BILL ANALYSIS                                                                                                                                                                                                    



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          CONCURRENCE IN SENATE AMENDMENTS
          AB 2987 (Nunez & Levine)
          As Amended August 28, 2006
          Majority vote
           
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          |ASSEMBLY:  |77-0 |(May 31, 2006)  |SENATE: |33-4 |(August 30,    |
          |           |     |                |        |     |2006)          |
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           Original Committee Reference:    U. & C.  

           SUMMARY  :  Creates a mechanism for a state-issued franchise for  
          the provision of cable and video service in California.  

           The Senate amendments  : 

          1)Move the franchising authority from the Department of Consumer  
            Affairs to the California Public Utilities Commission (PUC)  
            and make other changes relating to the application for and  
            renewal of state-issued franchises.

          2)Allow incumbent cable operators to opt-in to a state franchise  
            when a holder of a state franchise begins offering service in  
            the incumbent's territory, but the incumbent provider must  
            continue to offer specified services until the date the  
            franchise would have otherwise terminated.  

          3)Increase the amount of information video service providers  
            must provide to PUC concerning their video and broadband  
            deployment.

          4)Make changes to the definitions of gross revenue. 

          5)Make changes to the requirements to provide Public,  
            Educational, and Government (PEG) programs to clarify the  
            video service providers' obligation to provide and fund PEG. 

          6)Freeze rates for basic residential telephone service at  
            current levels until 2009, with PUC authorized to raise those  
            rates to reflect inflation increases.  

          7)Add specific requirements to prevent discrimination in the  
            provision of video service. 
           








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          This bill  :  

           1)Provides that PUC is the sole franchising authority for the  
            state-issued authorization to provide cable and video service  
            (video service).  Provides that PUC may fund its regulatory  
            costs only through a charge on video subscribers that is  
            imposed in an identical manner as the charge collected from  
            other utilities for this purpose.  PUC must begin accepting  
            applications for state-issued franchises by April 1, 2007. As  
            of January 1, 2008, all video service providers must seek a  
            state franchise instead of a local franchise.

          2)Provides that the application shall contain specified  
            information and statements, signed under penalty of perjury.

          3)Provides for a 44-day timeline in which PUC must complete an  
            application for a state franchise.

          4)Provides that a state franchise shall be valid for 10 years,  
            at which point the holder must renew the franchise if it  
            chooses to continue to offer video service in this state.

          5)Provides that an incumbent cable operator may seek a state  
            franchise to serve an area where it has a local franchise  
            prior to the termination of the existing local franchise if a  
            different company that holds a state franchise begins to offer  
            video service in the same area. If the incumbent cable  
            operator does opt-in to the state franchise, it must continue  
            to provide video service to all areas it is required to serve  
            under the local franchise until the date that franchise would  
            have expired.

          6)Requires the holder of a state franchise to pay rent to each  
            local entity where it provides video service a franchise fee  
            based on the gross revenue, as defined in the statute, for the  
            use of the public right-of-way.  If there is an incumbent  
            cable operator in that jurisdiction the fee shall be 5% of the  
            holder's gross revenue or the percentage applied to the  
            incumbent's gross revenue, whichever is less.  If there is no  
            local franchises or after all local franchise have expired,  
            the franchise fee will be 5% of gross revenue or a lower level  
            set by the local government thru ordinance.

          7)Provides that the holder shall designate a sufficient amount  
            of capacity on its network to provide the same number of PEG  








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            channels that the incumbent cable operator currently provides  
            within the local entity jurisdiction.  If less than three PEG  
            channels are currently provided within that local entity, a  
            local entity may request the holder to provide up to three PEG  
            channels. The local entity may request additional PEG channels  
            if they produce more than 56 hours a week of original, locally  
            produced programming on the current channels.

          8)Requires all incumbent cable operators to continue to offer  
            the same level of PEG support and I-net support as they do  
            under their franchise agreements today thru January 1, 2009,  
            or until their franchise expires, or would have expired had it  
            not been terminated abrogated, whichever is later.  Requires  
            all holders of state franchises to contribute a pro rata share  
            of the ongoing cash obligations of the incumbent cable  
            operator for PEG and I-net support.

          9)Provides that after the expiration of current franchise  
            agreements, local entities can require all video providers pay  
            a fee that is up to 1% of gross revenue to support PEG  
            operations.  If the franchise agreement that is in place today  
            requires the incumbent cable operator to pay a fee greater  
            than 1%, the local entity can set the fee at that higher  
            level, never to exceed 3%. 

          10)Requires video service providers to offer PEG programming to  
            all subscribers, and to provide the PEG programming at a  
            similar quality and functionality as it offers for its basic  
            tier of service.

          11)Requires all video service providers to make one channel  
            available for carriage of state public affairs programming  
            administered by the state.

          12)Provides that the local government shall control the time,  
            place, and manner in which video service providers access the  
            public right-of-way under the same terms and conditions as  
            they control the telephone companies' access to the  
            right-of-way today and that existing laws regarding the  
            permitting process and compliance with the California  
            Environmental Quality Act (CEQA) shall remain unchanged,  
            except that the local government shall be the lead agency for  
            CEQA purposes.

          13)Provides that local government has 60 days from the date a  








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            completed application for an encroachment permit is received  
            to either approve or deny that request.  An application is not  
            complete until the applicant has complied with all statutory  
            requirements, including all requirements of CEQA.

          14) Provides that video service providers may not discriminate  
            in the provision of video service. A company has met this  
            requirement if: 

             a)   For a holder of a state franchise that has more than one  
               million telephone customers in California  within three  
               years after a company begins providing video service, at  
               least 25% of the households that have access to the  
               company's service are low-income households and within five  
               years after a company begins providing video service, at  
               least 30% of the households that have access to the  
               company's service are low-income households.  These larger  
               telephone corporations must also provide free service to  
               one community center for each 10,000 video customers;

              b)   For holders with less than 1 million telephone customers   
               they must offer video service to all customers within their  
               telephone service area within a reasonable time, as  
               determined by PUC.  PUC shall not require holders to offer  
               service in areas where cost of providing service is  
               substantially above the average cost of providing service  
               in the rest of the company's territory; and,

              c)   For a company that does not have a telephone service  
               area a company that is offering service outside of its  
               service area, or a company that is offering service in an  
               area where there is no other providers of video services   
               there is a rebuttable presumption that discrimination has  
               not occurred.

          15)Creates specific buildout requirements for companies with  
            more than 1 million telephone customers as follows:

             a)   Companies that are predominantly deploying fiber optic  
               facilities to the customers' premises must offer service to  
               at least 25% of the households within its existing  
               telephone service area within two years and 40% of those  
               households within five years;

             b)   Companies that are not predominantly deploying fiber  








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               optic facilities must offer service to at least 35% of the  
               households in its existing telephone service area within  
               two years and 50% of those households within five years;

             c)   The five-year buildout provision can be extended if the  
               company shows PUC that less than 30% of the households with  
               access to its service have subscribed to the service; and,

             d)   Companies can only meet the buildout requirements  
               through the use of technology that provides equivalent  
               two-way broadband capability, and equivalent video  
               programming, content and functionality.  Satellite based  
               technologies cannot be counted toward meeting the buildout  
               requirement.

          16)A company may apply for an extension of the buildout or  
            redlining rules if extreme events that are out of the  
            company's control keep it from meeting the standards.  When  
            evaluating a petition for a waiver, PUC can only grant a  
            waiver if technical, operational, or regulatory issues beyond  
            the company's control hindered its buildout.

          17)Provides that all video service providers shall comply with  
            all existing video consumer service and provisions standards  
            in state and federal law.  These rules will be enforced by the  
            local entities. Increase by 250% the amount of fines from  
            current levels the local entities can assess for violations of  
            these consumer protection rules.

          18)Requires that a background check be performed on all  
            applicants for employment with the holder, for employees of  
            independent contractors and vendors to the holder who would  
            have access to the holder's network, central office, or  
            customer premises.

          19)Requires all holders employing more than 750 employees to  
            annually report to PUC the number of California residents  
            employed by the holder and the number of employees of  
            independent contractors and vendors that provide service for  
            the holder.

          20)Provides that all holders of state-issued franchises shall  
            annually report to PUC specified information regarding their  
            broadband deployment and video deployment in California.









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          21)Provides that a court of competent jurisdiction shall have  
            exclusive jurisdiction to enforce the provisions of this bill  
            regarding payment of fees, provision of PEG channels and  
            I-nets and that both PUC and the courts may enforce all  
            redlining and building out requirements.

          22)Provides that the telephone corporations providing video  
            service under this bill shall not subsidize the cost of  
            deploying a network that is used to provide video service and  
            other costs necessary to offer video service with revenue  
            derived from the offering of basic telephone service.

          23)Provides that nothing in the bill creates a vested right in a  
            state-issued franchise. 

           EXISTING LAW  :
           
          1)Authorizes local governments to grant additional cable  
            television franchises in an area where a franchise has already  
            been granted after a public hearing to discuss specified  
            issues.


          2)Provides that 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.


          3)Provides that the additional franchises must also contain the  
            same PEG access requirements as the original franchise.


          4)Requires all public utilities employing more than 750 total  
            employees to annually report the number of California  
            residents employed by the holder and the number of employees  
            of independent contractors and vendors that provide service  
            for the holder.


           
           FISCAL EFFECT  :  Unknown
           
           COMMENTS :  The purpose of this bill is to promote competition  
          for broadband and video service.  Current law requires companies  








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          seeking a new video franchise to seek a separate franchise in  
          each local government entity where it wants to provide video  
          service.  A company wishing to provide service across the state  
          would need to seek over 400 franchise agreements. This bill  
          would allow a company to seek a state-issued franchise from PUC.  

           
          Supporters believes this bill will lead to a rapid deployment of  
          new video and broadband services across the state as new  
          competitors, including the existing local telephone companies,  
          make investments in existing and new networks needed to compete  
          with the existing cable companies to provide video and internet  
          services.  This bill creates new investment opportunities in  
          broadband internet networks because these networks are needed to  
          provide competitive video services. 
           
          Today only a few areas of the state have multiple video  
          operators.  Instead, competition for video service comes  
          primarily from satellite services, such as DirecTV and the DISH  
          network, which are not required to obtain a local franchise or  
          pay a franchise fee to the locals.  Today satellite service  
          accounts for approximately 27% of the video market.  A few  
          companies are obtaining local franchise agreements to provide  
          competing video services, but due to the current franchising  
          process, this is occurring on a limited and slow basis across  
          the state.
           
          The companies that wish to provide competing services claim that  
          part of the reason why competition is slow in coming is the time  
          it takes to negotiate individual franchise agreements across the  
          state.  They also point to another provision in current state  
          law that requires new entrants into a video market to provide  
          video service to the entirety of the incumbent's service  
          territory.  This law was is intended to prevent new entrants  
          from discriminating in where they decide to offer service.  Some  
          of the potential new entrants argue that this law forces them to  
          build their infrastructure in a manner that is uneconomical for  
          them and, as a consequence, they simply opt to not compete in  
          certain franchise territories.. 

          This bill addresses these problems by allowing video service  
          providers to go to a single entity, PUC, to get a franchise to  
          provide video service across the state.  PUC will be required to  
          review and either deny or issue a franchise within a 44-day time  
          period.  PUC will also enforce certain standards of the bill,  








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          including buildout and redlining requirements, but the courts  
          will be the final arbitrators on disputes over other provisions  
          such as franchise fee and PEG support obligations. 

           Franchise Fees  :  This bill requires all holders of state-issued  
          franchises to pay the local government a rent or toll in the  
          form of a "franchise fee" for the use of the public  
          right-of-way. The rent or toll cannot exceed the franchise fee  
          that is paid by the incumbent cable provider today. After the  
          current franchises expire, the "fee" will be set at 5% of gross  
          revenue, or the local entity can set the "fee" at a lower level.  
          Federal and state law already cap franchise fees at 5%. 
           
           Redlining  :  One concern when new entrants begin providing video  
          services is that they will choose to provide the service only to  
          higher income neighborhoods and thus provide these areas of the  
          state with the advantages of new technologies and competition  
          but deny the same benefits to lower income neighborhoods, a  
          process known as "redlining."  Federal and state law prohibit  
          redlining by requiring the local franchise authorities to assure  
          that access to video service is not denied to any group of  
          potential residential video subscribers based on income.  
           
          To prevent redlining, the bill sets out specific targets which  
          different types of video service providers must meet. The  
          requirements differ between companies because that companies  
          that already have telephone customers have already built some of  
          the needed network and will have very different costs in making  
          the jump to video service and acquiring new customers than  
          companies that must build new networks and/or have no customers  
          today.  

          The specific redlining and buildout requirements are spelled out  
          in numbers 14 and 15 above. 

           PEG Channels  :  In many instances, local franchise agreements  
          require the video operator to offer a set number of channels to  
          provide PEG and to either provide monetary or in-kind support  
          needed to produce these shows.  This bill maintains current PEG  
          obligations by:

          1)Grandfathering-in the number of PEG channels that are offered  
            in each franchise today. All video providers must provide the  
            capacity for the same number of PEG channels as the incumbent  
            cable operator.  If less than three PEG channels are currently  








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            provided within that local entity, a local entity may request  
            the holder to provide up to three PEG channels.  The local  
            entity may request additional PEG channels if they produce  
            more than 56 hours a week of original, locally produced  
            programming on the current channels.

          2)Grandfathering-in all obligations for financial support of PEG  
            that are in place today.  All incumbent cable providers must  
            continue to offer the same level of PEG support and I-net  
            support as they do today under their current franchise  
            agreements until January 1, 2009, or until their franchise  
            expires or would have expired had it not been terminated under  
            terms of this bill, whichever is later.  All holders of state  
            franchises must contribute a pro rata share of the ongoing  
            cash obligations of the incumbent cable operator for PEG and  
            I-net support.

          After the expiration of the existing franchises all the  
          obligation to carry the same number of PEG channels that exist  
          today continues forever, unless the local entity fails to  
          provide at least eight hours of programming a day for that  
          channel measured quarterly.  All video service providers will be  
          required to continue to provide monetary support for PEG of up  
          to 1% of gross revenue to support PEG operations, but if the  
          franchise agreement that is in place today requires the  
          incumbent cable operator to pay a fee greater than 1%, the local  
          entity can set the fee at that higher level, but never to exceed  
          3%. 

          The bill also requires video service providers to offer PEG  
          programming to all subscribers, and to provide the PEG program  
          at a similar quality and functionality as it offers for its  
          basic tier of service.  The intent of this provision is to  
          prohibit a holder of a state franchise from dramatically  
          lowering the quality of the PEG programming or removing certain  
          functionality such as stereo sound from the PEG programming  
          while leaving it in place for other channel offerings. Some  
          video providers are concerned that technology constraints could  
          make it financially difficult for them to meet the same  
          standards as their commercial channels.  By requiring them to  
          offer similar quality and functionality, these providers are  
          given a minimum amount of flexibility while are expected to  
          provide these channels at a quality level and with functionality  
          that is nearly identical to their commercial channels.  









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           Consumer Protection  :  State law currently contains a thorough  
          set of consumer service and performance standards.  The local  
          franchising authority enforces the standards.  Some franchise  
          agreements also adopt additional or more stringent standards.   
          This means the consumer protection rules for video service  
          varies from jurisdiction to jurisdiction and can even vary  
          within a jurisdiction if there are multiple franchises.  This  
          bill leaves the authority to enforce consumer protection rules  
          with the local governments but creates a uniform set of state  
          rules based on the existing state and federal consumer  
          protection rules. The bill also increases the amount of  
          penalties that the local governments can issue by 250% over  
          existing law. 

           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 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 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 keeps 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  








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          federal privacy standards as are imposed on the existing cable  
          operators.

           Transition  : Over time this bill will result in a major change in  
          how video service is permitted in California. Eventually all  
          video providers will operate under a state-issued franchise  
          instead of a locally issued franchise.  While new entrants into  
          the market can easily go to PUC for a state-issued franchise  
          once PUC is ready to accept applications, all incumbent cable  
          operators will still be operating under local franchise.  In  
          some cases, these franchise agreements last another 20 years, in  
          others they have already expired and the providers are operating  
          under short-term extensions.  To help meet the goals of the  
          Legislature in creating a level playing field for all video  
          service providers while avoiding a chaos causing rapid shift  
          from local to state franchises, the bill creates a specific  
          transition process.  This transition process is also intended to  
          allow time for the PUC to establish the necessary resources and  
          processes to issue state franchises to new entrants and  
          incumbent cable operators. 

          No incumbent cable operators will be allowed to operate under a  
          state-issued franchise prior to January 2, 2008.  If the  
          incumbent cable operator's franchise expires before that date,  
          it can request a state franchise that begins on January 2, 2008,  
          and it's current local franchise will be extended until that  
          date. All parties wishing to provide video service can continue  
          to negotiate a local franchise until January 1, 2008. 

          If a video service provider with a state franchise provides  
          notice that they are about to begin providing video service in a  
          territory served by an incumbent provider, the incumbent  
          provider can then seek a state franchise to replace the local  
          franchise.  Allowing the incumbent provider to operate under a  
          state franchise creates a level playing field for all providers  
          by allowing them to compete under the same regulatory rules and  
          with the same financial obligations. 

          If the incumbent provider's local franchise expires after  
          January 1, 2008, and the incumbent does not opt-in to the state  
          franchise before the franchise expires, the incumbent provider  
          must seek a state franchise at the expiration of the existing  
          local franchise. 

          In all of the above circumstances, the incumbent cable operator  








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          will be obligated to continue to meet all PEG, I-net, and  
          emergency broadcast requirements under the franchise until the  
          franchise would have expired without the provision of this bill,  
          or January 1, 2009, whichever is later. New entrants will be  
          required to meet the same emergency broadcast requirements of  
          the local franchise and pay a pro rated share of any cash PEG  
          and I-net obligation. 

          While the transition period leaves local franchises in place for  
          a period of time, the transition period should not allow local  
          government to diminish the rights an incumbent cable operator  
          has to occupy the public rights-of-way, any protections or  
          rights provided under federal law, or to frustrate the  
          Legislature's intention in enacting this division.

           No Vested Right  :   This bill preserves the right to amend the  
          statute and therefore the terms of the state-issued franchise.  

           Arguments in opposition  :  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) is a public safety risk with the expiration of local  
          emergency service notifications; and, 5) creates a new state  
          bureaucracy to perform a local function (they argue the  
          franchise should be issued at the local level.)

          For more detailed information on the current franchising process  
          and the provision of video service generally, please refer to  
          the April 24, 2006, Assembly Utilities and Commerce Committee  
          analysis. 
           
           
           Analysis Prepared by  :    Edward Randolph / U. & C. / (916)  
          319-2083 


                                                               FN: 0017713