Tuesday, February 07, 2006

Franchise: New Tactics in Virginia

Here's a change of pace: a look at a Virginia telecommunications law. Normally I wouldn't impose my attempts to understand other state's laws on the readers of this blog but this one just might turn out to be important for Louisiana. Here's the deal: I'm expecting the next regular session of the Louisiana Legislature to have a real battle over a state-wide video franchise bill likely to be introduced by BellSouth. In other states this has been a battle royal between the cable and phone companies. The phone companies want to change the rules that govern TV-channels-for-sale-over-wires to allow them to serve only the most profitable neighborhoods while sticking cable with its current universal service requirements. As you might imagine the cable companies aren't happy and ally with municipal organizations and consumer groups to fight it. It's a combination that is potent enough to fight even the infamously effective Telco lobbying machine to a standstill.

That's been heartening to those who think that communities should have a say in its own future--especially when the phone companies are fighting to gain unrestricted access to city property without having to serve all of the community that owns that property.

But what's going on in Virginia right now suggests that the cable companies might be willing to join the phone companies and sell out local communities if they can get a good enough deal for themselves. What should be interesting to us here in Acadiana is finding out what cable wants and what phone companies are willing to give up.

If you'd like to look into all this yourself a local paper has an article, and you can even look at the law itself. (Warning, tough sledding.)

Some background: Northern Virginia is significant on two grounds. First, it's emerged as the most important battleground between the cable giants and the phone company Verizon's new fiber-optic based video services. Secondly, it is the home of Bristol, VA's "Optinet," a municipal fiber-optic utility which is proving both successful and aggressive. Optinet is capturing market share in excess of its business plan and has provided services and facilitated the development of local networking beyond its home town footprint.

Both of these unique factors appear to have had major effects on Virginia's bill. As far as Lafayette and Louisiana are concerned the first feature, phone company fiber to the home, is in contrast to Lafayette's situation. BellSouth is in no position to exert a competitive advantage in the same way that Verizon is in Virginia. The second, a successful local, public utility willing --even eager-- to play the role of a regional telecom leader is a parallel that must give BellSouth Louisiana nightmares.

It's also true that Verizon needs to be making money right now off its enormous investment in fiber in the Virginia region. The market is expressing doubt about its huge national investment in what is surely a long-term winner but does not promise much in the way of short-term profit taking. Add to that its (amazingly self-confident) "strategy" of building out an expensive network that can only be paid for in anything like the near term with the profits from the cash cow of cable TV service without first getting permission to offer cable TV. Verizon obviously decided that it would be easy enough to change the law and ignored all that "nonsense." Unhappily for them they'd never had to really deal with the idea that "all politics is local." They failed to take into account that offending every mayor, and town councilman in your little state house district by killing a traditional revenue stream just might not be considered smart politics even by legislators who'd happily trade less obvious local interests for re-election funds. Verizon's push to get state legislators to knife local government by removing local franchise agreements has ground to a halt in state houses along the east coast--bills that once seemed assured of passage are mired in rewrites and many doubt that any such bills will actually pass.

Add to this the growth of a successful muni fiber-optic based utility and the development of a regional coalition anchored by that public utility in the Appalachian western area and uncertainty and potential danger is high for all the incumbents.

So both the cable companies and Verizon had good reason to compromise here. A lot was at risk, the outcome of a blood-letting in Northern Virginia has no clear winner and a growing public insurrection in the western coalfields threatens to introduce significant new player. A compromise between the big telecoms that stabilized the situation and better defined the risk was in everyone's interest.

The take-home message? Things are in a complicated, chaotic, and dangerous moment in Virginia. What the corporations are willing to do there might prove unique...or, to the extent these factors spread, it might well prove a model for the future.

The Virginia Law
So, given that background, what do the cableco's and Verizon want?

From reading over the current version of the law (passed by the house and senate but not yet signed into law):

What cable wants is 1) parity. They want telephone companies that deliver video to be subject to the same rules they are. This law would provide that. (Fees, public access channels, etc. are provided for from all competitors.) 2) quick reduction of competitive disadvantage. Force any competitor to serve most (at least 65%) of a community on a relatively short 3-year schedule. 3) freedom to drop least profitable neighborhoods. If the teleco's decide not to build out to the last, presumably non-profitable 20% of a community the cablecos want the freedom to dump them too by getting out of old contracts with cities that required universal service.

What the phone company wants is 1) quick deployment. They don't want to wait more than 3 months after they decide they want to offer video to be able to provide it to paying customers. 2) quick profit. To be able to cherry-pick the most profitable parts of town for initial service and so show some fast payoff to investors. 3) no dregs. To never have to offer service to the least desirable 20% of a town or county (Significantly, not serving this last 20% is what BellSouth here in Lafayette made clear that it would refuse to do without taxpayer support.) 4) utterly predictable franchises. In practice this Bill impose a nearly uniform state franchise on all players. (The only possible changes would be if a provider decided it wanted to give a community more than the minimum provided in this bill--since the city must accept the minimum they've got no leverage to ask for anything special.) 5) no expansion/no teleco competition. The phone companies don't want to be required to ever have to step beyond the boundaries of their already paid-off phone-based infrastructure in order to compete in a community. This clause insures that, for instance, ATT will never have to compete with Verizon head to head in order offer local video service. (These guys are all monopolists by inheritance...competition does not come naturally and competing with your brothers baby bells for the same "ecological niche" must seem especially unpleasant.)

What both Cable but especially the Phone Corps want: 1) containment of the public "threat." No public entity that isn't already running an electrical utility gets to play in the telephone field. (No similar restriction exists for new private "overbuilders.") 2) reduction of phone price competition. As in Louisiana, public entities are forced to pretend to have expenses the do not have when setting prices they charge their citizens. (An example being that they are supposed to "impute" the cost of rental fees for property and poles they already own.) No similar "offsetting" fee is charged for the natural advantages of private providers--such as huge advantages in buying equipment in bulk. 3) force the public phone provider to operate without the financial support of the full utility company. This is accomplished by a no "cross-subsidy" rule. No similar rule applies to Verizon's wireless or phone divisions. Significantly the State Corporation Commission, the body that regulates utilities can approve a subsidy at its discretion...but not if it would result in lower prices than private providers. See #2 immediately above. (This cross-subsidy issue is the morass that is currently keeping Lafayette from deploying its system.)

What the munis and countys got: Mostly not as much. 1) preservation of the status quo ante in video and its applications to new cable providers. The phone companies have tried in various places to simply eliminate the franchise and its fees, cable access channels, community access provisions and the like. This, sad to say, is a huge win for the communities of Virginia. 2) no special, unique regulation of municipal cable services. Listing this as something the munis wanted and got might seem like a stretch. Who'd do something so whacky? Louisiana, that's who. Our nutty version deputizes the legislative auditor to regulate only municipals--meaning only Lafayette--because the constitution forbids the Public Service Commission to do what Cox desired. Virginia's solution is much saner.

This law, unless there is something I've missed, is only bad for fundamental reasons: the state should stay out of local attempts to help themselves and especially shouldn't dictate to local governments that they let outside corporations use community property without agreeing to serve the whole community. This law also persists in the malevolent silliness that little towns have some sort of unfair advantage over ruthless, international megacorporations. A sane level playing field should tilt toward the small local entities, not the big corporations. But beyond the basics this appears to be an almost honest law. The legislature in Virginia must be growing up.

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