Texas Challenges New Franchise Law

The showdown between cable and telephone companies in Texas has moved to federal court, as incumbent system operators attempt to overturn a new state law reforming franchising requirements for new market entrants.

The Texas Cable & Telecommunications Association filed suit Sept. 8 in U.S. District Court for the Western District of Texas, alleging the new law gives telephone companies leeway to offer advanced services to affluent consumers while ignoring poorer ones. The suit targets Gov. Rick Perry, who signed the bill into law Sept. 7; and members of the state Public Utilities commission, including chairman Paul Hudson and members Julie Parsley and Barry Smitherman.

The TCTA lawsuit asks the federal court judge to declare the telecommunications bill unlawful and enjoin the governor and PUC commissioners from enforcing the changes.

The lawsuit does not name as defendants either SBC Communications Inc. or Verizon Communications Inc., the companies which most zealously promoted the bill and stand to gain the most from its implementation, as it would enable video providers like the telcos to bypass local franchise negotiations in lieu of a speedy, one-stop process before state utility regulators.

According to the Texas bill, incumbent cable operators must adhere to their local agreements until their specified expiration dates.

SBC criticized the TCTA’s action as an attempt to stand in front of “greater competition for their captive customers.”

“Consumers in Texas and across the country can now see the lengths to which the cable industry will got to squelch competition and guarantee their annual price hikes. … Having been unchecked in their ability to raise rates by 40% since 2000, cable has every incentive to try to stop the competition this law was intended to bring,” said SBC senior vice president of state legislative and political affairs James M. Epperson Jr.

The suit challenges SB5, the precedent-setting reform bill that, among other things, authorizes statewide cable franchises for telephone companies, deregulates some of their rates and authorizes deployment of broadband over powerline (BPL) service.

The TCTA claims the new act violates the U.S. and Texas state constitutions, as well as the Federal Communications Act; ignores state prohibitions on exclusive franchises; and violates the federal duty to guard against redlining.

The latter charge reiterates operator arguments raised during the legislative process. According to public statements by telephone company officials to investors and others, telcos will market their new video services primarily to “high-value” customers, defined as individuals who can spend $100 or more on communications services from the video provider, according to analysts.

The TCTA argues it is the appropriate plaintiff to raise the issues, because the ills alleged in the suit affect all of its member companies.

“Competition cannot flourish when businesses offering the same services are treated differently for no reason,” Tom Kinney, the TCTA chairman and president of Time Warner Cable’s Austin division, said in a statement. “We have confidence that an impartial court will base its decision on facts and ultimately rule in the best interests of Texans and fair competition,” he said.


Time Warner has the most to lose. With an estimated 1.5 million Texas customers, it is the state’s dominant operator. And its rolls are set to swell by about another 500,000 subscribers, thanks to system swaps tied to Time Warner and Comcast Corp.’s joint acquisition of Adelphia Communications Corp.

Cox Communications Inc. and Charter Communications Inc. serve an estimated 500,000 and 250,000 subscribers, respectively, while independents count 1.5 million consumers, according to analysts.

The telecommunications-reform package was overwhelmingly approved by the legislature during a special session that was supposed to deal with the state’s education funding crisis. Those issues were not fully resolved, but both houses put their stamp of approval on the telecommunications bill.

It did not become official until signed into law by Perry earlier this month. Under the new policy, video providers such as Verizon can bypass the time-consuming franchise negotiations. Verizon, the prime driver behind the changes, had been pursuing local franchises, obtaining five to date in Texas.

But company officials have argued, in Texas and elsewhere, that Verizon needs to speed up the authorization process in order to bring consumer choice to the states it serves.

“The broadband customer’s thirst for fast, reliable and interactive voice, data and video services will be quenched” as Verizon rolls out new services over its fiber-to-the-premises network, Southwest region president Steve Banta said, in response to the governor’s action.

But incumbent cable providers have argued throughout the legislative process that Verizon and SBC are investing in fiber-optic technology already and don’t need “special help” from the government to move into video.

Kinney said he was disappointed when the governor decided to endorse “an incredible giveaway to Fortune 500 companies.”

“Not only did this legislation divert attention from the task at hand — solving the education crisis in our state — it also virtually guarantees higher phone rates for Texans, particularly seniors. In addition, middle and lower socioeconomic groups are highly unlikely to benefit from any net technological choices,” he said in a prepared statement.

Verizon has obtained five franchises for its FiOS TV video product, to be delivered over fiber-to-the-home architecture currently being installed. The company will debut the product in Keller, Texas, later this year. A spokesman for the telco stresses that although the state law supercedes local authority, Verizon intends to honor its pre-existing franchise agreements.

Though SBC also plans to deliver a video service in the near future, it argues its planned Project LightSpeed, a video-over-Internet product, does not fit the legal definition of a cable service and is not subject to franchising.


Cable lobbyists in other states worry their legislators will be influenced by the precedent Texas has attempted to set.

“I’d be amazed if they [weren’t]. It’s bound to have a ripple effect,” said California Cable Telecommunications Association Dennis Manger of that state’s legislators.

But in California, at least, it appears that impact will not be felt until next year. Verizon is promoting a change in a state law that currently mandates that video providers compete under the same operating terms. The next round of talks has been postponed until Sept. 21, after the end of the current legislative session.

As late as last week, Verizon lobbyists were working the statehouse halls to find support for a trimmed-down reform bill that would allow the telco to move forward with its video plans, Mangers said. But legislators want to allow the committee to come up with comprehensive legislation.

Mangers said the cable industry might find a strong ally in the League of California Cities.

“Texas cities did not fare well, and the league is concerned,” Mangers said, adding that the CCTA is in discussions about a partnership with the municipal lobby to fight reform efforts.

Verizon is also expected to pursue a bill in New Jersey after the state elections in November.

But as it pursues its legislative interests, Verizon has not dropped its local negotiations. On Sept. 6, the city council in Murrieta, a city of 80,000 in Riverside County, Calif., approved the telco’s second California franchise. The first came in Beaumont in 2003.

Ironically, the franchise grant came on the same night the city council approved a transfer application that will ultimately unify the incumbent cable operation. Currently, Adelphia and Comcast Corp. have non-competing franchises in the city. The council approved a transfer plan that would ultimately give Time Warner Cable both franchises.

Murrieta could be a tough market for Verizon. In addition to the incumbent cable operator, the rural community has an estimated 40% rate of satellite-dish penetration.