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June 30, 2005

Testimony Before the Texas Legislature Regarding Telecom Franchising and Licensing Requirement


Witness: Barry M. Aarons
Testimony Date 06/30/2005
Body of Congress: Texas House of Representaties
Committee: House Regulated Industries Committee
At the Request of: Representative Phil King

Testimony Subject:
Telecom Franchising and Licensing Requirement


JUNE 30, 2005

Chairman King and members of the Regulated Industries Committee, thank you for the opportunity to once again appear before you. For the record my name is Barry M. Aarons and I am Senior Research Fellow for the Institute for Policy Innovation which is headquartered in Lewisville, Texas. I reside in Phoenix, Arizona.

Last year I testified before you on the overall issue of telecommunications deregulation. During the recently concluded session you and your colleagues made a valiant attempt to implement the kind of change that would make Texas a leader in multi-modal data transmission and distribution. While the legislature fell short of your original intentions, we commend you for having the courage to step up to a most contentious set of issues.

As is usually the case when tackling such a large issue, many subset issues rise to the surface. One such issue is that of the antiquated system of franchising and licensing at the political subdivision level. It is one of those ideas that made sense at one time, but in today’s environment it is no longer practical or necessary. At best it is simply outdated and at worst it is anti-competitive.

History suggests that in a time when only two-way voice grade wire line telephone service existed there was an appropriate need to charge monopoly utilities a fee for the right to access the municipal rights of way. It was also appropriate that those licensing or franchise fees were correctly passed on to the end user, therefore allowing all users to equally share in the cost of a unilaterally delivered mono-modal system.

The same considerations were probably sensible for the delivery of one-way entertainment some 35 years ago when “pay TV” or cable television first became available. While they may not like to acknowledge it, those cable systems were virtual monopolies given their exclusive inter governmental agreements. In some cases they were oligopolies but in fact entry and exit was controlled by the municipality in which the service was being supplied.
The local franchise and licensing system in telephone and cable television, two distinct and different forms of service, was a workable system. But it was based on a uni-modal technological structure that no longer exists and no longer applies.

IPTV is the third generation of entertainment delivery to come along since the heady days of cable television in the early 1970’s. Satellite was the second generation. I remember distinctly my father’s observation in those days that “pay TV” would destroy the film industry by enabling distribution outside of theater venues. Then house counsel for Stanley Warner Theaters, his observation presumed alternative forms of distribution and concluded that it would stifle competition. Much as I hate to say it, my father was wrong. The premise was correct but the conclusion was flawed. And that same incorrect conclusion to premise has been promoted as other communications changes have evolved, especially in the past 10 years.

Most cities will admit that franchise agreements and licensing fees have little if anything to do with accessing the municipal rights of way. Most cable and wire line or fiber companies are paying the cost of access out of expenses. The franchise and license fees that are passed down are really service taxes on the end user. So for municipalities this is a revenue issue.

Let’s establish one unalterable fact at the onset. If the issue is the loss of revenue for municipalities there are ways short of continuing the old system that could be adopted. Most states have some level of shared revenues between the state and the cities. In states where an income tax is imposed the cities are pre-empted from imposing their own in exchange for a formulaic share of the revenue collected. So when reductions in income tax are enacted by the legislatures the cities are held harmless – the formula is adjusted to compensate so as to relieve the cities of any loss of revenue.

No matter what replacement for local franchising and licensing you could establish there are mechanisms for replacement revenues - if you determine that replacement is in fact necessary. So set that issue aside. It is clearly not justification for maintaining the existing franchise and licensing system.

But in examining the disparate tax issue, we find that 23 states including Texas have enacted consumption taxes on satellite services. Cable television companies contended that this was in an effort to “level the playing field” because their services were subject to franchise and license fees to the end user which made their services 4% to 6.25% or higher than their satellite competitors. Increasing a tax on one technology to accommodate another doesn’t make good sense to the taxpayers.

The satellite providers opposed this effort contending that the franchise and license fees were enacted for the privilege of accessing the local rights of way and that there was no commensurate activity by satellite providers. But in the final analysis legislators who enacted the taxes on satellite did so to equalize the provision of the end user service – the provision of broadcast services to the end user. And that is the focal point. This becomes a quirky definitional point. Franchising and licensing on a city by city basis becomes an antiquated local function at best.
The federal government prohibits political subdivisions below the state level to impose consumption taxes on satellite broadcast. This may no longer be any more appropriate to satellite than franchise and license taxes may be on cable and likely for the identical reasons. Another quirky definitional point.

The real issue is defined by the diverse nature of multi-modal transmission and distribution technologically. Realistically there are multiple technologies that have emerged for the distribution of content. Why, therefore, should we try to apply the square peg of satellite or IPTV in the round hole of wire line cable transmission and distribution? We shouldn’t. And the end users of all of these technologies should be treated equally. If you are not going to tax one, then don’t tax the other. If you are not going to requires franchises from one, then you shouldn’t require franchises from the other.

If, however, it is important to franchise or license the infrastructure providers - and frankly we are not sure that it is necessary or even appropriate, but let us assume for a moment that licensing of the technologies for delivery of content or data is a valid governmental function – then the licensing function should be done at the level that is the most ubiquitous. To force multiple licensing and franchising throughout hundreds of burgs and hamlets is a mid twentieth century solution to a 21st century application.

And, as scary as it may be to the private technology sector, the movement of political subdivisions to provide infrastructure in the form of fiber to the home makes this change that much more important. Yes we can fight over whether the cities should have the right to create infrastructure in the form of their own municipal networks, but that only diverts our attention to the real issue.

It is an issue for debate at another time. Whether Representative Pete Sessions’ bill prohibiting municipal networks, or Senator John McCain and Senator Frank Lautenburg’s bill limiting municipalities from that prohibition passes that issue may well be taken out of local authorities’ hands.

But that debate further demonstrates the obvious needs: to consolidate the oversight responsibility over data transmission and distribution to the state level; to eliminate antiquated local franchise and licensing authority over different technologies; and, to equalize the regulatory application over end user broadcast and communications services.

Thank you for the opportunity to visit with you here today.

The Institute for Policy Innovation is an independent and non-profit, public policy organization with offices in Washington, DC and Dallas, Texas.


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