August 19, 2008
CABLE TV COMPETITION
By: Kevin E. McCarthy, Principal Analyst
You asked for a discussion of initiatives states have taken to promote competition in cable TV. You also wanted to know whether any states have promoted an a la carte option in cable services, in which subscribers may choose individual channels rather than being required to purchase a package of channels from the cable TV companies.
Federal law limits state jurisdiction over the video services industry and gives the Federal Communications Commission (FCC) exclusive jurisdiction over direct broadcast satellite (DBS) companies, which are the primary competitors to cable TV companies. Federal law precludes states or other franchising authorities from specifying how cable companies offer channels, and the issue of whether companies should be required or encouraged to provide channels on an a la carte basis is one of FCC jurisdiction. Moreover most states have delegated their jurisdiction over cable companies to municipalities, which choose the company that serves their residents. Prior to 2005 Connecticut was one of only nine states that franchised cable companies at the state level.
Since 2005, at least 17 states including Connecticut have passed legislation to promote competition in video services by allowing telecommunications companies to enter the cable TV market on a statewide basis without being subject to traditional franchising requirements or rate regulation. In some cases, the legislation also transferred the jurisdiction over the entire video services market from municipal to state agencies.
FCC, rather than states or municipalities, has jurisdiction over whether cable companies offer channels on an a la carte basis. In 2004, FCC found that offering channels on an a la carte basis would cost consumers more money. A subsequent 2006 report found several errors in the analysis that formed the basis of the 2004 report and concluded that the a la carte option would save consumers money. The issue is highly contentious and it appears unlikely that FCC will act on this issue in the near future.
Cable TV franchising authorities (in Connecticut, the Department of Public Utility Control, DPUC) can only regulate the services, facilities, and equipment of cable TV companies to the extent permitted by federal law (47 USC Sec. 544 et seq.). Federal law requires that cable franchises be non-exclusive. However, there have been relatively few cases where cable companies compete within a franchise area. In Connecticut, this type of competition only occurs in the southeast corner of the state, which is served by Comcast and Thames Valley Communications, the cable television and Internet division of Groton Public Utilities.
Federal law gives the FCC exclusive jurisdiction over DBS companies such as DirecTV. These companies are currently the largest competitors to cable TV companies, serving 29% of customers in the national video services market as of 2006 (latest available data), according to FCC.
As described in OLR memo 2008-R-0451, federal law significantly limits the ability of franchising authorities to regulate cable TV rates. Rate regulation is limited to the basic service tier, which consists of the broadcast channels and public access channels. Regulation of rates for this tier must conform to FCC regulations, which are very specific. And even this regulation must end once FCC determines that a cable TV franchise is subject to effective competition, as defined by federal law. Federal law also specifies the process for renewing cable franchises and limits the circumstances under which a franchising authority can deny a renewal.
In 2007 Connecticut passed legislation 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. PA 07-253 requires entities, other than cable companies, that seek to provide video services to file an application with DPUC for a competitive video service provider certificate. It requires DPUC to grant the certificate if certain conditions are met, and DPUC has granted this certificate to AT&T for its U-Verse service. The entities that receive such certificates are called certified competitive video service providers. Providers are subject to some of the requirements that apply to cable TV companies, notably those regarding public access and customer information. But the providers are not subject to other requirements that apply to cable TV companies, including obtaining and renewing a franchise for a specified number of years and being subject to rate regulation. In addition, the providers are not required to build out their systems, i.e., offer to provide service to all households in their service territories. However, they may not engage in redlining, i.e., they may not deny access to service to any group of potential residential customers based solely on the income of the residents in the area.
Under the act, 30 days after a provider offers service in a cable company's franchise area, the cable company may seek a certificate of cable franchise authority from DPUC. A company may also apply for this certificate for any area that was outside of its franchise areas on or before October 1, 2007. Unlike cable franchises, the certificates are valid indefinitely and do not have to be renewed. Virtually all of the state's cable companies have applied for and received these certificates under these provisions. Under the act, companies with this certificate are not subject to rate regulation except as “set forth in federal law.” Federal law allows but does not require franchising authorities to regulate basic service rates. Thus, the act appears to terminate DPUC's ability to regulate a cable company's basic service rates once it obtains a new certificate. In docket 08-04-02, DPUC concluded that cable companies that have been granted a certificate under PA 07-253 are no longer subject to basic service tier rate regulation by DPUC, effective the date the docket was decided (July 16, 2008).
Legislation in Other States
PA 07-253 is similar to legislation passed in Texas (AT&T's home state) in 2005. The Texas legislature approved a cable and video franchise law that permits state-issued agreements for telecommunications companies entering the video market. The new entrants are not subject to rate regulation or build out requirements. Unlike Connecticut's law, the Texas legislation does not affect incumbent cable TV companies during the term of their existing franchises.
Since 2005, similar laws have been adopted in at least 16 other states, including Connecticut. These laws do not subject the new entrants to rate regulation and most (1) do not impose time limits on the certificates that new market entrants obtain to provide video services, (2) do not subject new entrants to build out requirements, and (3) allow cable companies to apply for similar treatment once a new entrant begins serving their franchise area. In most cases, these laws require new entrants to carry public access channels. Most of the laws prohibit municipalities from discriminating between companies by charging higher fees for access to rights of way, and prohibits the companies from using the average income of certain areas as a reason for denying service to these areas.
In 2006, statewide video franchise legislation was enacted in California, Indiana, Kansas, Michigan, New Jersey, North Carolina, South Carolina, and Virginia. The California law transfers to the state's Public Utility Commission the video franchising authority formerly held by local agencies. However, local agencies continue to oversee customer service, retain limited control over rights-of-ways, and will continue to receive a 5% franchise fee. The Indiana law makes the state Public Service Commission the sole franchising authority for video services in Indiana. Under the law, cable television providers are not required to obtain any other separate franchise agreements. The Kansas law requires any company providing cable television service or video service after July 1, 2006, to file an application with the State Corporation Commission. The law also requires the commission to promulgate regulations governing the state-issued video service authorization application process. Michigan's law also transfers the authority to franchise cable companies from municipalities to the state. New Jersey's law is unusual in limiting the term of new franchises granted to telecommunications and cable companies to seven years. In addition, when New Jersey's governor signed its law, he issued an executive order directing the Public Advocate (the equivalent to the Office of Consumer Counsel in Connecticut) to monitor and enforce the new law and the Board of Public Utilities to issue regulations.
Under Virginia's law, municipalities must offer two types of cable franchises; a traditional negotiated franchise and an ordinance cable franchise. New market entrants must first seek to negotiate a traditional franchise. If they reach an agreement within 45 days and get better terms than the existing cable company, the municipality must then give the cable company the same terms. If an agreement is not reached in 45 days, the new competitor may file notice that it intends to obtain an ordinance franchise and can begin selling video services 30 days after giving notice. Virginia's law requires new entrants to provide service to 65% of a market area within seven years, but allows nine exclusions from this requirement. These include areas with fewer than 30 homes per square mile and those where subscriber theft and nonpayment rates have been high.
In 2007 cable competition legislation was adopted in Florida, Georgia, Illinois, Nevada, Ohio, and Wisconsin as well as in Connecticut. The Ohio law has a build-out provision that requires a new entrant with more than one million telephone access lines in the state to provide access to at least 25% of the households in its proposed service area within two years and 50% of the households in the area within five years, unless the Commerce Department waives this requirement. The Wisconsin legislation transfers the responsibility for responding to consumer complaints from municipalities to the state. Similar legislation was passed in 2008 in Louisiana and Tennessee. Under the Tennessee law, AT&T must offer roughly 600,000 of its telecommunications customers the new video services within 3 1/2 years. The law prohibits the new entrants from discriminating in offering the service to potential customers based on their income, race, gender, or ethnicity and requires that 25% of households offered the video services be low income. Existing cable companies can continue with their local franchises or apply for a state franchise.
A LA CARTE CABLE SERVICE
Federal law precludes states or other franchising authorities from specifying how cable companies offer channels, and the issue of whether companies should be required or encouraged to provide channels on an a la carte basis is one of FCC jurisdiction.
In November 2004, the Media Bureau of FCC released a report to Congress on the efficacy of a la carte pricing in the pay-television service industry. The report found that although an a la carte option would allow consumers to pay for only the programming they choose, given then-current viewing practices, few consumers would have experienced lower bills for multi-channel programming. Specifically it found that if consumers were required to purchase channels on an a la carte basis, only those consumers who would purchase fewer than nine programming networks might see a reduction in their monthly cable bill. Consumers who purchase at least nine networks would likely face an increase in their monthly bills. The average cable household watches approximately 17 channels, including broadcast stations. If the average household purchased each of these channels under an a la carte regime, it would likely face a monthly rate increase under a la carte sales of between 14% and 30%.
Subsequently, in February 2006, the Media Bureau issued a report that reexamines the conclusions and underlying assumptions of the 2004 report. In particular, the 2006 report describes a number of errors in the Booz Allen study that the Media Bureau relied upon to support the conclusion of the earlier report that a la carte is not economical.
The 2006 report finds that the earlier report relied upon unrealistic assumptions and presented biased analysis in concluding that a la carte “would not produce the desired result of lower MVPD (cable) rates for most pay-television households.” The 2006 report identifies mistaken calculations in the Booz Allen study, which was originally submitted by the cable industry for FCC consideration. Booz Allen itself acknowledged the errors, which other economists also confirmed. The 2006 report explains that the study failed to subtract the cost of broadcast stations when calculating the average cost per cable channel under a la carte. As a result, the study overstated the average price per cable channel by more than 50%. The study significantly underestimated the number of programming channels that a subscriber could enjoy under a la carte while still achieving savings compared to the subscriber's current fees. Correcting for this mathematical error, consumers' bills decreased by anywhere from 3% to 13% in three out of the four scenarios considered in the study. In addition, the 2006 report notes that, through the use of questionable assumptions, the study may have further overestimated the costs of a la carte. The study (accepted in the Media Bureau's 2004 report) assumed that a shift to a la carte would cause consumers to watch nearly 25% less television per day. The 2006 report finds that there is no reason to believe that viewers would watch less programming than they do today simply because they could choose the channels they find most interesting. Finally, the 2004 report failed to mention that the study shows that, even with the math error noted above, if a la carte were only implemented on digital cable systems with appropriate set top boxes in place, then a la carte could result in a 1.97% decrease in consumers' bills. The 2006 report can be found online at www.fcc.gov/mb.