The Telcos Are Coming!

The cable industry steadily has been taking local phone marketshare from the telcos. And cable continues to dominate the high-speed arena, leaving telcos’ DSL offerings in the dust. Now telcos are trying to strike back on the video side, causing cable operators to gear up for a legislative fight with Verizon in bellwether California that could change the way municipalities craft franchises. In the legislative session that adjourned July 2, Verizon tried to get a bill passed that would allow the telco to offer video to consumers in its service territory without having to wire an entire cable franchise area. The bill—AB 2242, which was heard in the Senate Energy, Utilities and Communications Committee on June 29—died in committee, but Verizon plans to readdress the issue early next year. And it could be a wild ride, says California Cable Telecommunications Association president Dennis Mangers. "We may end up seeing a revamp of the entire franchise laws in California," Mangers says. "This is a whole new day. The door has now been opened to take a look at how franchises are granted. The incumbent, that is the cable operators, would be foolish to see exemptions extended to a newcomer, in this case being Verizon. The laws already have allowed satellite companies to be exempt from requirements that give them an economic edge over cable. We can’t let that happen with the telephone companies, too." Mangers alerted CCTA’s members that Verizon will ask legislators next year for latitude in how cities grant franchises to competitors, and is telling them to prepare for a fight. The CCTA will monitor what Verizon does and act accordingly, he says, declining to outline strategic plans. "We won’t be able to nip this in the bud," Mangers says. "But we do need to figure out a way to temper the law so that a level playing field is created." Verizon has a lobbying plan in place to modify the existing franchise laws, but Verizon spokesman Jon Davies declined to discuss the telco’s strategy for getting what it wants, other than to say it wants a law that would give cities the option of allowing competitors into the cable industry outside the current franchise boundaries. "Our franchise areas don’t correspond with cable franchise areas," Davies says. A change in the current law "would allow cities to grant franchises to telcos even though they don’t cover a whole cable franchise area." Such a change could allow Verizon to cherry-pick the best customers, cable operators complain. Several state senators support the bill because it could stimulate competition, says Joe Camicia, California Senate Majority Leader Don Perata’s (D-East Bay) chief telecom consultant. He predicts Verizon’s proposed bill will receive significant attention from the state legislature in 2005. "This could be World War III for cable operators. It will certainly change the cable landscape," says Camicia, who has a unique perspective on the issue, having been a cable executive with Charter and Marcus Cable before becoming a lobbyist and legislative aide. "I wouldn’t bet against the cable guys on this issue. But I think this is going to be a significant fight for the cable industry—the biggest in a long time for cable operators in California. The legislature wants to promote competition, and this is a good way to do it." The battle between the cable industry and Verizon already has taken on a warlike tone. "It was one of those classic showdowns," Mangers says of the hearing held on June 29. "Verizon’s corporate hierarchy ordered its California lobbyists to seek an exemption from the state’s level playing field statute, allowing it to begin providing video service only in its own service areas. The law, which we wrote and sponsored in the late ’80s, requires any applicant for a cable franchise to ultimately serve the entire geographical area of the franchise territory." CCTA plans to figure out what the landscape will look like if a similar bill is adopted. It also will determine how MSOs can be protected against telcos’ potentially uncompetitive practices and figure out if any changes need to be made to the current law that "reduces an onerous legacy issue with existing franchises," Mangers says. "We will devote some time to this effort at our summer board meeting in Lake Tahoe in August, and we encourage counsel and franchising personnel from our member companies to give thought to this issue in preparation," he says. Sneak Attack Verizon tried to "ramrod this legislation through without the appropriate dialogue and discussion that a bill of this nature requires," says Leo Brennan, VP/GM of Cox’s Orange County system, and CCTA’s president. "Issues such as level playing field, rebuild costs and whether these costs are funded by the telephone rate payers, access channel requirements, pole rates and many other issues like these need to be considered and addressed before a decision can be made…Obviously if they are able to pick and choose where they offer video, then other potential providers would want to have the same capabilities." Verizon used an unconventional tactic to introduce its bill in the closing days of the legislature’s two-year session. The telco found a discarded bill and an author—retiring Assemblyman Tony Strickland (R-Thousand Oaks)—to introduce it in the middle of June. Verizon began lobbying its position to legislators immediately. Usually, bills are introduced early in the year and work their way through several committee hearings before being voted on, Camicia says. Verizon’s tactic—known as "gut and amend"—caught cable operators off guard. Operators tried to convince the senators that this was a sneak attack involving complex policy issues that could not be resolved in such a short time, Mangers says. Although the bill never got out of committee, it garnered significant support. The California League of Cities and the California County Association support it, and the Communications Workers of America sent representatives to the hearings on behalf of Verizon. SBC Communications, which serves most of the state, did not actively lobby for the bill, but several of the telco’s executives and lobbyists attended the meeting, and Mangers expects SBC to support whatever Verizon comes up with next year. "We were backed by a representative from TURN (Towards Utility Rate Normalization) and governmental affairs personnel from Adelphia, Comcast and Time Warner," says Mangers. Verizon’s gut-and-amend approach perturbed some senators, attendees of the hearing say, although Energy, Utilities and Communications Committee chairman Senator Debra Bowen (D-Redondo Beach) said at the hearing that she was pleased to see Verizon interested in investing and competing in California. She also noted the issue was too complex to deal with so quickly, which put the bill to rest—for now. "Verizon will be back, and we will need to be prepared that they will be permitted, at some time in the future, to add video service to their bundles in their own service territory," Mangers says. "We will have the opportunity to describe the ways in which we believe this prospect disadvantages us in the competitive theater, and we will need to be ready to present specific, credible, rational amendments that are clearly aimed at achieving parity and not designed to cripple competition."