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HomeMy WebLinkAboutAgenda Statement 1984/11/27 Item 11 COUNCIL AGENDA STATEMENT Item 11 Meeting Date 11/27/84 ITEM TITLE: Resolution of Intent //�- to grant modified franchise agreement to Cox Cable Television, Inc. and setting a public hearing to consider this proposed agreement on December 11 , 1984 f-� SUBMITTED BY: City Manager ,14- 4'., tom' (4/5ths Vote: Yes No X ) BACKGROUND On April 16, 1964, the City Council of the City of Chula Vista adopted Ordinance No. 882 granting a franchise to Area Television Antenna, Inc. to operate a community antenna television system in the City of Chula Vista. That franchise was subsequently taken over by Cox Cable which operates a system of approximately 250,000 subscribers in the Cities of San Diego, La Mesa, El Cajon, National City, Chula Vista, and Imperial Beach and certain unincorporated areas. The original franchise under which Cox Cable operates is for 30 years, expires in 1994, and provides a franchise fee of 2% of gross revenues related only to the transmission of general broadcast programs. Transmission revenues received in connection with the transmission of paid television programs is excluded. The franchise agreement is comparable to those formulated in the mid 60' s when the technology and the potential of the CATY was limited. Except for the franchise fee, which has been raised to 3% of revenue from general broadcast programs, there is very little additional commitment for service or programs imposed upon the franchise holder. There is also little leverage for the City to renegotiate or restructure a new agreement except for extending its term or deregulating its rate structure. While modifications of a minor nature were made to the franchise over the years, and rate increase requests were reviewed by the City Council on an occasional basis, very little review of the substance or the major terms of the current franchise has been undertaken. At its meeting of May 3, 1983, however, the City Council , in approving a periodic rate increase, authorized staff to negotiate modifications in the Cox Cable franchise with the City of Chula Vista. A number of points were to be discussed in the negotiations which will be discussed more fully later in this report. Over a period of over a year discussions with representatives of Cox Cable transpired, but these discussions were delayed due to a substantial length of time between the initial and subsequent meetings. Nonetheless, a proposed modification has been developed, and will be discussed more fully later in the report. Page 2, Item 11 Meeting Date ii/Z//84 On October 30, 1984, the President signed S66, a comprehensive federal cable bill . Although there are some desirable features in this legislation, it has the effect of weakening even more the City's negotiating position based on the current franchise. This legislation was developed after the cable industry initiated a cable bill which was designed to protect the cable industry's interest. Later, the bill was modified in the House of Representatives and after off and on negotiations between representatives of the cities and the National Cable Industry, a compromise was reached which resulted in the recently enacted federal legislation. Some of the pertinent points of this legislation are as follows: 1 . Rate Regulation Section 623 (c) grandfathers the regulation of rates for basic service, such as local broadcasting signals, for two years following the bill 's effective date. It also grandfathers in state laws which permit deregulation of basic service rates in states, such as California, during this two-year period. What this means to Chula Vista is that the cable company has the option to deregulate their rates under AB 699 in which they would contribute so much for each subscriber for local programming in exchange for rate deregulation. Even if the cable company did not opt for this option, deregulation would occur automatically under the terms of the new federal legislation within two years. 2. Limited Viewers' Channels While Cox Cable has developed a technology to avoid customers inadvertently receiving a pay service such as the Playboy Channel , the new federal legislation in Section 624 (d)(2) (A) requires that all cable operators make lock boxes available upon request of the subscriber to allow that subscriber to prohibit the viewing of obscene or indecent programing during any time specified by the subscriber. 3. Franchise Fees Under this law, a franchising authority may establish a franchise fee of up to 5% of gross revenues derived from the operation of the cable system. Currently, Chula Vista's franchise fee, as well as the fees for all other cities in the Cox system except Imperial Beach* is 3%. Chula Vista's, however, only applies to basic service, and does not apply to pay service. Under the proposed modification to the franchise agreement, the 3% franchise fee would be extended to include the pay service, which will derive an additional revenue to the City estimated at X10,000/yr The law provides no additional leverage to the City to negotiate the 5% ceiling as a franchise fee, especially in light of the City's existing franchise and the franchise fees established in the other cities serviced by Cox. * Imperial Beach has a 5% fee, but this applies to basic service only. A 3% fee applied to both basic and pay service produces more revenue than 5% against basic service only. Page 3, Item 11 Meeting Date II/z//34 4. Grandfathering Section 634 of the law grandfathers the provisions of existing franchises for the life of the franchise except for those provisions which are in direct conflict with particular provisions of the bill , such as rate regulation. It is another way of saying that the new law supersedes the provisions of the City's franchise where there is a conflict. 5. Renewal The new federal law establishes a renewal process which will be imposed upon all franchises which can be activated at the option of the City or the operator. The process involves, first, the franchising authority such as the City holding a public hearing for the purpose of identifying the community's future cable-related needs and to review the operator's past performance. The proceedings are initiated between 30 to 36 months prior to the scheduled expiration of the date of the franchise. Next, after a preliminary assessment is made after the hearing that a franchise should not be renewed, the City must conduct administrative proceedings to determine whether the operator has complied with the existing franchise and the applicable law, that the quality of the operator's service has been reasonable in light of community needs, that the operator has legal , technical and financial ability to provide services and facilities, and that the operator's proposal is reasonable to meet future cable-related community needs and interests. Once the administrative proceeding is complete, the City is required to make the final decision to grant or deny the application for renewal , and if the application is denied, it must be based on one or more factors listed above and these reasons must be specified in writing. Denial of a renewal application is no easy task since, to make the findings listed above, the franchising authority must have a record- keeping system which would produce systemmatic and regular documentation of franchise violations, and the franchise holder must be provided notice with opportunity to correct these violations during the course of the franchise. 6. Municipal Ownership Municipal ownership is authorized in Section 613 (e)(1 ) . Programming decisions, however, must be made by an entity separate from the franchising authority, such as possibly a separate foundation or non-profit corporation. 7. Consumer Protection The new law authorizes franchising authorities to establish and enforce customer service requirements, construction schedules, and other construction-related requirements in the franchise. States and localities also have broad authority to enact and enforce consumer protection laws as long as those laws are not inconsistent with the new law. Page 4, Item 11 Meeting Date 11/2T/84 RECOMMENDATION: Adopt Resolution of Intent to grant modified franchise agreement to Cox Cable Television, Inc. and set a public hearing to consider this proposed agreement on December 11 , 1984. BOARDS/COMMISSIONS RECOMMENDATION: Not applicable. DISCUSSION: The major elements of the proposed cable television franchise which in many respects closely follows the ones in San Diego and El Cajon but in other respects exceeds these franchise agreements, are as follows: 1. The franchise fee is changed from 3% of basic cable service to 3% of basic and pay cable television service. In 1983-84, the City received $90,545 in revenue from its franchise fee. In calendar 1985, revenue from basic service is estimated to be $104,200. Under the proposed new definition of "total gross receipts," which embraces approximately 98% of all revenue earned by Cox Cable, the revenue to the City from the 3% franchise fee is estimated in 1985 to be $175,200, with $71 ,000 of this amount coming from pay service revenues. By 1996, it is estimated that revenue from the base fee will be $162,000, with another $132,000 coming from the pay service, or a total of $294,000. It is estimated that between 1985-96, the City would receive total fees of $3,099,700, with $1 ,765,000 coming from basic service, and $1 ,337,700 from pay service. 2. The proposed franchise agreement would provide for quarterly franchise fee payments. Currently, franchise payments are made three months after the conclusion of the calendar year. Under the new agreement, the Grantee would pay a franchise fee quarterly, based on the fee paid in the previous year, with the fourth payment due after the filing of the annual verified revenue statement, that shall then adjust for all estimated payments made for that calendar year. There is also added to the franchise a penalty provision of 1% of the amount due for each month or fraction thereof in which the owed payment is due and unpaid. 3. While Cox Cable provides separate channels for government, education, and the public, there is nothing in the current franchise that commits to the provision of these services, along with the access from the City to their studios and channels. The proposed franchise, in Section 8, spells out this commitment which must be provided by Cox Cable at their own expense without cost to the City. 4. Section 20, Paragraph C, contains the commitment by both parties to agree to discuss future non-entertainment uses of cable television including the possibility of entering into joint ventures to promote business or other non-entertainment uses of cable. This is nothing more than an agreement to agree, but it does spell out the intent and interest of the parties to discuss in the future non-entertainment services, such as data transmission for business security systems for homes and business, etc. Page 5, Item 11 Meeting Date 11/Z7/84 5. The franchise provides a new Section 9 requiring prior approval of the City Council when ownership or control of 30% or more of the voting stock of the Grantee is acquired by another person or entity. This should give the City control over transfers of ownership which could affect service to the customers and would help in making certain that the franchise with the City was properly fulfilled. 6. Regarding indemnification to the City (Section 15) , there are two major changes made to the current language. First, the insurance policy held by the Grantee, and any certificate of insurance evidencing the same, shall name the City, its offices, and employees as additional insured. Next, the amount of the said insurance is increasing from $100,000 for personal injury or death of any one person, $300,000 for personal injury or death of two or more persons, and $50,000 for damage to property resulting from one occurrence to $500,000, $1 ,000,000, and $300,000. These amounts are higher than in the City of San Diego franchise, and are consistent with recently negotiated franchises, i .e. , the City of Oakland. 7. The proposed franchise contains new and stronger language regarding meeting certain minimum technical standards in order that adequate standards can be provided to the system subscribers. This language, found in Section 16, specifies the FCC minimum technical standards and places other performance standards on the Grantee. 8. Somewhat related to these standards, the proposed franchise provides that the Grantee maintain a written record of customer service requests and complaints and make an annual report to the City. These records are also available at any time for inspection by the City. This should be an aid in assisting the City in monitoring performance of the Grantee in executing the franchise. 9. Section 17 requires supplying copies of any petitions, applications, or communications submitted by either the Grantee or the City to the Federal Communications Commission, the State PUC, or any other Federal or State regulatory commission or agency having jurisdiction over the Grantee's cable television system transmitted simultaneously to the City and Grantee. 10. There is also a provision in the franchise in much more detail than in the current franchise to determine the purchase price if the City elects to purchase the cable system upon termination of the franchise, and provides for an arbitration process if there is a dispute over the amount of the purchase price. 11 . One of the major elements of the franchise is that rate setting is deregulated with the provision that the Grantee establish its own rate and charges for services rendered to subscribers under this franchise in accordance with the Federal Communications Act of 1984. While this may seem to be a major concession, it must be viewed in the context of the new Federal law, which would deregulate rates in the cable industry within two years. Page 6, Item 11 Meeting Date 11/2//84 12. About the only bargaining point the City had in these negotiations had to do with the term of the franchise. It is proposed that this franchise, similar to the current one, be for a 25 year period. It also contains a provision, identical to San Diego's, which subjects the provisions of this franchise to renegotiation every 5 years during the term. These renegotiation periods are designed to change the terms and conditions of the franchise to reflect any significant changes which have occurred during the interim period. The agreement further specifies that at each of these 5-year intervals, the franchise can be extended an additional 5 years. If at such interval , however, a renegotiation is in process, and results in an agreement, the term cannot be extended unless so specified by the City Council. In no case can the total term of the franchise exceed 50 years. The evaluation of this term proposed in the new franchise should be viewed within the context that most cable franchises on the average range between 20 to 30 years, with Chula Vista's current franchise and the one in San Diego established for a 30 year period. Also, the extension beyond the proposed 25 years really is in control of the City as far as the renegotiation periods are concerned. The City of San Diego, for example, failed to reach an agreement in their first renegotiation with the result that the first 5-year extension was not provided to the cable company. It should be viewed in the broader context, however, of the new Federal law in which it is extremely difficult for a City not to renew a franchise when it terminates. So whether a franchise is for 20, 25, or 30 years, it will be extremely difficult for a city not to renew a franchise, unless the service is very poorly done, and the city has an excellent record system and has provided adequate due process to the grantee to correct any deficiencies which may occur in their operation. Besides these major provisions of the proposed franchise, there were other issues that were discussed with the Cable Company. One was to increase the franchise fee from 3% of base and pay service to 5%. The Cable Company was unreceptive to this increase, since this would be in excess of any other fee collected by any other city in their system. Also, the 3% fee is fairly standard throughout the country, with only those that achieve 5% being those that had done so illegally or had received the blessing of the FCC having justified the additional 2% as being required to properly regulate the cable franchise. Another issue was a senior citizen discount. Such a discount program would affect the entire Cox system of which Chula Vista makes up only approximately 10% of that system. Since senior citizen discounts are not provided systemwide, Cox Cable is reluctant and unwilling to provide such discounts just in one part of the system. There was concern regarding subscribers being able to screen out unwanted channels like the Playboy Channel . While the franchise does not speak to that issue directly, as a matter of practice, Cox Cable has taken steps in applying technology to achieve this result. In any case, as mentioned earlier, the new Federal law will require that all cable operators make lock boxes available upon request of the subscriber to allow that subscriber to prohibit the viewing of obscene or indecent programming. 4) 055 Page 7, Item 11 Meeting Date 11/21/84 There was another concern that the way the current franchise is structured, the City may be motivated to grant a rate increase because it receives increased income as a result. This issue basically is being resolved by deregulating the rates under the franchise, and, of course, even if this did not occur under the franchise, it would occur under the new Federal law within two years. A final point which was discussed back in May 1983 was a commitment by Cox Cable to provide a state of the art at rebuild. The approach used by Cox, however, is to upgrade and replace elements of the system, such as amplifiers and transmission lines as they deteriorate. A major rebuild of the system, therefore, is not contemplated in the near future or even during the course of the franchise. It should be recognized that the proposed franchise is not what you will find in those communities which have been awarding new franchises during the last five years. Competition for these franchises has been so intense that the cable companies normally have overcommitted on the technology that go along with some very expensive systems. Unfortunately, cities have acquiesced to these proposals and in some cases demanded even more. Within the context of the current franchise, where the City has very little leverage for negotiating, and with the new Federal Communications Act of 1984 which gives the City even less negotiating leverage, it is my view that the proposed franchise is a major improvement over the current franchise and in some respects better than any franchise currently with Cox Cable in the San Diego region. Given the options of Cox Cable to deregulate rates currently under State law and certainly within two years within Federal law, and given the probable ease of renewal of the franchise under the new Federal law, the proposed franchise is viewed as an improvement over the franchise, and probably better than the City normally would expect to achieve given its negotiating position. So, in terms of additional franchise fee revenue that would be paid and some of the other advantageous provisions that are in this proposed franchise, it is therefore recommended that it be given serious consideration and approved. FISCAL IMPACT: It is estimated that the City will receive $71 ,000 in additional revenue from the proposed franchise in 1985. WPC 0540A Dated