2. Build-Out Requirements

DIVCA requires that state video franchise holders actively build out their systems, and to do so in a non-discriminatory fashion. The build out requirements, set forth in Pub. Util. Code § 5890, are very specific regarding franchise holders that (together with their affiliates) have more than 1,000,000 telephone customers in California. But as to holders that (together with any affiliates) have less than 1,000,000 telephone customers in California, DIVCA provides that Section 5890 is satisfied if the holder "offer[s] video service to all customers within [its] telephone service area within a reasonable time, as determined by the Commission." Pub. Util. Code § 5890(c). The issue for Phase II is how the Commission should implement this statutory provision for the smaller state video franchise holders.

In the following discussion, we first summarize the statutory requirements for franchise build-out as they relate to the larger state video franchise holders.2 We then summarize the debate between the commenters over the meaning of the statutory provisions specific to the state video franchise holders with less than 1,000,000 telephone customers in California. Finally, we explain that we will extend the statutory provisions for larger franchise holders as a "safe harbor" to the smaller video franchise holders, except that smaller franchise holders are not required to offer video service in areas where the cost to provide video service in that area is substantially higher than the average cost of providing video service in that telephone service area. We also explain below that GO 169 has already established a process for video franchise holders subject to Section 5890(c) to apply for case-by-case determinations of what are "reasonable" build-out requirements; we believe that this process adequately meets the needs of these video franchise holders subject to Section 5890(c).

2.1 Summary of Statutory Requirements

DIVCA requires state video franchise holders to provide non-discriminatory access to their video service. The requirements, for the larger franchise holders, are expressed in terms of (1) minimum percent of low-income households out of total households with access to the franchise holder's video service within specified periods, and (2) minimum percent of total households with access to the franchise holder's video service within specified periods, depending on the predominant video technology that the franchise holder is deploying. We describe these requirements in greater detail below.

Pub. Util. Code § 5890(a) sets forth the fundamental principle that a "cable operator or video service provider that has been granted a state franchise ... may not discriminate against or deny access to service to any group of potential residential subscribers because of the income of the residents in the local area in which the group resides." Pub. Util. Code § 5890(b)(1) and (2) then prescribes the conditions under which the larger state video franchise holders (over one million telephone customers) may meet the non-discrimination requirements of subdivision (a):

Similarly, DIVCA contains specific requirements for larger state video franchise holders regarding the pace at which they offer access to all households within the holder's telephone service area, depending on the predominant video technology deployed. We refer to this DIVCA provision as the build-out requirements, which are set forth in Pub. Util. Code § 5890(e)(1) and (2):

In contrast to the specific requirements for larger state video franchise holders, the smaller holders (those with fewer than one million) telephone customers in California are not given any formula for compliance with the non-discrimination or build-out requirements of DIVCA. Instead, the smaller holders are held to a standard of reasonableness, subject to determination by the Commission, as to both the non-discrimination and build-out requirements:

Holders or their affiliates with fewer than 1,000,000 telephone customers in California satisfy this section if they offer video service to all customers within their telephone service area within a reasonable time, as determined by the Commission. However, the Commission shall not require the holder to offer video service when the cost to provide video service is substantially above the average cost of providing video service in that telephone service area.

Pub. Util. Code § 5890(c).4

DIVCA also provides video franchise holders with the opportunity to file an application for an extension of time to meet the franchise development requirements summarized above. Under Pub. Util. Code § 5890(f)(1), after two years of providing service, a state video franchise holder may apply to the Commission for an extension of time to meet the requirements of Pub. Util. Code § 5890(b), (c) or (e); in other words, the application for an extension is available to any state video franchise holder, regardless of the number of its telephone customers. DIVCA sets forth the following terms regarding the grant of an extension:

Pub. Util. Code § 5890(f)(4).

2.2 Positions of the Parties

In short, as the foregoing summary shows, DIVCA effectively gives smaller state video franchise holders flexibility in how they demonstrate compliance with the non-discrimination and build-out requirements of Pub. Util. Code § 5890. In D.07-03-014, the Commission reserved to Phase II of the DIVCA rulemaking the consideration of compliance mechanisms to satisfy the requirements of Section 5890(c).5 One compliance mechanism, the "safe harbor," would consist of a development formula similar in principle to the statutory formulas for larger state video franchise holders. The other compliance mechanism would be "case-by-case," literally an application in which the franchise holder would justify the reasonableness of its development efforts based on the circumstances peculiar to its service area.

The assigned Commissioner issued a Scoping Memo on May 7, 2007 seeking comment on various issues. Among other things, the Scoping Memo invited the parties to submit specific proposals for the "safe harbor" and "case-by-case basis" compliance mechanisms to satisfy the requirements of Section 5890(c).

In response to this invitation, six parties commented on compliance mechanisms. These commenters are: a group of small, mostly rural local exchange companies participating jointly (Small LECs);6 California Cable and Telecommunications Association (CCTA); Joint Consumers,7 the Commission's Division of Ratepayer Advocates (DRA); Greenlining Institute (Greenlining); and SureWest TeleVideo.

The commenters differ sharply and fundamentally over the inferences to be drawn from the legislative distinction between larger and smaller state video franchise holders. Commenters representing the smaller telephone companies argue that DIVCA intends relaxed requirements for smaller franchise holders; these commenters propose compliance mechanisms that reflect such a legislative intent. Commenters representing the consumer and cable interests read the legislative intent differently; these commenters' proposals reflect more or less the compliance mechanisms for larger franchise holders while also taking into account the DIVCA provisions specific to smaller franchise holders (e.g., not obligated to offer video service in higher cost areas). Detailed summaries follow.

SureWest TeleVideo recommends that the Commission adopt the same safe harbor "benchmarks" as for the larger state video franchise holders but would double the timeframe within which a smaller franchise holder must meet those benchmarks:

 

Predominantly Fiber-Based Systems

  
 

Four Years

25% of Households

  
 

Ten Years

40% of Households

  

 

Non-Fiber-Based Systems

  
 

Six Years

35% of Households

  
 

Ten Years

50% of Households

  

SureWest TeleVideo, Opening Comments at p. 3. SureWest TeleVideo contends its safe harbor proposal recognizes the differences smaller franchise holders face relative to larger franchise holders, in particular, less access to capital. Id.

In reply to parties recommending that the statutory safe harbor apply to both larger and smaller state video franchise holders, SureWest TeleVideo argues that the small incumbent local exchange companies have far more diverse service areas and much less access to capital than an AT&T or a Verizon. From these differences, SureWest TeleVideo draws the conclusion that the Commission ought to adopt safe harbors to enable smaller franchise holders to "avoid questions about their pace of build-out [and] minimize the potential for additional Commission proceedings investigating compliance" with DIVCA. SureWest TeleVideo, Reply Comments at p. 2. SureWest TeleVideo also argues that if the Legislature had intended all franchise holders to be subject to the same build-out requirements, it could simply have included smaller franchise holders in Pub. Util. Code §§ 5890(b) and (e) but it did not do so. Id. at p. 3.

For the same reason, SureWest TeleVideo disputes DRA's argument that smaller franchise holders should be subject to DIVCA's non-discrimination standards for serving low-income households. SureWest TeleVideo contends that smaller franchise holders are not subject to the non-discrimination benchmarks set forth in Section 5890(b)8 and that the Commission may address discrimination concerns under Section 5890(a) through complaint/investigation processes. Moreover, according to SureWest TeleVideo, there are no specific build-out benchmarks for franchise holders with fewer than 1,000,000 telephone customers; there is only the requirement to build out their telephone service areas within a reasonable time, and even that requirement is qualified in that such holders need not build out areas where the cost to do so is high. Id.

SureWest TeleVideo further recommends that the state video franchise holder merely certify that it will comply with the non-discrimination and build-out requirements of Pub. Util. Code § 5890. Id. at p. 6. SureWest TeleVideo does not believe a case-by-case application should have to include a build-out plan. Instead, SureWest TeleVideo points to the monitoring provisions of GO 169 (Section VII.C.1), and asserts that if the Commission or a local government believes the applicant has not made reasonable progress in building out its service area, the Commission can open an investigation in which the burden of proof should be on the applicant to demonstrate satisfaction of the build-out requirements. Opening Comments at pp. 3-4; Reply Comments at p. 6.

Small LECs do not oppose adoption of a safe harbor for smaller state video franchise holders so long as it does not become the de facto standard for whether those holders have met DIVCA's build-out requirements. Small LECs, Opening Comments at p. 3. Small LECs request a case-by-case compliance mechanism that is identical to that proposed by SureWest TeleVideo; in particular, the smaller franchise holder would not have to propose a build-out plan at the application stage but would bear the burden of proof to demonstrate the reasonableness of its build-out efforts in any enforcement proceeding instituted by the Commission. Id. At pp. 3-4. The rebuttal arguments of Small LECs similarly mirror those of SureWest TeleVideo. See Small LECs, Reply Comments at pp. 2-5.

CCTA argues that "there is no rational basis for adopting a different or lower standard than that which the Legislature required for state franchise holders with more than 1 million telephone customers to comprise a safe harbor build-out requirement applicable to a telephone corporation with fewer than 1 million customers . . . This is particularly so when the DIVCA expressly provides a cost exemption, so that telephone companies with fewer than 1 million telephone customers are not required to offer video service in their telephone service areas where the cost to provide video service exceeds the average cost of providing video service." CCTA, Opening Comments at pp. 2-3.9

All three commenters representing consumer interests support using the statutory safe harbor provisions, namely, Pub. Util. Code § 5890(b) and (e), for all state video franchise holders.10 DRA notes that some smaller franchise holders may have a low percent of low-income households in their service, making difficult the attainment of the specific benchmarks set forth in Pub. Util. Code § 5890(b)(1) and (2). DRA proposes an alternative for satisfying DIVCA's non-discrimination requirement in this circumstance.11

Regarding the case-by-case compliance mechanism, DRA recommends the Commission treat this mechanism as a request for waiver of the build-out requirements, with the burden on the smaller franchise holder to demonstrate the need for the waiver. DRA, Reply Comments at p. 3. The waiver request would be a public process, with community meetings and presentation of supporting evidence on cost issues, technological options, and timelines. Id. at pp. 3-4. DRA would not require the franchise holder to undergo a public process, however, if the franchise holder is merely requesting an extension of time.12 Id. at p. 4.

Joint Consumers consider there is no justification for having both a safe harbor and a case-by-case compliance mechanism; in any event, Joint Consumers believe that a safe harbor should be rigorous. Joint Consumers, Opening Comments at p. 2. Any review process conducted by the Commission regarding either compliance mechanism should allow for public participation. Id. at pp. 3-4.

Greenlining argues that relaxed standards for smaller state video franchise holders would allow them to take advantage of the streamlined state franchising system without providing any benefit to DIVCA's target communities. Greenlining, Reply Comments at p. 2. Greenlining also argues against the case-by-case compliance mechanism, asserting that such a mechanism would take the Commission away from the ministerial role envisioned by the Commission for itself in its implementation of DIVCA. Id. at p. 4. Greenlining concludes that the existing DIVCA provisions allowing for requests for extension to comply and for exemptions from serving higher-cost areas are more than sufficient to cover smaller companies' concerns over excessive costs, limited resources, inability to access certain households, and other hurdles in the build-out process. Id. at p. 5.

2.3 Adopted Compliance Mechanisms for
Smaller State Video Franchise Holders

We agree with the commenters representing the smaller telephone companies that the Legislature intended in DIVCA to allow them more flexibility (relative to larger telephone companies holding state video franchises) in demonstrating compliance with DIVCA's build-out requirements. However, we do not need to establish different "safe harbors" for these video franchise holders to afford them flexibility. The flexibility that the smaller telephone companies seek is set forth within the four corners of the statute in the provisions that allow the smaller franchise holder to demonstrate compliance "within a reasonable time" based on its own telephone service area, and that exempt the smaller franchise holder from the build-out requirements in areas where the cost of providing video service is "substantially above the average cost of providing video service in that telephone service area." Pub. Util. Code § 5890 (c).

Upon careful review of the comments, we conclude that these provisions give precisely the flexibility that the Legislature intended. It would be arbitrary for us to create a special "safe harbor" for smaller franchise holders by adopting SureWest TeleVideo's proposal (twice as long a build-out as that allowed larger franchise holders under Pub. Util. Code § 5890 (e)). Even if we were to accept SureWest TeleVideo's assertion that smaller franchise holders lack the financial resources of larger franchise holders, SureWest TeleVideo offers no concrete support or evidence for the timeframes in the safe harbor mechanism it proposes.13

It is in the public interest for all holders of state video franchises to build out their systems so that service is available to consumers throughout the franchise area. We find that the more reasonable approach is to use the safe harbor provisions of Pub. Util. Code § 5890(e) for all state video franchise holders. All commenters on this issue except SureWest TeleVideo and Small LECs support this approach. Any smaller telephone company with a video franchise that considers the build-out requirements of Pub. Util. Code § 5890(e) infeasible has recourse to the case-by-case compliance mechanism established in GO 169.

Similarly, we extend the benchmarks set forth in Pub. Util. Code § 5890(b) regarding non-discriminatory service to low-income households to video franchise holders with fewer than one million telephone customers. Nothing in the record convinces us that these franchise holders subject to Section 5890(c) are not also required to comply with non-discrimination requirements in Section 5890(a), or that the benchmarks set forth in Section 5890(b) should not also be applied to these franchise holders when they are implementing a safe harbor build-out plan. However, as DRA notes, some franchise holders may have difficulty complying if the proportion of low-income households in the holder's service area is relatively low. In such cases, we will require the franchise holder to demonstrate that the percent of low-income households in its service area to which it provides access to video service correlates closely to the percent of all households provided access. For example, assume a state video franchise holder has 500,000 customer households in its service area, of which only 50,000 are low-income households. In this example, the franchise holder may not be able to meet the benchmarks in Pub. Util. Code § 5890(b) that low-income households constitute 25% or more of the households with access in a franchise holder's service area. We find that DIVCA's non-discrimination benchmarks are satisfied, under circumstances like those in the example, if the franchise holder provides access to low-income households in substantially the same proportion as total households. Thus, when the franchise holder is providing access to half of all households, it concurrently should be providing access to half of all low-income households in its service area.

We must reject Small LECs' proposal for the case-by-case compliance mechanism. Under the proposal, the smaller franchise holder would be exempt from any up-front franchise development requirement, whether in the statute, the Commission's regulations, or the holder's application. The smaller franchise holder, under Small LECs' proposal, would bear no obligation other than the burden of proof in any enforcement proceeding, whether initiated by the Commission or brought by complaint of a local government, that the holder was meeting the reasonableness requirement of Pub. Util. Code § 5890(c).

We agree with Small LECs that Section 5890(c) shows concern for the special circumstances of smaller franchise holders. However, we do not construe Section 5890(c) as mandating or even authorizing a kind of after-the-fact reasonableness review. When we endorsed the idea in D.07-03-014 of allowing a smaller franchise holder to devise its own build-out, we clearly expected the holder to tell us in advance what that built-out plan would be.14 It is equally clear from DIVCA that the Legislature expected objective milestones to be established and met for each state video franchise holder's build-out, regardless of the number of customer households in the holder's service area.

Our GO 169 already contains a case-by-case compliance mechanism, among other compliance options for smaller state video franchise holders. In relevant part, VI.B.1 of GO 169 provides:

With respect to build-out requirements pursuant to Pub. Util. Code § 5890(c), a State Video Franchise Holder . . . will be deemed to [comply] if it meets one of the following three conditions:

. . .

(3) The State Video Franchise Holder satisfies company-specific build-out requirements adopted by the Commission. To seek to satisfy this condition, a State Video Franchise Holder shall file an application with the Commission within the calendar year in which it applies for a State Video Franchise. This application shall specify how the State Video Franchise holder plans to offer Video Service to its telephone customers within a reasonable time. The application will launch a proceeding that will conclude with a vote of the full Commission.

Based on the comments, we believe these provisions give almost complete guidance. The additional guidance we set forth below follows closely from Pub. Util. Code § 5890.

First, the company-specific application should contain clearly stated build-out milestones. By definition, these milestones may differ from those set forth in DIVCA, but they must demonstrate a serious and realistic planning effort by the smaller state video franchise holder. Second, the company-specific application should clearly state the constraints affecting the holder's build-out, with particular attention to the types of constraints noted in DIVCA itself.15 Third, to the extent that there are areas within the smaller franchise holder's service area that are substantially higher cost than average to provide video service, those substantially higher cost areas should be clearly delineated and explained in the application. See Pub. Util. Code § 5890(c).

2 For purposes of this decision, we refer to video franchise holders with more than 1,000,000 telephone customers in California as the "larger" franchise holders, and those with fewer than 1,000,000 telephone customers as "smaller" franchise holders.

3 In Pub. Util. Code § 5890(e)(3) and (4), DIVCA provides relief for a larger State video franchise holder that has difficulty meeting the 40% or 50% build-out requirement, as appropriate. The holder is not required to offer access to that percent of households until two years after at least 30% of the households with access to the holder's video service subscribe to it for six consecutive months. Pub. Util. Code § 5890(e)(3). If the 30%/six consecutive months subscription level is not achieved within three years after the holder begins providing video service, the holder may request a delay from the Commission in meeting the 40% or 50% build-out requirement, as appropriate, until the subscription level is reached. If the request is supported by sufficient documentation, the Commission must grant the delay until such time as the holder reaches the 30%/six consecutive months subscription level. Pub. Util. Code § 5890(e)(4).

4 The Commission indicated in D.07-03-014 that it expected the franchise development requirements of DIVCA would have little or no impact on incumbent cable operators. As the Commission explained, "we interpret [the statute] to call for requirements only to the extent that a [holder] does not `offer video service' to all of its telephone customers within its `telephone service area.' If all of a [holder's] telephone customers have access to its video service (as is typically the case for incumbent cable operators), then we need not impose any further obligation on the holder." The Commission required such a holder to submit an affidavit of compliance with this condition. See D.07-03-014, mimeo, text accompanying notes 608-09 (emphasis in original).

5 D.07-03-014, Ordering Para. 22.

6 Small LECs consist of Calaveras Telephone Company, Cal-Ore Telephone Co., Ducor Telephone Company, Foresthill Telephone Co., Global Valley Networks, Inc., Happy Valley Telephone Company, Hornitos Telephone Company, Kerman Telephone Co., Pinnacles Telephone Co., The Ponderosa Telephone Co., Sierra Telephone Company, Inc., The Siskiyou Telephone Company, Volcano Telephone Company, and Winterhaven Telephone Company.

7 Joint Consumers consist of California Community Technology Policy Group, Latino Issues Forum, and The Utility Reform Network (TURN). TURN responded separately to the Proposed Decision.

8 SureWest TeleVideo, Reply Comments at 3 (contending that DRA ignores the law and incorrectly applies the standards of Section 5890(b) for low-income household benchmarks to franchise holders with fewer than 1,000,000 telephone customers).

9 CCTA tries to bolster its argument with many assertions about the experience of incumbent cable operators in building out their video franchises. The Opening and Reply Comments of CCTA, SureWest TeleVideo, and Small LECs also contain much debate over the relative advantages and disadvantages of incumbent cable operators and incumbent local exchange companies in seeking to provide video service.

10 See Joint Consumers, Opening Comments at pp. 1-2; DRA, Reply Comments at pp. 1-2; Greenlining, Opening Comments at pp. 1-2.

11 See DRA, Opening Comments at p. 3. DRA's proposal utilizes the percent of total low-income households provided access, rather than the percent of all households. We address the problem noted by DRA and adopt what we believe is a similar solution. See section 2.3 below.

12 Presumably, DRA is referring to an extension request under Pub. Util. Code § 5890(f).

13 Under that proposal, depending on the predominant video technology deployed, a smaller franchise holder would be in compliance by providing access to 50% or less of its customer households 10 years after it begins providing video service.

14 "If it does not meet any of our safe harbor conditions, a State video franchise holder subject to Pub. Util. Code § 5890(c) shall file an application with the Commission that proposes `reasonable' build-out requirements. The application shall be filed any time in the calendar year in which [the holder] applies for a state video franchise." D.07-03-014, mimeo, text accompanying note 610. (Emphasis added.)

15 See¸ for example, Pub. Util. Code § 5890(f)(3), regarding Commission review of a franchise holder's failure to satisfy build-out requirements. In such review, the Commission is required to consider factors that are beyond the holder's control, including:

(i) The ability of the holder to obtain access to rights-of-way under reasonable terms and conditions.

(ii) The degree to which developments or buildings are not subject to competition because of existing exclusive arrangements.

(iii) The degree to which developments or buildings are inaccessible using reasonable technical solutions under commercially reasonable terms and conditions.

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