HomeMy WebLinkAboutAgenda Statement 1984/12/18 Item 16 COUNCIL AGENDA STATEMENT
Item /6
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Meeting Date 12/}x-/84
ITEM TITLE: Public Hearing on proposed franchise agreement with Cox Cable
Television, Inc.
a. Ordinance ,220,76 Granting franchise agreement between City of
Chula Vista and Cox Cable Television, Inc.
SEOOND READING AND ADOPTION
SUBMITTED BY: City Manager J 4 (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 CATV 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.
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Page 2, Item / 6
Meeting Date 11/ri-t/64 /.2/4
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
programming 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 $70,000/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.
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Page 3, Item 16
Meeting Date-7271=17R /.,//�
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 systenmatic 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
franchi se.
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 16
Meeting Date4M f„1..- /o'
RECOMMENDATION: Conduct public hearing and place ordinance on First Reading.
BOARDS/COMMISSIONS RECOMMENDATION: Not appl icabl e.
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.
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Page 5, Item
Meeti ng Date (v-ht`
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, 3300,000 for personal injury or death
of two or more persons, and $50,000 for damage to property resulting from
one occurrence to 3500,000, $1 ,000,000, and 3300,000. 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 6
Meeti ng Date i.2-74'
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.
Page 7, Item 06
Meeting Date-T4 l -/i'W
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.
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