VII. Bonding Requirements

Public Utilities Code § 5840(e)(9) declares that a state video franchise application shall include "[a]dequate assurance that the applicant possesses the financial, legal, and technical qualifications necessary to construct and operate the proposed system and promptly repair any damage to the public right-of-way caused by the applicant." "To accomplish these requirements," the statute provides that "the commission may require a bond."218

Pursuant to Public Utilities Code § 5840(e)(9), the OIR tentatively required each applicant to "either post a bond valued at $100,000 or produce a financial statement that demonstrates that the applicant possesses a minimum of $100,000 of unencumbered cash that is reasonably liquid and readily available to meet expenses." This section reviews and analyzes comments regarding this proposed bonding requirement.

A. Position of the Parties

Verizon argues that a bond requirement in excess of $100,000 is "neither appropriate nor necessary."219 It maintains that the "$100,000 financial showing is consistent with that imposed by the Commission on other facilities-based communications companies, and there is no reason to change it here."220 Verizon adds that proponents of an increase in the bond amount "confuse bonds with two distinct purposes - those provided as a safeguard to cover initial estimated start-up costs, and those addressing specific and actual operational costs which may be drawn down by cities after-the-fact."221 Verizon argues that the "adequate assurance" determination is intended only "to insure adequate initial capitalization as a start-up business."222 Verizon explains that local entities "maintain control of the means of access to the public rights of way," which means they may continue "to issue encroachment permits, assess reasonable cost-based fees, and require bonds when appropriate."223

In its opening comments on the draft decision, Verizon argues that "a bond cannot issue without a franchise effective date."224 Based upon its experience, Verizon states that "financial institutions cannot issue bonds insuring performance for an obligation that does not yet exist. . . . Any incorrect information in the bond application, e.g., an incorrect `guess' as to the effective date of the yet-to-be issued franchise, would invalidate the bond . . . ."225 Verizon asserts that "[t]his problem can be easily rectified by conditioning the holder's ability to provide video service on its posting a bond within a certain period of time, e.g., five business days, from the effective date of the franchise."226

With respect to submission of a financial report, Verizon asks the Commission to "clarify that if an applicant chooses to submit a financial report, the latest available audited report should be submitted."227 Verizon states that the methods used to show the unencumbered cash requirements should include "alternative financial instruments defined in D.91-10-041 and D.95-12-056."228

SureWest "believes that the $100,000 bond required by the proposed General Order is appropriate . . . ."229 If the Commission increases the bond amount, however, SureWest argues that the increase "should not be based on a one-size-fits-all approach."230 SureWest asserts that a one-size-fits-all increase might impede small providers (like SureWest) from bringing video service to "small areas of the state."231 SureWest states the Commission could continue the distinction already made between communications companies with less than one million California telephone customers and those with more, and require that the former be subject to the $100,000 bond requirement and the latter be "subject to a higher bond requirement."232

In reply comments on the draft decision, Small LECs argues that obtaining an executed bond "could be administratively difficult."233 Small LECs characterizes this proposed requirement as "unnecessary."234

Joint Cities argue that performance bonds do not provide the most protection to local governments.235 Joint Cities state that bonds "are more difficult for local governments to access," so the preferred security instruments are "letters of credit and security funds controlled by local governments."236 Nonetheless, Joint Cities maintain that bonds "should be required for all state video franchises."237

If the Commission chooses to require bonds, Joint Cities recommend that the bond valuation be "designed to truly protect local governments and their constituents."238 Specifically, Joint Cities suggests that the Commission eliminate the $100,000 bond amount and instead "(a) determine the proper amount and format of the bond after reviewing the application; (b) inform the applicant of the Commission's determinations; and (c) require that the applicant submit a properly executed bond to the Commission, as well as copies to all affected local governments, no later than sixty (60) days before beginning video system construction."239

In determining the amount and format of the bonds, Joint Cities urges the Commission to abide by four principles:

"[W]ith respect to cable systems that have already been constructed, the amounts of the bonds should, at a minimum, be consistent with the valuation amounts of the security instruments to which cable operators have already agreed."240

"[W]ith respect to video/high speed data systems that will require considerable future construction in the public rights-of-way, the amount of the bonds should reflect said activity."241

"[L]ocal governments in whose areas each state franchised system will operate should be listed as obligees on the pertinent bonds and these bonds should require that these governments timely receive copies of each bond and any modifying instruments. . . ."242

"[T]he effective time for government action required by the bonds should be no less than ninety days . . . ."243

Joint Cities warns that not heeding its admonitions "create[s] unnecessary liability for the State of California and for the Commission."244

Pasadena asserts that "the $100,000 bond is not sufficient for a city the size of Pasadena, and certainly would not adequately protect local governments and the public across much larger franchise areas."245 Pasadena explains that it has had to "use security instruments to address cable TV and OVS operator deficiencies in meeting franchise agreements . . . [including] recover[ing] unpaid franchise fees, PEG payments, undergrounding costs, and pole attachment fees."246

Pasadena puts forth a proposal for a tiered bond structure. Pasadena argues that for any "entities that will be constructing plant to serve video customers . . . the Commission . . . [should] require a bond of at least $500,000, or $100,000 for every 20,000 customers served, whichever of these two options is greater."247 For existing systems, Pasadena states that "the bond amounts should, at a minimum, be consistent with security requirements to which cable operators have already agreed."248 Pasadena adds that "all local governments in whose areas a video service provider is operating should be identified as obligees on the bond."

Finally, Pasadena argues that the Commission should "eliminate the option of simply providing proof of cash on hand."249 Pasadena states that, in its experience, "video service providers may have financial resources when an application is filed, but those resources may no longer be available when problems occur."250 In addition, Pasadena asserts that the video service provider would be under no obligation to use the cash on hand to repair damage to the public rights-of-way.251

Los Angeles and Carlsbad Responders argues "[t]he flat $100,000 bond amount, which may be adequate in the case of a state franchise which is operating only in limited areas, appears to be woefully inadequate to secure the performance of a state franchisee which may be operating statewide."252 Accordingly, Los Angeles and Carlsbad Responders asks the Commission "to clarify that its bond requirement is not a substitute for a state franchise holder providing any security instrument that may be required by a local entity for persons obtaining permits to do construction in the rights-of-way."253

Los Angeles and Carlsbad Responders also endorses a "proportional" approach for the Commission's bonding requirement.254 By way of example, Los Angeles and Carlsbad Responders states that the cable providers within the City of Los Angeles' fourteen franchise areas must "provide a performance bond or a letter of credit" and that the amount ranges from "$82,000 to $1 million dollars."255 In determining this amount, Los Angeles and Carlsbad Responders explains that the factors used are "the geographical size of the franchise area, the size of the system to be installed in the City's public-rights-of way, the number of homes passed, and the number of potential subscribers in each of the franchise areas, and other risk factors."256

Agreeing that the $100,000 cash bond is "far too low," League of Cities/SCAN NATOA supports the idea of "requir[ing] a bond or unencumbered cash in an amount that varies by service provider, based on the potential number of subscribers in its proposed service area."257 League of Cities/SCAN NATOA also calls for the Commission to "identify those parties that may be allowed to draw on bonds in the case of default by the obligor, and under what circumstances the bonds may be recovered."258 In particular, League of Cities/SCAN NATOA urges the Commission to "consider making the bond amounts available to local governments who demonstrate harm arising from the default of the obligor, including harm arising from defaults on franchise fee payments, failure to pay fines for customer service violations, or damage to the public rights-of-way."259

Greenlining endorses the Joint Cities' "position regarding a higher bond level and far higher initial fees."260 Greenlining reasons that "it would be better for the CPUC to eliminate bonds than to suggest that a token amount can protect the public."261 In addition, Greenlining "supports the League's position that the $100,000 cash bond is too low and the purposes and uses of such bonds are vague."262

DRA urges the Commission to consider "a sliding or tiered scale for establishing a bond or unencumbered cash amount."263 DRA, however, does not recommend any specific bond amounts.264

B. Discussion

We conclude that we should impose a bond requirement. Like most commenting parties, we find that requiring a bond is a satisfactory and efficient way to determine whether applicants possess financial, legal, and technical qualifications necessary to be state video franchise holders.265

The rest of this section assesses specific features of the bond requirement proposed in the OIR. In response to comments, we modify some of the specifics of this requirement.

1. Purpose of the Bond

Public Utilities Code § 5840(e)(9) guides our assessment of the purpose for a bond. The statute declares that the Commission may require a bond to establish that an applicant possesses "the financial, legal, and technical qualifications necessary to construct and operate the proposed system and promptly repair any damage to the public right-of-way caused by the applicant."266 Public rights-of-way, in this context, include the areas "along and upon any public road or highway, or along or across any of the waters or lands within the state."267

Verizon too narrowly defines the purpose of the bond when it states that the Legislature merely intended for a bond "to insure adequate initial capitalization as a start-up business."268 Public Utilities Code § 5840(e)(9) expressly directs that a bond, in part, would serve as adequate assurance of an applicant's qualifications to "operate the proposed system."

Nevertheless, we, like Pasadena and Los Angeles and Carlsbad Responders, conclude that our bond requirement is not a perfect substitute for a "state franchise holder providing any security instrument that may be required by a local entity."269 The Commission's bond requirement only demonstrates that an applicant possesses the "qualifications" necessary to offer video service. While we cannot grant local entities any new authority to impose security instruments, we recognize that some local entities also may require security instruments in their oversight of local rights-of-way. DIVCA tasks local entities with governing "time, place, and manner" of a state video franchise holder's use of the local rights-of-way.270 In overseeing time, place and manner of this use, local entities may issue rights-of-way permits, and these local permits may require further security instruments to ensure that a state video franchise holder fulfills locally regulated obligations. 271 Locally required security instruments can best take into account size and scope of a state video franchise holder's local construction and operations.

2. Amount of the Bond

Many parties urge us to abandon the one-size-fits-all approach to the bond requirement proposed in the OIR. Parties advocating for tiered bonding requirements include Pasadena; Los Angeles and Carlsbad Responders; DRA; and League of Cities/SCAN NATOA.272 Upon further review of the comments, we are persuaded to adopt a bond requirement that bases the size of the bond on the number of a state video franchise holder's potential customers. We wish to neither under- or over-assess the bond amount required to demonstrate applicants' qualifications.

Specifically, we revise the bond amount to require state video franchise holders to carry a bond in the amount of $100,000 per 20,000 households in a proposed video service area, with a required $100,000 minimum per state video franchise holder. Given that that the requirements of DIVCA are intended to spur competition, rather than stymie it, we will place a cap of $500,000 on the bond requirement imposed on each state video franchise holder.

In establishing this requirement, we considered various factors that could be used in crafting appropriate bond levels. We found that there is no standard set of criteria, and no specific value assigned to each criterion, to which local franchising authorities agree to when developing local bonding requirements. A review of publicly available franchises finds a huge discrepancy in required terms.273

Similarly, comments reflect different considerations. Some parties, like Pasadena and League of Cities/SCAN NATOA, suggest that the Commission tier its bond requirement solely on the basis of the number of video customers served.274 In contrast, Los Angeles and Carlsbad Responders ask us to consider a far wider range of criteria when setting a bond amount. These criteria include the following: "the geographical size of the franchise area, the size of the system to be installed in the City's public-rights-of way, the number of homes passed, and the number of potential subscribers in each of the franchise areas, and other risk factors."275

Upon review of these comments, we conclude that we should base the size of the bond on the number of households in an applicant's proposed video service area. These households would only include those in the state video franchise holder's proposed state video service area; homes subject to local franchise agreements are excluded from this count. Some of the other proposed criteria - such as "the geographical size of the franchise areas . . . [and] the size of the system to be installed in the City's public-rights-of-way . . ." - are liabilities that can be accounted for in local entities' permits. We need not entirely duplicate local security instruments. Also we declined to use "the number of homes passed," because this figure does not adequately take into account future construction and operational demands. We expect that state video franchise holders will quickly expand beyond the number of homes they had passed at the time they filed their application.

Turning to the specific amounts of bond requirements, we adopt a requirement that ensures that a bond is sufficient to establish a state video franchise holder's qualifications, but does not place a significant barrier to entry on applicants that are qualified to provide video service. In particular, our bonding requirement is sensitive to SureWest's concern that imposing a significant bond requirement "might impede small providers . . . from bringing video service to "small areas of the state."276 DIVCA is intended to spur competition to the benefit of California consumers. Thus, the bond requirement should not be unduly burdensome or unnecessarily complex.

3. Issuance and Notice of the Executed Bond

We clarify that we require that the bond be issued by a corporate surety authorized to transact surety business in California. The Commission shall be listed as the obligee on the bond. We, however, decline to list other entities as obligees, as recommended by the League of Cities/SCAN NATOA and Pasadena.277 Only the Commission should be an obligee on a bond designed to prove to the state franchising authority that an applicant possesses adequate qualifications to be a state video franchise holder. As is their current practice, local entities may require additional security instruments to ensure proper treatment of their local residents and usage of their local rights-of-way.

Since a bond typically needs a franchise effective date to be issued, we will not require an applicant to provide the Executive Director a copy of its executed bond until five business days after the effective date of its state video franchise.278 This copy must be provided to the Commission before a state video franchise holder begins offering video service pursuant to a state video franchise. The applicant shall attest to the amount and future execution of the required bond in the affidavit included in its application. Pursuant to Public Utilities Code § 5840(e)(1)(D), the state video franchise holder also must provide a copy of this affidavit to affected local entities.

Outside of its application, a state video franchise holder need not provide further notice of the state bond to local entities in its video service area. We find no statutory basis for Joint Cities' and Pasadena's recommendation to require a state video franchise holder to provide a copy of the executed bond sixty days before it commences video system construction in a local jurisdiction.

A state video franchise holder may not allow its bond to lapse during any period of its operation pursuant to a state video franchise. During all periods of operation, a state video franchise holder must continue to possess requisite legal, technical, and financial qualifications.

4. Alternative to Submit Financial Statement

As an alternative to a bond, the OIR allowed applicants to demonstrate "[a]dequate assurance that the applicant possesses the financial, legal, and technical qualifications" to be a state video franchise holder by producing a financial statement that demonstrates that the applicant possesses unencumbered cash that is reasonably liquid and readily available to meet expenses.279 The amount of unencumbered cash was required to be an amount equal to that of the proposed bond.

Upon further review of the statute and comments, we, however, remove this option from the General Order. We agree with Pasadena that it is inappropriate for us to allow the option of "simply providing proof of cash on hand."280 This option is not expressly permitted by DIVCA. Moreover, it is unclear whether the financial statement qualifies as "adequate assurance" that the applicant possesses "legal" and "technical qualifications" necessary to be a state video franchise holder. The statute only directs that a bond may provide this adequate assurance.

We decline to address further suggested revisions to the financial statement option.281 These comments are moot due to our decision to remove the financial statement option from the General Order.

218 Cal. Pub. Util. Code § 5840(e)(9).

219 Verizon Reply Comments at 12.

220 Id.

221 Id. at 11.

222 Id. at 11-12.

223 Id. at 12 (citing Public Utilities Code § 5885(a) and Government Code § 50300).

224 Verizon Opening Comments on the PD at 9.

225 Id. at 10.

226 Id.

227 Verizon Opening Comments at 6.

228 Id., Attachment B.

229 SureWest Reply Comments at 13.

230 Id.

231 Id.

232 Id.

233 Small LECs Reply Comments on the PD at 4.

234 Id.

235 Joint Cities Opening Comments at 7.

236 Id.

237 Id. at 8.

238 Id. at 6.

239 Id. at 21.

240 Id. at 8.

241 Id.

242 Id. at 8-9.

243 Id. at 9.

244 Id.

245 Pasadena Opening Comments at 5.

246 Id. at 3.

247 Id.

248 Id.

249 Id.

250 Id.

251 Id.

252 Los Angeles and Carlsbad Responders Reply Comments at 8.

253 Id.

254 Id.

255 Id.

256 Id.

257 League of Cities/SCAN NATOA Opening Comments at 14.

258 Id.

259 Id. at 15.

260 Greenlining Reply Comments at 11.

261 Id.

262 Id.

263 DRA Reply Comments at 12.

264 Id.

265 See League of Cities/SCAN NATOA Opening Comments at 14 (supporting a bond requirement); Pasadena Opening Comments at 3 (same); SureWest Reply Comments at 13 (same); Verizon Reply Comments at 12 (same). Joint Cities voices the concern that performance bonds, as compared to other security instruments, "are more difficult for local governments to access." Joint Cities Opening Comments at 7. As explained below, however, we do not expect that local entities will be accessing the bond imposed by the Commission.

266 Cal. Pub. Util. Code § 5840(e)(9).

267 Id. at § 5830(o).

268 Verizon Reply Comments at 12.

269 Los Angeles and Carlsbad Responders Reply Comments at 8.

270 Cal. Pub. Util. Code § 5840(e)(1)(C) (providing that a state video franchise holder must comply with "all lawful city, county, or city and county regulations regarding the time, place, and manner of using the public rights-of-way, including, but not limited to, payment of applicable encroachment, permit, and inspection fees"). See also id. at § 5885(a) ("The local entity shall allow the holder of a state franchise under this division to install, construct, and maintain a network within public rights-of-way under the same time, place, and manner as the provisions governing telephone corporations under applicable state and federal law, including, but not limited to, the provisions of Section 7901.1.").

271 Id. at § 5840(e)(1)(C) (recognizing that state video franchise holders must abide by lawful local regulations regarding "the time, place, and manner of using the public rights-of-way").

272 Pasadena Opening Comments at 3; Los Angeles and Carlsbad Responders Reply Comments at 8; DRA Reply Comments at 12; League of Cities/SCAN NATOA Opening Comments at 14. See also SureWest Reply Comments at 13 (stating any increase of the bond amount proposed in the OIR "should not be based on a one-size-fits-all approach").

273 For example, the City of Pittsburgh requires a $75,000 line of credit ( http://www.city.pittsburgh.pa.us/cable/sections_13-16.html#13.4); the City of Oklahoma requires a $100,000 bond during construction, which drops to $25,000 after construction is completed ( http://www.okc.gov/pim/pim_library/CableAgreement.html); the Cities of Palo Alto, East Palo Alto, Menlo Park, and Atherton, and the Counties of Santa Clara and San Mateo together require a $1,000,000 bond that decreases to $500,000 after construction is completed ( http://www.city.palo-alto.ca.us/cable/franchise-agreement.html#11); Montgomery County, Maryland requires a $2,000,000 bond throughout the life of the franchise and $100,000 in cash ( http://www.montgomerycountymd.gov/mcgtmpl.asp?url=/content/cableOffice/June98franchise.asp).

274 Pasadena Opening Comments at 3; League of Cities/SCAN NATOA Opening Comments at 14. See also SureWest Reply Comments at 13 (proposing a tiered requirement if we decide to raise the baseline bond amount).

275 Los Angeles and Carlsbad Responders Reply Comments at 8.

276 SureWest Reply Comments at 13.

277 League of Cities/SCAN NATOA Opening Comments at 15 (asking the Commission to consider determining that those local governments that demonstrate harm arising from the default of the obligor should be listed as obligees on the bond); Pasadena Opening Comments at 3 (advocating that "all local governments in whose areas a video service provider is operating should be identified as obligees on the bond").

278 Cal. Pub. Util. Code § 5840(d)(9)(E).

279 See id. at § 5840(e)(9) (stating that a state video franchise application shall include "[a]dequate assurance that the applicant possesses the financial, legal, and technical qualifications necessary to construct and operate the proposed system and promptly repair any damage to the public right-of-way caused by the applicant").

280 Pasadena Opening Comments at 3.

281 These comments include Verizon Opening Comments at 6 and League of Cities/SCAN NATOA Opening Comments at 14.

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