As the cable industry continues to evolve to emphasize broadband over video, one town's experience is raising questions as to whether the trend means a move away from franchise agreements.
Pay TV overbuilder RCN Corp., which already serves Philadelphia and Lehigh Valley in Pennsylvania, recently expanded into Upper Milford Township in Lehigh County. But according to Township Manager Daniel Delong, RCN declined to get a cable franchise agreement with the community, arguing it did not need one because it would only be offering broadband and phone services in the area, not pay TV.
Under the Communications Act, no new operator may provide cable service without a franchise agreement. Under the law, "cable service" is defined as "the one-way transmission" of video programming or other programming service, as well as any subscriber interactions necessary "for the selection or use of such video programming." Franchise agreements provide cable operators with the necessary rights for constructing the system, including the authorization to use public rights-of-way. In exchange, franchising authorities may charge operators a fee, which is limited by law to no more than 5% of annual gross revenue.
"We made the offer to them saying we're totally open to entering into a franchise agreement. And their response was basically, 'We don't provide TV. We provide internet and telephone,'" Delong said in an interview. He added that as it stands now, the township has "no authority to regulate telephone or internet service."
RCN declined to comment on its expansion in the township.
Tim Himmelwright — director of communications and public affairs for the incumbent cable operators in Upper Milford Township, Service Electric Cable TV Inc. — said that franchise agreements serve several important functions. First, franchising authorities must ensure access to cable service is not denied to an area on the basis of income. In part, this is why when Service Electric first came to the township, it built out service throughout the area, even in rural corners where the company was less likely to get an immediate return on investment.
In addition, Service Electric's franchise agreement with the township stipulates that if a customer disconnects service, the disconnected cable between the house and the utility pole cannot be left hanging. Instead, the company must take it down. Without a franchise agreement, the township could not enforce similar rules on RCN.
According to Delong, RCN has thus far gotten around the need to access the township's public rights-of-way or utility poles by only deploying service in private developments that are on the edges of town.
"At this point, as far as we're aware, they are only in private developments where we don't have any public roads or any say on any occupancy of road right-of-way," he said, noting that because many of the cables are underground, it is hard for the town to even know exactly where the company has deployed.
According to a cable industry lawyer, RCN is hardly the first operator to say it does not need a franchise agreement to come into a new area. In the mid-2000's, AT&T Inc. faced a number of legal challenges after it began expanding its fiber network and providing U-verse video service. AT&T argued that U-verse was an "IPTV service" that relied on a two-way interactive network, rather than a "cable service," which, under the law, relies on "one-way transmission."
"AT&T paved the way 15 years ago to try to enter the video business without a franchise using its existing telephone rights of ways authorizations," the lawyer said, noting that the company was ultimately met with litigation and state laws that generally caused AT&T to change tacks and instead pursue state-wide franchising authority.
Paul Glist, a partner at the law firm Davis Wright Tremaine LLP who concentrates on the areas of cable television and telecommunications, said in an interview that the example of AT&T and U-verse is instructive because it shows how the industry's approach to franchise agreements can change over time.
"What AT&T did is they went around the country pushing the state level franchising that you see in a large number of jurisdictions now," he said, adding that the burdens imposed by statewide franchising agreements versus local ones "tend to be much lighter."
"They still preserve some element of public access and franchise fees, but sometimes those are collected at the state level and then repatriated to the localities, which spares a lot of accounting and audit burdens and the renewals generally become much, much simpler," Glist said.
The RCN example, however, is different because the company is not delivering an IPTV video offering, instead choosing to focus solely on broadband and phone service. But Glist said he does not expect pay TV video offerings, and therefore cable franchise agreements, to die out entirely, noting that the vast majority of U.S. households continue to subscribe to a traditional pay TV service.
"I don't know where it's going to end up. But I don't know that having some curated video content is going to disappear," Glist said.
The cable industry lawyer, who asked to remain anonymous due to client interests, agreed, saying RCN in Upper Milford Township is likely to remain the exception and not the rule.
In the meantime, though, Delong said he is keeping a close eye on the township's revenues, as presently, the town earns more from its cable franchise fees from Service Electric than it does from property taxes, which total roughly $118,000 a year. Service Electric's Himmelwright said the incumbent operator paid almost $200,000 in franchise fees to the township last year.
"That [franchise] fee used to increase at about 8% a year in my budget but last year it went flat and it's looking like this year will be flat too," Delong said, adding, "If that fee goes away, folks are most likely going to be looking at a small property tax increase to replace those funds."