Score one for cable op

Local regulators are overruled in California franchise sale

Cable mogul Paul Allen won a big victory last month when a federal judge overruled local regulators, allowing the Microsoft co-founder to buy a cable franchise in Santa Cruz County, Calif. But the decision also could grant more leeway to other cable operators as they tussle with local regulators.

If the judge's decision withstands Santa Cruz's appeal, operators across the country would gain long-sought legal ammunition in their own fights with testy municipal governments over license transfers and renewals, as well as in disputes over how much they can charge customers.

Judge William Alsup ruled that Santa Cruz officials overstepped their authority in denying Allen the right to buy the local system operated by Charter Communications.

Alsup said Santa Cruz violated Allen's First Amendment rights by denying him the franchise after he refused to comply with an unusual set of demands. "County agents made up the rules," he said. "Such 'regulation' lends itself to the suppression of speech."

Santa Cruz also was found to have illegally ordered Allen to:

  • Hire an outside consultant to analyze Allen's business plan and undergo a second round of inquiry from the county, despite expiration of the FCC's 120-day limit on local reviews of license transfers.
  • Incur additional expenses, including a $500,000 "mitigation" fee, beyond the 5% of revenues that local franchises are allowed to charge in regulatory fees.
  • Freeze rates, even though a two-year freeze agreed to by a previous owner of the franchise had expired.

"This is a reminder to cities that they can't use renewals and transfers to extract things they otherwise aren't permitted to demand," said Daniel Brenner, general counsel for the NCTA.

Following another court decision last month striking down the limit on a cable company's subscriber reach, the ruling shows "renewed respect for First Amendment rights involving cable," said Ben Golant, cable adviser to FCC Commissioner Harold Furchtgott-Roth.

Santa Cruz's allies, however, predict that the federal appeals court in San Francisco will back them up and provide some much-needed guidance to help cities decide whether franchise sales serve the public interest. "Determining what is the standard for review will be the key ruling coming out of this case," said Bill Marticorena, the consultant who advised Santa Cruz officials in the Allen deal.

The franchise was one of 473 franchises that were part of Allen's deal when he bought Charter Communications in July 1998 for $4.5 billion. The transaction rocked the cable industry because of its then-unheard-of $3,600-per-subscriber price tag.

After Allen refused to pay for an unprecedented financial analysis of the transaction, Santa Cruz officials turned down his request on grounds that he would cut back on local service or try to increase local rates in order to earn an "acceptable" rate of return.

The county's concerns were justified "up to a point," said Alsup. But he noted that Allen paid cash for Charter, negating any risk that the company would have to cut services or jack up rates to avoid default on loans if cash flow flagged. "The extreme economic fears ... were grossly disproportionate to the actual risks," he wrote, noting that Santa Cruz's cable ordinance stipulates that no license transfer may be "unreasonably withheld."