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from: Forbes

TV: The Bells’ Next Battle

From Forbes, January 24, 2007

Federal Communications Commission chairman Kevin Martin and his fellow commissioners will get their first taste of life under a Democratic majority on Feb. 1.

Martin and his cohorts are scheduled to appear before the Senate Commerce Committee, where they’ll have to address, among other issues, why they voted to override certain state and local laws that govern applications by AT&T and Verizon to sell TV service and to require local governments to act on those applications within three months. (Never mind that the FCC itself took nine months—months longer than it was supposed to—to act on AT&T’s recent application to take over BellSouth.)

The congressional grilling will be of interest to investors in more than just AT&T and Verizon. Comcast, Time Warner, Cablevision , Liberty Global and other entrenched cable providers have a stake in the future of this disputed regulation. So do TV viewers everywhere. Cable rates have risen 93% since 1990, and consumers should benefit from more competition.

Whether the new FCC rule will stand up to legal and political challenges remains to be seen. Lawsuits from towns loom. Newly powerful Democrats don’t like what they consider an infringement on their own power. Moreover, 10 states have established their own fast-track processes for TV applications and don’t like the FCC meddling either.

“The only certainty in the FCC action is that this gives AT&T and Verizon more leverage in negotiating with cities,” says Stifel Nicolaus analyst Blair Levin. “From there, it is very unclear on how it proceeds. There are a lot of variables: cable companies, the legalities.” Like many FCC decisions, the matter may drag on for years in courts.

After the FCC announced the rule in December, then-incoming House Commerce Committee Chairman John Dingell, D-Mich., fired off a contentious letter (or “Dingellgram” as they’re known in Washington) to Martin characterizing the action as “extremely inappropriate” and asked for specifics on why the FCC should usurp congressional authority. Martin, the 40-year-old, boyish-looking chairman and ally of the bells, sent back an eight-page explanation citing Supreme Court cases and telecom laws. (No word yet on when Martin and his fellow commissioners will come before Dingell’s committee.)

Last year, the House passed federal legislation that would have granted phone companies the ability to sell TV service without getting permission town by town. But the Senate never moved on the bill, and now, with Democrats in power, such legislation is unlikely.

Outside of Washington, phone companies have been far more successful: AT&T has won reform in nine states out of its 22-state territory and in 17 other cities, while Verizon has won reform in New Jersey and has 600 video agreements with cities and states allowing 1.2 million of its customers to get TV service. Other states such as Illinois, however, haven’t been so accommodating.

For example, in Naperville, Ill., AT&T walked away after five months of contentious negotiations. City officials wanted the San Antonio company to offer the service over fiber-optic lines to the whole community quickly because, they said, a state law requires that AT&T not get a better deal than competitor Comcast, which must provide service everywhere. City officials feared that Comcast, citing the “level playing field” state law, would file suit or withhold the 6% tax the cable company collects from consumers and pays over to the towns. AT&T, however, insisted it should be allowed to meet the coverage mandate through a mixture of satellite and fiber-optic lines.

AT&T and Naperville also disagreed over the city’s insistence that AT&T disclose where it wanted to put 200 closet-sized boxes it needed to support the TV service. Earlier, the Illinois towns of Carpentersville, Wheaton, Geneva, North Aurora, Roselle and Itasca all imposed moratoriums on those boxes and told AT&T they couldn’t be built without a local franchise agreement. AT&T sued the towns. The case sits before a judge on leave.

Meanwhile, Comcast has contacted the towns about the AT&T suit, says Jim Knippen, the attorney representing the cities. (The implication being that if the towns cut a good deal with AT&T, Comcast will sue them.)

The new FCC rule is a direct threat to the towns’ and Illinois’ right to set their own laws, Knippen says. “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people,” reads the 10th Amendment of the Constitution.

The FCC rule would supersede local laws such as Illinois’ “level playing field” statue. Martin argues the commission had the authority to act under the 1934 telecommunications law (as interpreted by court decisions) because it had found that an “unreasonable barrier to entry” existed for AT&T, Verizon and other telcos entering the TV market.

The FCC is currently collecting comments on its proposed order, and it could take effect later this year if it is not held up in court.

FCC Commissioners Jonathan Adelstein and Michael Copps, both Democrats, dissented on the opinion, citing lack of jurisdiction. “The sum total here is an arrogant case of federal power riding roughshod over local governments. It turns federalism on its head,” Adelstein says. “This item blatantly and unnecessarily tempts the federal courts to overturn this clearly excessive exercise of the limited role afforded to us by the law,” he added in a statement.

The irony here is that consumers, the FCC, Congress and the Illinois towns all want the same thing: more competition for the cable companies.