Saturday, November 03, 2007

LUS Franchise Agreement

Kevin Blanchard over at the Advocate reports that a franchise agreement between LUS and the Lafayette Consolidated Government (LCG) will be introduced at this Tuesday's City-Parish Council meeting.

While it is 1) technical, 2) presented as an uninteresting "me too" copy of Cox's, and 3) no doubt a terminally boring read this will be extremely important to Lafayette consumers and citizens—try not to let this slide by you. To understand why the franchise agreement is big deal and what shapes it I'll have to provide some background from both the state and federal levels. Stick with it: It will have a lot to do with how much you pay for cable and internet—and it will have a huge effect on City-Parish revenues with an indirect effect on how much tax you have to pay for basic local government services. (This document should every bit as important to you as a sales or property tax ordinance--and will probably have a bigger effect on Lafayette's future than any single tax ordinance ever has.)

As Blanchard points out, the oddity in this agreement is that it will require LUS to pay itself (for attaching to its own poles) and to pay its parent organization (LCG) a fee to access its own customers over the rights of way LCG owns.

That does sound a bit strange doesn't it? Why bother? Doesn't this just introduce odd inefficiencies and distort costs?

Yes, it does — and it is intended to. On to the story behind the story.

Some State of Louisiana Background:
Loyal readers will recall (1,2,3) that BellSouth (now AT&T) and Cox pushed a law through the Louisiana legislature back in '04 shortly after LUS announced its intentions to build a fiber-optic network. That law was intended to stop Lafayette from building a network at all. That story is a long and ugly tale of corporate lobbying and legislative foolishness that LPF covered extensively. Luckily Governor Blanco forced a compromise on the legislature that let Lafayette go forward — but the rewritten-by-committee bill left Lafayette open to legal challenges and imposed a minefield of restrictions and regulations that apply only to municipal telecom utilities. Regulations, that is, that apply only to Lafayette.

Flying the flag of "free enterprise" the two enormously powerful wireline cable and phone monopoly enterprises played the poor-me role of disadvantaged competitors who needed protection from the competition threatened by the city of Lafayette's local electrical, water, and sewer utility. Lousisiana's legislature rushed to protect them from this threat. Prior to this law LUS and Lafayette could have simply started up a utility in this area--as it can in electricity or sewerage or natural gas--without any heavy-handed restriction by the state. There would have been no legal basis for a lawsuit to try and prevent it and no way to impose special costs or regulation only on a utility owned by the people of Lafayette. The Louisiana "Fair" Competition Act changed that.

The law provides for a way to drive up the "paper" costs and a regulatory mechanism for ensuring that those higher costs are actually paid by the customers of LUS' Fiber division. LUS is required to, for instance, pay itself a fee for the use of its own poles and the rights of way that the community owns that is the same as it or the city would charge private companies. (Note that LUS already bears the real cost of building, maintaining, and replacing that property and that those costs are not subtracted from these state-imposed fees. We, and only we, pay twice.) These pay-it-to-yourself "costs" would merely be the silly imposition of a paper shuffle if the state had not required that those costs be passed on to the customer. But that is what the law does.

What is interesting is that the state constitution specifically outlaws using the Public Service Commission (PSC) to regulate publicly owned utilities. (Based on the presumption, I assume, that we as both owners and voters can do that for ourselves.) Since using the PSC to regulate public bodies is illegal, the tortured solution was to place the supposed responsibility in the hands of the state legislative auditor, who has neither the expertise nor the staff to do the job. Recognizing that "problem," the (un)Fair Competition law directs the PSC to both suggest rules to the auditor and to then enforce those rules. This is pretty transparently an evasion of the state's basic law but, hey, they write the laws, right?

Even more interesting, the regulations that the PSC are required to enforce are designed to raise the costs to the consumer. If that seems to you like a funny role to ask a PUBLIC Service Commission to play, I'd have to say it seems odd to me too. I had thought the role of the PSC was to protect the public from being overcharged or taken advantage of in other ways. I was not under the impression that it existed to protect large corporations from competition. Silly me. My guess is that the folks over at the PSC aren't all that happy about it either. It is not the job they signed up for.

The central mechanism that these PSC/Legislative Auditor regulations use to raise your rates is to tote up all the costs to LUS from equipment costs, to billing costs, to interconnection fees, to salaries, to taxes, to pole attachment fees, to franchise fees (the latter two are the elements being considered by the Council Tuesday). The will use a baseline industry cost based in part on what the incumbents say their costs are to establish a "fair price" that must, by law, include the costs to "rent" property they own and fees to use poles that they have already paid to install and maintain. They will then set a minimum price that LUS must charge. Slow down and read that again: they set a minimum price. They will NOT allow LUS to charge you the least that it could...they will force Lafayette's utility to charge more than it would have to without a set of regulations that force false costs on it.

This is all transparently designed, not to force "a level playing field" or "protect the public" as the incumbent providers claimed in the legislature; it is designed to limit the price competition that LUS will provide AT&T and Cox in Lafayette. Cox and AT&T don't want to be forced to lower their prices to compete in Lafayette. They most especially don't want to be forced to lower their prices to compete ONLY in Lafayette. That would make it all too obvious that public utilities like LUS could be a success and provide real value to its citizen-owners. LUS would be a "bad" example for other communities; one that might encourage them to do for themselves what Lafayette has done.

And that would never do.

The Federal Regulatory Issue at hand:
Now all this messy state law and regulation might be preempted by Federal regulation -- without the benefit of an enabling law. (I know this is getting convoluted. Stay with me for a while longer; it's important. :-) )

The FCC just this past Wednesday gave "relief" to cable companies on the issue of franchising in a partisan 3-2 vote. This ruling is yet another extension of the FCC's decision to insert itself into the national franchising issue. The ultimate outcome is pretty disturbing in that the ruling will pretty much will allow a cable company to quit honoring any part of its franchise contract it doesn't like beyond the monetary fee. Look for support for AOC and governmental networks to vanish. Whether it allows any cable company to immediately quit honoring its contract is in dispute. (Didn't know the FCC could abrogate contracts? Me neither.) Earlier remarks by the FCC chair had indicated that it wouldn't void current contracts.

The History:
State and federal franchise issues are also topics that have been covered on these pages, but in synopsis: The incumbent phone companies, lead by AT&T, are determined to get into the cable business. It is easy to see why since estimates I've seen show the profit margin at somewhere between 40 and 60% and their own year-to-year reports show that their core business, landline phone service, is declining every year even with margins cut to the bone. But the old Bell phone companies don't want to have to follow the same rules that cable did in developing this lucrative market: they don't want to have to go to the public bodies who own the land and negotiate a franchise contract to use the public rights of way. Their first tactic was to go to state governments and get them to take over the localities property rights and establish a state-wide franchise that allowed the state to control the money and disburse it to the localities. Not surprisingly state legislators found shifting this power into their hands an attractive "pro-business," "pro-competition" policy. This state-level tactic worked in the early rounds but then the municipalities began to unite in opposition and the laws were more and more often either vetoed (as Blanco did here in Louisiana) or defeated in the legislature.

With the preferred state-level alternative failing the phone companies turned to the federal government. They first asked the FCC to establish a federal-level franchising regime. (This is essentially what they have for phone service--the feds reached down and simply "took" state and local rights of way and allowed the phone monopoly to use them for free. This was in an earlier, less ideological, time and for the "good" cause of universal phone service and no one much objected.) The FCC demurred as the Congress was in the midst of gearing up for a major rewrite of telecommunications law. At that point in time no one had any trouble believing that the incumbent providers would mostly get what they wanted. But then AT&T's CEO went and started the big war over Net Neutrality and the whole bill went down in flames. (Comcast has recently restarted the controversy.) Congress considered but was unable to pass a law that would have redefined franchising.

The FCC then stepped in, and in the face of a obvious lack of Congressional support for the idea, decided to do for the phone companies what they had previously directed the Bells to ask Congress for: they instituted a regime that removed much of the control of rights of way from their local, municipal owners. As you might imagine, lawsuits are underway that argue that the FCC has overstepped its boundaries and is attempting to legislate by regulation. The FCC ruling forbade local governments from requiring cable franchisees to serve the whole community ("buildout" requirements); and basically it forbade municipalities from asking for asking for much of anything beyond money—which was already strictly limited by federal law. As a consequence all sorts of contracts between local governments that cut deals for schools or police or government office, and deals that supported local media like AOC with funds and channel space to provide coverage of city-council events and locally produced programming are all now on the chopping block. Those contracts, by federal fiat, don't have to be honored. And the city cannot try very hard to negotiate a better deal (not that much is left to "negogitate") since the FCC imposed a "shot clock:" if the city and the corporation cannot reach an agreement within 90 days the corporation can simply go ahead and provide services without finalizing a contract. (The room for abuse ought to be obvious--localities will have no leverage whatsoever and could easily be reduced to agreeing to whatever the company decided to hand out. Remember, generosity is not a trait of these fellas.) It goes without saying that without any real leverage the local clauses that insure that providers meet service requirements to customers goes out the door.

So does that mean that LUS could decide not to honor its contract too? No, there is no practical way that LUS is not going to meet the obligations it makes with the people of Lafayette...it is a public body and it will not desire to and will not be allowed to simply stiff the city-parish. But Cox, who you will recall, suggested the legislature fine the citizens of Lafayette $900,000 if they had the nerve to vote for fiber, is surely resentful enough to pull back from any contribution to our city that does not look good on a sponsorship form.

Conclusion:
So that, as Paul Harvey might say, is "the rest of the story."

LUS is going into the Council on Tuesday to discuss a franchise agreement for its fiber-optic based cable system that will be shaped by the requirements of a state law that was initially designed to kill the project. Instead of being a document that we could proudly point to as a one which sets out the unique and forward-looking obligations of LUS to the community and its customer-owners we will likely get a defensive document that promises no more than what the city fathers could extract from Cox in the last contract round. The strange franchise and pole attachment agreements that LUS will sign with itself are by-products of the (un)Fair Competition Act and its resulting, anti-consumer regulations that are designed to drive up the price of LUS's services and so minimize the competition it can offer its citizens. To add insult to injury, federal intervention may well result in Cox deciding to abandon most of the very franchise agreement that LUS will be imitating while LUS will, regardless of federal "relief," will be obliged by its ownership and the aforementioned law to fulfill its contractual obligations regardless of the competitive disadvantage at which it is put.

I think that's all pretty sad and more than a little sick. I hope you do too. We've earned better than a me-too franchise with our local communications utility.

Welcome to topsy-turvy world of American Broadband Policy as it plays out in real local communities.

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