilities in order to complete wireless and long distance calls. It requires that the intrastate access charge be no more than the interstate access charge set by the FCC.
Connecticut is unusual in that it regulates cable at the state level; in most states cable service is regulated by municipalities or counties. In Massachusetts, municipalities franchise cable companies and regulate their rates to the extent permitted by federal law, but the state Department of Telecommunication and Cable acts as an appellate body. Virginia requires cable companies to negotiate franchise terms with municipalities, but provides that a standardized default franchise be awarded if no agreement is reached within 45 days.
State regulation of the industry has become more common in recent years. Ohio shifted from local to state regulation in 2007. Other states, including California, Indiana, Kansas, New Jersey, North Carolina, South Carolina, Texas, and Virginia, have authorized state franchises as part of video competition laws. California allows an incumbent cable company to apply for a state franchise when the local franchise expires or if the local franchising authority agrees to it, and allows an authority to require all local franchisees to apply for a state franchise. Kansas requires the local franchising authority to modify the franchise of an incumbent cable company facing competition to match its terms to those contained in the competitor's state franchise within 180 days of the cable company's request.
Several states have included build-out requirements in their recent legislation. California requires that large telephone companies entering the video market ensure that, within three years, at least 25% of the households with access to their video services have an annual household income below $35,000; the proportion increases to 30% after five years. Virginia allows municipalities to require that video service be provided to up to 65% of the dwelling units in a company's telephone service area within seven years after service has begun; this can be increased up to 80% after ten years. In contrast, Indiana, Kansas, North Carolina, South Carolina, and Texas, like Connecticut, prohibit build-out requirements.