Subject: [NEXTEL-1] Cole, Raywid & Braverman, L.L.P.-Attorneys at Law

From: Marcel <[email-masked]>
Date: Sun, 05 Jan 2003 12:18:40 -0500

Cole, Raywid & Braverman, L.L.P.

Attorneys at Law

2361 Rosecrans Avenue, suite 110

El Segundo, CA  90245-5200

Telephone: (310) 643-7999

Fax: (310) 643-7997

M E M O R A N D U M

TO:                  LSI Seminar Participants

FROM:            Jeremy H. Stern, Esq.

William F. Bly, Esq.

DATE:             September 9, 2002

.

RE:                   MuniToons: The Folly of Municipal Ownership of Broadband Facilities

I.          Background on Municipal Ownership of Cable and Telecommunications
Systems

The roots of municipal ownership of cable systems trace back to the early days of
the cable industry, when cable
pioneers began laying down cable and charging a fee for television service that was
otherwise provided for free from
over-the-air broadcasters. In that era when satellite service had not yet been
introduced, and “CATV” was just a fledgling
industry, municipal ownership provided a means for delivering television signals to
largely rural areas that had poor broadcast
reception and insufficient subscriber density to attract investment from private cable
companies.(1)  Municipal ownership thus
provided a means for delivering television service to homes that otherwise would have
virtually no service at all.

Over the last twenty years, however, the industry has changed dramatically, with
CATV evolving from a mere
antenna service in rural America to a source of new networks and original programming
available to rural and urban
customers.  The changes in the last decade alone have been even more stunning. with
the launch of Direct-To-Home satellite
service — one of the most highly successful consumer product launches ever, and with
the creation of “broadband” cable
providing advanced digital services, such as digital television, high-speed internet
service, and telephony.  In the midst of this
transformation, Congress passed the Telecommunications Act of

(1)  A survey conducted by the National Civic Review reported that in 1981
twenty-eight municipally owned cable systems were in operation.
Of these twenty-eight communities, seventeen had fewer than 2,500 residents and
twelve had fewer than 1,000 residents.  Carl R. Ramey, The
Cable Act and Municipal Ownership: A Growing First Amendment Confrontation, 46
Fed Comm. L.J. 147, 156 (1993) (citing David W.
MacKenna, The Cabling of America: What About Municipal Ownership?, Nat’l Civic
Rev. 307, 310 (1981)).

Cole, Raywid & Braverman L.L.P.

Memorandum To: LSI Seminar Participants

September 9, 2002

Page 2

1996, which opened the door to competition in the telecommunications industry and
added fuel to the boom and bust cycle
of the l990s and early part of this century.

During the heyday of the Post-1996 Act boom cycle, municipalities began
articulating new arguments for entering the
telecommunications industry, and indeed many large urban municipalities entered the
market.(2)  They saw a new “gold rush”
in telecommunications and wanted in on the action.  Thus, many began to view
municipal ownership as a potentially valuable
source of additional revenue and a logical extension of municipal ownership of
traditional utilities, such as water, gas and
electric.  They also believed that they could speed the delivery of new services to their
residents by deploying necessary
infrastructure themselves, rather than waiting for industry to do it for them, and inject
new competition into the industry. (3)

Is there any basis for these new arguments for municipal ownership?  Are they
based on fact, or mere folly?  As set
forth below, the evidence from cue studies of municipal ownership suggests the latter.
Moreover, municipal ownership of
cable facilities as a means for providing competition in the cable television industry
raises serious fairness and First
Amendment concerns.  Is it fair for an industry regulator to compete against the entities
it regulates?  Is ownership by the
government of an increasingly important vehicle for delivering media content consistent
with the parameters and intent of the
First Amendment?  The answer to both of these questions is no.

(2)  In recent years, larger communities have gotten into the act, with municipal cable
systems now in operation or under development in
larger cities, including Gainesville, Florida and Tacoma, Washington. and in suburban/
exurban locations like Braintree, Massachusetts and
Newnan, Georgia.  Jeffrey A. Eisenach, Ph.D. Does Government Belong in the
Telecom Business?, page 7, Progress on Point, Release 8.1
(Progress and Freedom Foundation January 2001) (“Eisenach Report”). Municipal
utilities are also beginning to provide telecommunications
services, such as fiber leasing, local dial tone and long distance telephone service.  As
of 2000, 58 municipal utilities are leasing fiber. 18 are
providing local telephone service, 10 are offering long distance service, 61 are offering
ISP services, and 32 are providing high-speed data
service. Id

(3)  One study published in 1997 and updated in 1998 provided the following three
reasons for municipal entry into the market: (1) fill in for
lack of quality service at an acceptable rate from the incumbent provider; (2) provide
an economic benefit to the community by generating
revenue to fund other services, and/or providing an incentive for new business
development and (3) provide a new source of revenue for the
utility company. Municipal Overbuilders: What Can You Do About Them, CATA
Brief, 1997-8, page 2 (November 1997, Revised as of
October 21, 1998) (“CATA Brief”).  Another study conducted by two professors at
the University of Denver provided the following
rationales for municipal entry into the telecommunications industry: (1) provide
telecommunications infrastructure to enhance the
municipalities electric power utility through demand side management; (2) provide
additional revenue streams to replace revenues lost
through the deregulation of the electric utility industry; (3) ensure that the community
receives advanced telecommunication services; and
(4) inject competition in the local telecommunications industries.  Ronald J. Rizzuto and
Michael O. Wirth. Costs, Benefits, and Long-Term
Sustainability of Municipal Cable Television Overbuilds, page 1 (GSA Press. Denver,
CO 1998) ( ‘Denver Report”).

Memorandum To: LSI Seminar Participants

September 9, 2002

Page 3

II.        Can Municipalities Really Do More For Less?  The Truth About the Alleged
Benefits of Municipal
Ownership.

Those that argue in favor of municipal ownership of broadband facilities tend to
view those systems as a logical
extension of other municipally-owned utilities, such as gas, electric or water,(4) or as a

source of new general fund
revenues.(5)  They also view telecommunications infrastructure in the same manner as
traditional infrastructure such as roads
and highways.(6)  In so doing, these advocates often overlook many of the unique
aspects of the business of providing
broadband services.  For example, providing cable television services does not merely
involve stringing up a cable plant and
turning on a switch and billing customers.  The operator must determine what content to
provide on its system (a task for
which government is ill-suited) and then must negotiate sophisticated retransmission
consent agreements with content
providers in order to obtain content for the system.  Large cable operators are able to
promise content providers a large
subscriber base, and thus have the ability to obtain more favorable carriage terms than
municipally-owned systems.
Moreover, large cable operators benefit significantly from economies of scale that allow
them to spread administrative and
operating costs over a larger revenue base.

In addition, municipalities that take customers away from the incumbent cable
operators lose franchise fees (five
percent of gross revenue) that the incumbent provides the City.  And if the municipality
ends up buying out the incumbent,
which has happened in some locations,(7) the municipality loses significant public
benefits provided by the incumbent, such as
grants for Public, Educational and Governmental Access, I-Nets, and taxes.
Furthermore, from a state tax perspective,
municipal ownership has the effect of robbing Peter to pay Paul.  Municipalization of
telecommunications facilities removes
private sector assets from the tax base, thereby impacting state funds available to
county governments and school districts.
Ultimately, the taxpayers are harmed by this.

Thus, there are significant disadvantages to municipal ownership of broadband
systems.  In fact, most studies of
municipally-owned broadband facilities show that in most circumstances municipal
ownership is a poor public policy and
economic choice.  Thus, even in situations where the municipality charges lower rates
than the incumbent, it comes at the
expense of the

(4)  See. e.g. Carlson. Steven C.. “A Historical, Economic, and Legal Analysis of
Municipal Ownership of the Information Highway”.‘25
Rutgers Computer & Tech. L.J. (1999).

(5)  Municipalization and Subsidized Utility Competition — The Taxpayers
Perspective, Cal-Tax Digest (California Taxpayer’s
Association, April 1997) (“Cal-Tax Report”).

(6)  Id.

(7)  See. e.g. Rizzuto, Ronald J.. Municipal Telecommunication Overbuilds: The Track
Record and New Incarnations, page 8 (University of
Denver, February 28, 2002) (“Denver Report Update”).

Cole, Raywid & Braverman L.L.P.

Memorandum To: LSI Seminar Participants

September 9, 2002

Page 4

financial health of the municipal utility or taxpayers, who must shoulder the burden of
filling the gap between costs and
revenues.

Denver Report

In 1998 two professors from the University of Denver completed a case study of
four municipally-owned cable
systems.(8)  This report concluded that municipal ownership of cable systems was
generally not a good business decision.
First, it concluded that none of the four systems that were analyzed were sustainable
over the long run because each currently
has, and has had cash flow gaps.  In order to be sustainable each would have to either
commit permanent subsidies for their
cable operation or increase cash flow by increasing rates or subscribership, or by
finding a new revenue stream.(9)  Second,
the study found that all but one of the systems (Cedar Falls) would have to upgrade its
system to remain competitive with
DBS in their core video business.(10)  Third, the study found that the systems studied
appeared to create rate savings for their
customers, but that these savings were, in reality, an illusion:

They are an illusion because as noted earlier, the municipal cable system is not
financially
self-sustaining.  These municipal power companies have had to subsidize
operating expenses
and capital expenditures, provide interest-free loans and levy taxes in order to
keep cable
rates low.  If municipal power companies eliminated the subsidies by raising
cable rates, the
cable rate savings would be reduced substantially, particularly in Glasgow,
Paragould and
Cedar Falls.

In Negaunee, the elimination of subsidies would have only a small impact on
cable rate
savings.  The hidden cost in Negaunee is deferred technological reinvestment.
Instead of
reinvesting to modernize the plant, Negaunee has kept cable rates low.  As a
consequence,
Negaunee has only a 35-channel analog system with two premium channels.
There is no
pay-per-view, digital video or data/Internet access capability. (11)

(8)  Denver Report. supra. at note 3.

(9)  Denver Report at 4.

(10)  Id

(11)  Id at 5

Cole, Raywid & Braverman L.L.P.

Memorandum To: LSI Seminar Participants

September 9, 2002

Page 5

• Updated Denver Report

Earlier this year, Dr. Rizzuto provided an update to the Denver Report in a
PowerPoint presentation he submitted at
the Great Lakes Cable Expo in Indianapolis on February 28, 2002. (12)  Mr. Rizzuto
divided his analysis into two categories:
(1) Traditional Municipal Cable Telecommunications Overbuilds (13); and (2) New
Types of’ Telecommunications
Overbuilds. (14)  With regard to the first category, Mr. Rizzuto concluded, among
other things, that municipally owned
telecommunications systems have generated “cable rate savings,” but that the rate
savings are not sustainable and, as he
concluded in his earlier report, in fact an “illusion”:

Municipal power companies are willing to incur on-going negative cash flow,
escalating debt
levels, and increasing community taxes, additional subsidies and/or reduced
reinvestment in
telecommunication technology in order to maintain the illusion of large cable
rate savings.

Mr. Rizzuto further concluded that in situations where the municipality prices its
services very low, the incumbent
cable operator often ends up selling out to the municipality, (15) and that in moderate
pricing situations the municipality
generally does not generate enough revenue to maintain a state of the art system.

The new telecommunication overbuilds that Mr. Rizzuto analyzed had not been in
operation long enough for Mr.
Rizzuto to reach definitive conclusions about their profitability; however, Mr. Rizzuto
was able to provide some general
comments.  First, Mr. Rizzuto commented that a “data only” model is not likely to be
viable as a stand-alone business.
Second. Mr. Rizzuto commented a municipal system providing multiple revenue
systems “looks like a commercial overbuilder
strategy” and that this strategy “is still a work in progress.  Third, Mr. Rizzuto
questioned whether a municipality will have the
proper discipline to manage the business. e. g. to make business decisions rather than
political decisions.

(12)  Denver Report Update. supra. footnote 6.

(13)  “This category included four types of systems (1) video only (low pricing), (2)
video and data (low pricing), (3) video only (moderate
pricing),and (4) video and data (moderate pricing)  Denver Report Update, supra, p 3.

(14)  “This category included a case studies of three new systems: (1) Braintree,
Massachusetts (data first, then video); (2) Glenwood
Springs, Colorado (data only); (3) Coldwater, Michigan (video, data, voice and
dial-up). Denver Report Update. supra, page 18.

(15)  “Denver Report Update, page 16.

Cole, Raywid & Braverman L.L.P.

Memorandum To: LSI Seminar Participants

September 9, 2002

Page 6

• CATA Brief

A study prepared by the Cable Telecommunications Association also analyzed
several municipally-owned
telecommunications systems and concluded that none had been succcssful.

No city has successfully operated its own system for more than five years
without increased
taxes or financial contributions from public funds. When municipal systems
incur
unanticipated expenses or fail to meet revenue expectations, the city has to
make up the
difference. Most often, this is accomplished by raising local taxes, issuing bonds
obligating
city revenues or, if’ the service is provided by a local utility, such as the power
company,
authorizing it to charge higher rates for its service in order to cover the cost of
the cable
service. The result is a “cable television tax” that is paid by everyone in the
community
whether they are customers of the municipal system, customers of the
incumbent or
competitive cable system, or aren’t cable customers at all) (16)

Along these lines, the CATA brief further quoted Barry Orton, a professor at the
University of Wisconsin-Madison
and consultant for many cities as stating, “Most cities, when push comes to shove, find
(municipal ownership) is too much
work and it’s too much money.” (17)  Another city consultant, Al Powers of Carlisle,
Iowa “warns cities to be aware of the
risks of large, up-front costs, with no guarantee of recovery, before embarking on
municipal ownership in competition with an
incumbent operator.”(18)

• California Tax Payers Association Study

A study published by the California Tax Payers Association (“Cal-Tax”) also
questioned the financial viability of
municipal ownership.  In particular, it cited a study conducted by Media Connections
Group, a private consulting firm
engaged by the City of Milpitas, California, which stated that the municipal network
envisioned by the City “could not be
operated successfully in a competitive environment by a commercial partner (of the
City’s) unless very aggressive penetration
levels are assumed for core telephone and/or cable services.”(19)

(16)      CATA Brief. Supra, at 3.

(17)      Id

(18)      Id.

(19)      Cal-Tax Report, supra, page 13.

Cole, Raywid & Braverman L.L.P.

Memorandum To: LSI Seminar Participants

September 9, 2002

Page 7

The Cal-Tax Report noted that lower costs of municipal power derive from
subsidies, not more efficient operations.
The subsidies provided to government-owned electric utilities include: (1) exemption
from federal and state income taxes; (2)
exemption from other taxes (included property, gross receipts and excise taxes); (3)
the ability to secure tax-exempt debt
structures; (4) access to low-interest government loans and loan guarantees; and (5)
preferential access to low-price federal
power.(20)  Indeed, one study estimated that removal of the tax and interest subsidies
would increase municipal power rates
by 16 to 17 percent.(21)  Tax payers are ultimately harmed because these subsidies
cost money — their money.

CALNET

CALNET was a state-owned telecommunications system designed by the State of
California to connect state
agencies and other public entities with modem telecommunications services while saving
taxpayers money.(22)  The State of
California lost so much money on CALNET, however, that it privatized the system in
1998.(23)  In 1997, Lee Kerscher,
California’s deputy director for telecommunications and networks stated to a reporter,
“We’ve had continued financial losses
associated with Calnet. Suffice it to say the legislature when establishing Calnet
expected to achieve significant savings and
those savings have not occurred.”(24)  The CTPA reported the following conclusions
reached by a December 1996 strategic
plan prepared by the California Department of Information Technology, which
recommended divesting the state owned
system.  CALNET: (1) “Owning and operating telecommunications networks are
neither core competencies nor core
responsibilities of the state”; (2) “State-owned network infrastructures have proven
costly and cannot keep pace with the
rapid developments in telecommunications technology”; and (3) “The inability of
CALNET to meet, at competitive cost, the
service requirements of…state agencies.”(25)

III.       The Regulator as Competitor — Is this Fair?

Aside from questions regarding the financial viability of municipal ownership, there
are serious questions regarding the
fairness of having a municipality, which has regulatory authority over broadband
systems, compete with the entities it
regulates.  These concerns become even

(20)  Cal-Tax Report, pages 5-6.

(21)  Id. (citing a 1994 study done by Putnam, Meyers & Bartlett. Inc. for the Edison
Electric Institute.

(22)  Eisenach Report, page 14.

(23)  Id.

(24) Eisenach Report, page 14 (citing Arielle Emmen, “John Thomas Flynn’s California
Network Nightmare,” Civic.com (April 1997) at
www.fcw.com/civic/articles/1997/CIVIC.040197_21.asp)

(25)  Cal-Tax Report at 14.

Cole, Raywid & Braverman L.L.P.

Memorandum To: LSI Seminar Participants

September 9, 2002

Page 8

greater considering that many municipalities have offered artificially low rates at the
expense of the taxpayers and the financial
health of the municipal utilities, and that in those situations the incumbent cable
operator
has often sold out to the
municipality.(26)

A.        Overview of Municipal Regulatory Authority

A municipality has extensive regulatory authority over a cable television
system.(27)  For example, a municipality is
entitled to require a cable operator to enter into a franchise agreement that specifies
the
terms and conditions under which the
cable operator may access the public rights-of-way.”28  Franchise agreements may
require the cable operator among other
things, to pay franchise tees in an amount up to 5% of gross revenues; dedicate
channels on their system for public,
educational and governmental (“PEG”) access; make payments for PEG facilities and
equipment; operate PEG studios; wire
and serve public buildings and schools; post performance bonds; obtain insurance;
provide detailed reports of its operations,
and comply with customer service obligations.  Cable operators may be fined for failing
to comply with certain provisions of a
franchise agreement, and serious breaches may be grounds for termination of the
franchise, thereby terminating the operators’
right to own and operate the system.  Cable operators also may be required to receive
permission from a franchising
authority to transfer the franchise — for example, upon a sale or merger — and must
periodically renew their franchises.

A municipality has significantly less regulatory authority over non-cable
telecommuni-cations services; however, the
municipality still has authority to require permits (or use of the rights-of-way, and may
own the poles that are leased to the
cable companies. Moreover, municipalities frequently argue that they have authority to
regulate customer service for
non-cable services, and in recent years it has been commonplace for local regulators to
exceed their authority over
telecommunications companies, by attempting to impose franchise like requirements on
telecommunications companies that
seek use of the public rights-of-way.29

(26) Denver Report Update, pages 14-16,

(27) See Communications Act of 1934, as amended. 47 U.S.C. 541.549.

(28) Id at 541.

(29) One such situation was litigated in City of .Auburn v. Qwest Corp.. 247 F.3d
966, superceded on rehearing. 260 F.3d 1160 19th Cir. 2001).
cert denied City of Tacoma v. Qwest Corp., 2002 U.S. LEXIS 232, 122 S. Ct. 809
(2002). In that case, Qwest challenged the requirements
contained in telecommunications ordinances adopted by several Washington
municipalities, including the Cities of Auburn. Olympia and
Tacoma, on the grounds that they violated state and federal limitations on municipal
franchising of telecommunications providers. In the
ordinances, which are typical of those advanced by municipal consultants nationwide,
the municipalities sought to require
telecommunications providers to: file an application containing detailed information
unrelated to the rights-of-way:  negotiate certain terms of
the franchise with the cities; undertake extensive reporting and approval processes for
transfers of ownership and stock; provide the
municipalities with network capacity and offer the municipalities favorable rates. The
Ninth Circuit’s opinion provides the most authoritative
statement to date regarding the limitations on municipal telecommunications franchising.
The court held that Section 253 of the
Communications Act is a “virtually absolute” preemption on municipal franchise
requirements.  Section 253’s “purpose is clear—

Cole, Raywid & Braverman L.L.P.

Memorandum To: LSI Seminar Participants

September 9, 2002

Page 9

B.        Anti-Competitive Implications of Municipal Ownership

As any person involved in the franchising of cable systems knows, a
municipality’s regulatory authority is significant.
The municipality may dramatically add to the cost of providing service, micromanage
customer service, and threaten
continued operation of a system by invoking breach proceedings and imposing
unreasonable demands during transfer and
renewal proceedings. Thus, when a municipality itself enters the broadband market, it
has the power and strong incentive to
disadvantage the incumbent and favor itself.  The municipality also has the power to
undercut the incumbent’s rates at the
expense of the municipality’s tax payers or municipal utility.  This can, and often has,
led to the municipally-owned utility
driving out the incumbent.30  Consequently, municipal ownership raises serious
due-process concerns.

At present, few courts have considered the implications of municipal ownership on
a company’s due process rights.
The issue was considered, however. in at least one case - Warner Cable
Communications, Inc. v. City of Niceville.31  In
that case, the court denied Warner Cable’s due process claim on ripeness grounds, in
that the company had not pointed to
any tainted decisions that implicated its due process rights.  The court did not,
however, “foreclose the possibility that the
City’s dual role as Warner’s regulator and competitor might, in particular circumstances
give rise to a valid due process
claim:32  In fact, the court expressly noted that there might be some circumstances that
would give rise to a valid claim:

If a dispute rises in which the City is called upon to be “complainant, jury,
judge and “executioner,” Cruz v.
Ferre, 755 F.2d 1415, 1422 (11th Cir. 1985) (quoting Cruz v. Ferre, 571 F.
Supp. 125, 133 (S.D. Fla.
1983)), there may exist an intolerably high risk of self-interested, unfair
governmental action, particularly since
the City’s competitor in this case is a first amendment speaker.  We recognized in
Cruz that, because of the
“potentially great impact upon first amendment rights, regulation of communicative
activity must adhere to more
narrowly drawn procedures than regulation of ordinary communicative activity.”33

certain aspects of telecommunications regulation are uniquely the province of the
federal government and Congress has narrowly
circumscribed the role of state and local governments in this arena.”  Accordingly, the
court found that Section 253(c) “saves” only those
municipal requirements that are “directly related to management of the rights-of-way.”

(30) Denver Report Update, page 16.

(31) 911 F.2d 634 (11th Cir. 1990).

(32) Id. at 642.

(33) Id.

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Memorandum To: LSI Seminar Participants

September 9, 2002

Page 10

Moreover, at least one court has considered the anti-competitive implications of a
municipality tying provision of one
service to another.  For example, in United States v. City of Stillwell,34 the court
prohibited the City of Stillwell,
Oklahoma from requiring purchase of electric service as a condition of receiving water
or sewer service.  The case arose out
of a complaint filed by the United States, which alleged that the city was involved in an
illegal tying of services.  Ultimately, the
city consented to entry of judgment without trial or adjudication.  Pursuant to the
judgment, the city was “enjoined and
restrained from requiring any consumer of electric energy to purchase retail electric
service.  As a condition of receiving water
or sewer service...”35  The city was also ‘enjoined and restrained from denying,
withholding, or delaying any service, license
or permit, or otherwise threatening, discriminating or retaliating against any person that

has not agreed to purchase or does
not purchase electric service...unless (the) reason for such conduct is unrelated to such
person’s choice of retail electric
provider.”36

Another situation involving a City’s anti-competitive conduct arose in USA Media
Group v. Truckee Donner.37
That case involved a situation in which a cable company was hindered in upgrading its
plant to provide high speed Internet
access because the City of Truckee Donner made it difficult for the cable company to
obtain access to the rights-of-way and
enter into pole attachment agreements. Coincidentally, or maybe not so coincidentally,
the city’s municipally- owned electric
utility also had plans to provide high speed Internet access. At present, the case is
still
pending and motions for summary
judgment are scheduled to be heard this fall.  This case illustrates the potential for
anti-competitive behavior that exists when
the government owns and controls essential facilities.

Finally, numerous courts have held that a cable operator’s franchise may not be
taken away, or not renewed, without
affording the cable operator due process.38  Under this case law, it would seem to be
a violation of the incumbent’s due
process rights if a municipality operates a competitive system in a manner that
disadvantages the incumbent and thereby
drives the incumbent to sell-out to the municipality.

(34) 1998 U.S. Dist. LEXIS 18203 (E.D. OK November 5. 1998).

(35) Id at 3.

(36) Id

(37) ‘ Case No. 99-CV-2315 (E.D. Cal November 22.1999).

(38) “See. e.g. City of Issaquah v. Teleprompter Corp., 611 P.2d 741 (1980);
Teleprompter of Erie. Inc. v. City of Erie, 537 F. Supp 6 (W.D. Pa.
1981); Three Rivers Cablevision v. City of Pittsburgh, 502 F. Supp 1118 (W.D. Pa.
1980)(same): Birmingham Cable Communications. Inc v.
City of Birmingham, 1989 U.S. DISL LEXIS 7475 (N.D. Ala. 1989).

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Memorandum To: LSI Seminar Participants

September 9, 2002

Page 11

If a municipality does operate a system in an unfair manner that disadvantages the
incumbent, one option for the
incumbent, other than filing a due process claim or First Amendment Claim (as
discussed below), is to seek a modification of
its franchise under Section 625 of the Cable Act.39  Under so-called “commercial
impracticability provisions of Section 625,
a cable operator is entitled to demand a reduction in its existing franchise obligations
if
circumstances change in an
unexpected manner.  Such an application resulted in litigation in Naperville, Illinois.40
In that case, when Naperville issued a
more favorable franchise to an overbuilder — Ameritech New Media — the federal
district court ruled that the incumbent
was allowed to suspend access studio support, franchise fees, and other franchise
obligations. Significantly, once a
modification request is flied, the operator can begin implementing the proposed
modifications immediately. 41

IV.       First Amendment Implications of Municipal Ownership

Municipal ownership of broadband facilities implicates the First Amendment to
the extent that the municipality acts in
a manner that favors itself over the incumbent cable operator. Under well-settled law, a
content-neutral government
regulation that results in an incidental burden on First Amendment freedom must be
within the constitutional power of the
Government, further an important or substantial governmental interest, be unrelated to
the suppression of free expression, and
restrict no inure speech than is essential to the furtherance of that interest. 42

Applying this standard, a court recently held that a franchising authority may not
exercise its regulatory authority in an
ad hoc manner that fails to restrict possible arbitrary conduct. 43 Similarly, another
court has held that the First Amendment
requires a city to set a content neutral, non-discriminatory fee for the cable television
franchise and prevents use of the fee as
a vehicle for selecting a preferred operator.44   Still another court has held that a
franchising authority may not impose a
policy that has the effect of permitting only one company to operate a cable franchise in
the franchise area.45   Under this
case law, a municipality would clearly

(39) 47 U.S.C. 545

(40) See Cable TV Fund 14-A. Ltd. v. City of Naperville.  1997 WL 433628.24
(ND. Ill 1997)

(41) “See Tribune United Cable of Montgomery County v. Montgomery County, 784
F.2d 1227 (4th Cir. 1986; Cablevision Systems Corp v.
Town of East Hampton, 862 F. Supp. 875, 887-88 (ED.N.Y. 1994); and Cable TV
Fund 14-A Ltd.. v. City of Naperville. 1997 WL 433628, 8-10
(N.D. Ill 1997).

(42) See Charter Communications, Inc. v. County of Santa Cruz, 133 F.Supp.2d
1184, 1217-18 (N.D.Cal. 2001), appeal docketed. No. 16975
(9th Cir. Oct. 11, 2001), citing United States v, O’Brien. 391 U.S. 367,377 (1968).

(43) Id.

(44) Group W Cable, Inc. v. City of Santa Cruz, 679 F. Supp. 977, 980 (N.D. Cal.
1988).

(45) “See Preferred Communications v. City at Los Angeles, 13 F.3d 1327 (9th Cir.
1994).

Cole, Raywid & Braverman, L.L.P.

Memorandum To: LSI Seminar Participants

September 9, 2002

Page 12

violate the First Amendment if it regulates the incumbent cable operator in a manner
which favors itself over the incumbent
operator.  This is especially true if the favoritism reaches a level that it de facto
drives
the incumbent operator to sell-out to
the municipality.

V.        Other Considerations

A.        Section 253 Implications

In general, a municipality derives all of its authority from the state in which it is
located.46  Some states, such as
Texas, Virginia and Missouri, have prohibited municipal ownership of broadband
systems.  These prohibitions have been
challenged by municipalities as a violation of Section 253(a) of the Telecommunications
Act, 47 U.S.C. § 253(a), which
provides that “No State or local statute or regulation, or other State or local legal
requirement may prohibit or have the effect
of prohibiting the ability of any entity to provide any interstate or intrastate
telecommunications service.”  The courts are split
on whether a municipality is an entity protected by this statutory prohibition.

• City of Abilene Texas v. FCC.47  This case concerned the validity of a
Texas statute that prohibited
municipalities from providing telecommunications services. The case was originally
brought before the FCC,
which determined that Section 253(a) does not preempt the Texas statute.  The
case was then appealed to
the D.C. Circuit, which affirmed the FCC ruling, stating that “Federal law may not
be interpreted to reach
into areas of State sovereignty unless the language of the federal law compels the
intrusion.” 48  The court held
that the term “any entity” did not necessarily include a municipality and therefore
was insufficient to overturn
the state statute. 49

• Missouri Municipal League v. FCC50  This case invalidated a Missouri
statute that prohibited the
state’s local subdivisions from obtaining certificates necessary to provide
telecommunications services or
facilities directly or indirectly to the public.  The case w initially brought before the
FCC. which relied on the
Abilene decision to uphold the state statute- The Eighth Circuit rejected the
reasoning of the D.C. Circuit in
Abilene and overturned the FCC decision: “we conclude that because
municipalities fall within the ordinary
definition of the term ‘entity’ and because Congress gave that term expansive

(46) See e.g. Sailors v. Board of Educ., 387 US. 105, 107-108 (1967).

(47) 164 F.3d 49(DC Cir. 1999).

(48) Id at 52

(49) Id at 53

(50). 2002 U.S. App. LEXIS 16382 (8th Cir. 2002).

Cole, Raywid & Braverman, L.L.P.

Memorandum To: LSI Seminar Participants

September 9, 2002

Page 13

scope by using the modifier ‘any,’ individual municipalities are encompassed within the
term ‘any entity’ as used in §
253(a).51

• City of Bristol, Virginia v. Earley.52  This case invalidated a Virginia statute
that barred localities from
competing with commercial providers of telecommunications services and
equipment.  In ruling that Section 253(a)
preempted the state statute, the court specifically rejected the D.C Circuit’s holding
in Abilene, and found that “the
broad and unambiguous language of § 253(a) makes it clear that Congress did
intend for cites to be “entities” within
the meaning of the Telecommunications Act.”53

B.        California’s Proposition 218

A municipality that seeks to build and operate a telecommunications facility
obviously must raise money to fund the
project.  Typical options for doing so include selling municipal bonds, and imposing
taxes.  In California, if the project is
funded by imposing a tax, Proposition 218 would require approval by a two-thirds
vote of the people.

The relevant portions of Proposition 218 prohibit local governments — including
charter cities — from imposing,
extending or increasing any general or special taxes, unless or until the taxes are
submitted to a vote of the people.  In the
case of a general tax, only a simple majority is required.54  In the case of a special
tax,
a two-thirds majority is required.55
A special tax is one imposed for a specific governmental purpose.56  Under this law, a
tax levied for the purpose of funding a
municipally-owned utility would constitute a special tax and require a two-thirds vote of
the people. 57

V.        Conclusion

Although many municipalities tout municipal ownership of broadband systems
as a new and valuable potential source
of revenue, the evidence shows that municipal ownership is rarely a good public policy
or economic choice.  In fact, any rate
savings to the customer are generally offset by a number of countervailing factors,
including higher taxes. As a result,
municipal

(51) Id at 17.

(52) 145 F. Supp. 2d 741 (W.D. VA 2001)

(53) Id. at 747.

(54) Cal. Const. art. XIII C, §2. subd. (b).

(55) Cal. Const. art. XIII C. § 2, subd. (d).

(56) See. e.g.. Rider v. County of San Diego. 1 Cal. 4th 1 (1991) (sales tax imposed
for the purpose of financing a jail and a court house was a
special tax, because it was levied to fund a specific governmental project).

(57) Id.

Cole, Raywid & Braverman L.L.P.

Memorandum To: LSI Seminar Participants

September 9, 2002

Page 14

ownership often merely shifts the costs of service from the customers using the service
to taxpayers in general, creating only
an illusion of savings.  Moreover, municipal ownership tends to remove valuable private
assets from the tax base, which
impacts the state funds available to county governments and school districts.  Municipal
ownership also is subject to abuse
that skews competition in the marketplace in adverse ways.  Finally, if political
pressures cause the municipality in its dual role
as regulator and operator to favor itself over the incumbent, the incumbent may have a
valid due process or First Amendment
claim.

Thus, in reality, municipal ownership usually results in lower state and local
revenues and higher taxes.  For this
reason, the trend generally has been toward privatization of the telecommunications
industry.58  Municipal ownership of
telecommunication systems runs counter to this trend.

(58) For example. “[i]n 1993, the United States privatized management of the Internet
infrastructure.  In 1997, it negotiated the World Trade
Organization General Treaty on Telecommunications Services, which encourages
privatization of government-operated telecommunications
carriers in other nations.  It has privatized communications satellites, and even created
a
new entity, the Internet Corporation for Assigned
Names and Numbers (ICANN). to facilitate the privatization of domain name
management on the Web.”  See Eisenach Report, supra, page 1.

Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/

---

From: "Todd Ellis" <[email-masked]>
Date: Sun, 5 Jan 2003 15:26:11 -0500

This is an uninformed individual.

Todd Ellis
  -----Original Message-----

  M E M O R A N D U M

  William F. Bly, Esq.

  DATE:             September 9, 2002

  .

  RE:                   MuniToons: The Folly of Municipal Ownership of
Broadband Facilities

---

From: Marcel <[email-masked]>
Date: Sun, 05 Jan 2003 15:29:19 -0500

Motion Granted........

He will be added to the Know nothing, Talk-A-Lot list.........

Todd Ellis wrote:

>  This is an uninformed individual.Todd Ellis
>
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---

From: "Todd Ellis" <[email-masked]>
Date: Sun, 5 Jan 2003 15:38:16 -0500

We've actually conducted studies for this exact business sector for clients.
The ones that say it can't be done are typically those that represent cable
television distribution offices or small telcos/ISPs.  I can show you how a
Passive Optical Network (PON) using Alcatel ATM as the engine and tri-freq
fiber is the coolest thing you've seen yet.  You only have one problem - you
need a healthy take rate, and that will depend on the number of homes
served - but typically 30%.  When you are the muni and offer it as a
consumer service rather than a consumer business, it can't be touched.

Todd Ellis

  -----Original Message-----
  From: Marcel [mailto:[email-masked]]
  Sent: Sunday, January 05, 2003 3:29 PM
  To: [email-masked]
  Subject: Re: [NEXTEL-1] Cole, Raywid & Braverman, L.L.P.-Attorneys at Law

  Motion Granted........

  Todd Ellis wrote:

  >      RE:                   MuniToons: The Folly of Municipal Ownership
of Broadband
  >      Facilities
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---

From: Marcel <[email-masked]>
Date: Sun, 05 Jan 2003 15:49:17 -0500

What kind of $$?

Todd Ellis wrote:

>  We've actually conducted studies for this exact business sector for clients.  The ones
> that say it can't be done are typically those that represent cable television
> distribution offices or small telcos/ISPs.  I can show you how a Passive Optical Network
> (PON) using Alcatel ATM as the engine and tri-freq fiber is the coolest thing you've
> seen yet.  You only have one problem - you need a healthy take rate, and that will
> depend on the number of homes served - but typically 30%.  When you are the muni and
> offer it as a consumer service rather than a consumer business, it can't be touched.Todd
> Ellis
>
>      Broadband
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---

From: "Todd Ellis" <[email-masked]>
Date: Sun, 5 Jan 2003 16:00:26 -0500

How much you wanna spend?

In what regard?
  -----Original Message-----
  From: Marcel [mailto:[email-masked]]
  Sent: Sunday, January 05, 2003 3:49 PM
  To: [email-masked]
  Subject: Re: [NEXTEL-1] Cole, Raywid & Braverman, L.L.P.-Attorneys at Law

  What kind of $$?

  Todd Ellis wrote:

  >      Subscribe to Nextel-1:
http://www.groups.yahoo.com/subscribe/NEXTEL-1
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---

From: Marcel <[email-masked]>
Date: Sun, 05 Jan 2003 16:09:05 -0500

Todd Ellis wrote:

On da cheap~

In what regard?

Alcatel ATM

---

From: "Todd Ellis" <[email-masked]>
Date: Sun, 5 Jan 2003 16:12:18 -0500

Depends on the layout.  Can be between $5-10 mil  for 10,000 homes.   $1200
for customer premise equipment.  51% of the cost of the infrastructure is
the construction of the distribution fiber plant.
  -----Original Message-----
  From: Marcel [mailto:[email-masked]]
  Sent: Sunday, January 05, 2003 4:09 PM
  To: [email-masked]
  Subject: Re: [NEXTEL-1] Cole, Raywid & Braverman, L.L.P.-Attorneys at Law

  Todd Ellis wrote:

  On da cheap~

  In what regard?

  Alcatel ATM

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---

From: Marcel <[email-masked]>
Date: Sun, 05 Jan 2003 16:17:43 -0500

Is that with Right-Of-Way costs and trenching?

Todd Ellis wrote:

>  Depends on the layout.  Can be between $5-10 mil  for 10,000 homes.   $1200 for
> customer premise equipment.  51% of the cost of the infrastructure is the construction
> of the distribution fiber plant.
>
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---

From: "Todd Ellis" <[email-masked]>
Date: Sun, 5 Jan 2003 16:27:46 -0500

Aerial and trenching...no ROW costs...those could be 2-3X the buildout
price.
  -----Original Message-----
  From: Marcel [mailto:[email-masked]]
  Sent: Sunday, January 05, 2003 4:18 PM
  To: [email-masked]
  Subject: Re: [NEXTEL-1] Cole, Raywid & Braverman, L.L.P.-Attorneys at Law

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---

From: Marcel <[email-masked]>
Date: Sun, 05 Jan 2003 16:35:17 -0500

Ouch!~~~~~~~~Never Mind!

Todd Ellis wrote:

>  Aerial and trenching...no ROW costs...those could be 2-3X the buildout price.

---

From: "Todd Ellis" <[email-masked]>
Date: Sun, 5 Jan 2003 19:45:36 -0500

That's why smaller munis that operate electric utilities have such a leg up.
They own the right of way in populated areas, and don't have those costs to
amortize.  A major cost advantage!  Now you see what I mean that this guy
has no idea what he is talking about.

Todd Ellis
Operations Manager, Telecommunications Division
Booth & Associates, Inc., a Utility Services Associates company
An Employee-Owned Business
1011 Schaub Drive, Raleigh, NC 27606
Phone: (919) 851-8770, ext. 109  Fax:  (919) 859-5918
Cellular:  (919) 418-3358  Alpha Pager:  (877) 205-9320
E-mail:  [email-masked]
Two-way SMS: [email-masked]
Web:  www.booth-assoc.com
Telecommunications, Transmission & Distribution, System Planning and Special
Projects,
Mapping and Field Services, Substations & Relaying, Strategic & Financial
Services

---

From: Marcel <[email-masked]>
Date: Sun, 05 Jan 2003 21:44:53 -0500

That is also why Soco has such a advantage over Nextel.

Todd Ellis wrote:

>  That's why smaller munis that operate electric utilities have such a leg up.  They own
> the right of way in populated areas, and don't have those costs to amortize.  A major
> cost advantage!  Now you see what I mean that this guy has no idea what he is talking
> about.
>
> Todd Ellis
> Telecommunications, Transmission & Distribution, System Planning and Special Projects,
> Mapping and Field Services, Substations & Relaying, Strategic & Financial Services
>
>
>
>
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