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Clayton, Richard E., Ed.Municipal Decision-Making Factors Relative to CableTelevision Ownership.Pasadena Urban Coalition, Calif.; San Gabriel ValleyPublic Cable Council, Pasadena, Calif.Oct 7342p.; Developed with legal assistance from theBeverly Hills Bar Association Law Foundation and withfinancial assistance from the Avon FoundationDr. Louis C. Riess, San Gabriel Valley Public CableCouncil, 1570 East Colorado Blvd., Pasadena,California 91116 ($4.95)

MF-$0.75 HC-$1.85 PLUS POSTAGE*Cable Television; *Decision Making; MetropolitanAreas; *Municipalities; Problem Solving; *PublicPolicy; Risk

ABSTRACTA study was made to identify and provide information

and factors which should be taken into consideration by amunicipality in its development of policy regarding the ownership,franchising, and ordinance issues involved in cable television. Sincethe report discusses Southern California activities, specificallythose of the San Gabriel Valley, it is somewhat limited in scope.Listed are the advantages and disadvantages of private ownership andits relationship to the public interest in addition to financial andoperational factors. Detailed factors of public ownership whichinclude forms and cost factors favoring public ownership, engineering'and financial projections, the financing of public ownershiprequirements for tax-exempt status, and social policy factors areexamined in detail. Further, the report lists specific forms ofpublic ownership and details the advantages and disadvantages ofmunicipal ownership, ownership by a nonprofit organization, inaddition to a special public authority model. The report takes a "lowprofile advocacy position" in behalf of the poor and/or minoritygroups and emphasizes that citizens may still take a hand in shapingpublic policy about cable television. (WCM)

Municipal Decision-Making Factors

Relative to Cable Television

Ownership

A Joint Project ofThe San Gabriel Valley Public Cable Council

The Pasadena Urban Coalition

and

The Beverly Hills Bar Association Law Foundation

MUNICIPAL DECISION-MAKING FACTORS

RELATIVE TO CABLE TELEVISION

OWNERSHIP

A Joint Project of

THE SAN GABRIEL VALLEY PUBLIC CABLE COUNCIL,

THE PASADENA URBAN COALITION,

and

THE BEVERLY HILLS BAR ASSOCIATION LAW FOUNDATION

October 1973

Developed With Financial Assistance:

from

The Avon Foundation

Copyright, Thy Pasadena Urban Coalition 1973

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PROJECT DIRECTORAND CONSULTANT:

LEGALASSISTANCE:

Dr. Louis C. Riess, Assistant to the President,Pasadena City College; and Chairman, San GabrielValley Public Cable Council

Ms Angela Pickett, Beverly Hills Bar AssociationLaw Foundation

EDITOR: Richard E. Clayton, Technical Writer PasadenaCity College

SAN GABRIEL VALLEY PUBLIC CABLE COUNCIL

Franchising SAJJ,,omm..ttee Wmbers

Charles D. Scott, Executive Director, Pasadena Urban Coalition,Subcommittee Chairman

Larry Armatsong, City of Monterey Park

John Bateman, Consultant, Public Cable Television Authority

Murray Brown, Editor, Western Cif Magazine

Jim Buell, Administrative Analyst, City of Burbank

Ray Cadei, Administrative Assistant, City of El Monte

John Calvetti, Vice President, Optical Systems Corporation

William K. Cassell, California Institute of Technology

Phillip Essman, Consultant, Division of Educational Media, Office ofSuperintendent of Schools, County of Los Angeles

Allan Fink, Coordinator of Learning Materials, Pasadena Unified SchoolDistrict

Roderic;: McIver, Placement Counselor, Greater Los Angeles Urban League

John O'Donnell, Administrative Assistant, City of South El Monte

Dr. Edward Ryan, Superintendent, Arcadia Scnool District

Brownie Spanovich, Superintendent of Communications, City of Pasadena

Roger Storey, Assistant to the City Manager, City of Glendale

PREFACE

This report represents an attempt at providing an explanation ofwhat factors should be considered in any process involving the decisionof cable television ownership. While it purposefully attempts to avoidpredictions by the very nature of the subject matter covered herein ittaxes a "low profile advocacy position" in behalf of those citizens inAmerican society who tend to derive fewer benefits from anything oldor new. These citizens are usually poor and/or members of minoritygroups.

Like many reports before, this effort suffers cf necessity from theuncertainty and newness of the communications medium it seeks to describeor explain, and the beneficial usage it seeks to advocate. Yet, itdiffers or deviates from other such reports in that it seeks to address it-self to policy factors which should be considered by malicipal decision-makers who presently have the task of regulating the use or ownershipof cable television through local ordinances and franchise agreements.Also, unlike other reports, the manner in which the subject matter ispresented indirectly places specific emphasis on the potential of cabletelevision in promoting the First,Amendment's purposes and interests offreedom in diversity and expression in order that an informed public maycope with the exigencies of their period.

This report reflects the attitude of speculative futuristic amazementas well as the sincere aspirations of many who have become activists ofcable television as a "problem-solving" communications medium.

It is certain that cable television is beginning to create a publicinterest, public access video tape revolution. Neil Hickey, in his Notesfrom the Video Undeumund (printed as a two-part series in T.V. Guide,commencing in December, 1972), calls it "the new television for the1970s," and describes how it has already engaged the talents, energies, andimagination of people who never dreamed they might themselves become creatorsof programs instead of remaining mere passive receptors

As to be expected, Panasonic, Ampex, Akai, Sony, Bell and Howell, andotherrtanufacturers of TV cameras are assisting in adding to the numberof enthusiasts. Two recent technological innovations make possible thealternate media movement: the portable, inexpensive TV camera, and thevideo synthesizer. The Sony Corporation introduced its light-weight (22pounds), low-cost ($1500), fully portable,battery-operated television systemutilizing half-inch reusable video tape in 1968. This has had considerableimpact on the economic considerations for entering into film making. Pre-viously it cost roughtly 110 dollars for 30 minutes of black and whitefilm with magnetic soundtrack proposition, but now can be considered forapproximately $12 to $15 per 30 seconds on video tape that records soundright onto the tape, requires no processing, and is reusable.

Such impact on economic considerations has motivated campaigns ofactivists such as MS: Red Burns and Professor George Stoney. As Directorsof New York University's Alternate Media Center, they have developed new

visual literacy among people who want to create programs for the Center.Open Channel, another New York nonprofit group directed by Ms TheaSkiover, has the more specific aim of making public access a reality.California also has Its organizations vying for their position in thealternate media, particularly in the northern part of the state where an"umbrella" organization representing minority group interest has fostered aventure with a private operator for a state-wide public access cabletelevision channel.

Perhaps the best known advocates of minority interests in "over-the-air" broadcasts; and cable TV are the Black Journal (a New York basedorganization which is America's only Black affairs TV broadcaster),-and anaffiliate of the Public Broadcasting Service with its 230 public TVstations across the country. The Washington, D.C., organization BESTof the Urban Communicator, whose primary spokesman, Ted Ledbetter andWilliam Wright, seems to have focused its interests primarily on cabletelevision recently.

This paper is a report out of a committee which has been engagedmore directly in local Southern California activities, specificially theSan Gabriel Valley. Consequently, the report, which is basically the,product of the franchise subcommittee of the San Gabriel Valley PublicCable Council, is limited in scope, but is designed to meet the needs ofthe municipalities, of the community organizations, and private and publiceducational institutions who are member-participants in the Council.

Special acknowledgements go to Dr. Louis C. Riess for his painstakingwork with the Council and the insights brought to this final report; toMs. Angela Pickett of the Beverly Hills Bar Association Law Foundation forher legal research; and to Harold Horn of,the Cable Television InformationCenter in Washington, D.C., who was particularly helpful in reviewing thefinal draft.

Special gratitude is given to: Roger Storey from the City of Glendale,and James Buell, Research Analyst for the City of Burbank, for theircomments on the Municipal Ownership Section; and to Bohn Calvetti ofOptical Systems Corporation, Ray Cadei of the City of El Monte, andRoderick McIver of the Greater Los Angeles Urban League for their assistancewith the Private Ownership Section.

ii

TABLE OF CONTENTS

I. Statement of Purpose 1

II. Introduction 2

III. FACTORS OF PRIVATE OWNERSHIP

A. Introduction

B. Advantages and Disadvantages 6

1. Public Interest 7

2. Financial 8

3. Operational 8

IV. FACTORS OF PUBLIC OWNERSHIP

A. Introduction 10

B. Forms of Public Ownership 10

C. Factors Favoring Public Ownership 10

D. CTV Cost Factors 12

E. Engineering and Financial Projection 14

F. Financing Public Ownership 15

G. Requirements for Tax-Exempt Status 16

H. Social Policy Factors 17

V. SPECIFIC FORMS OF PUBLIC OWNERSHIP

A. Municipal Ownership

1. Introduction 19

2. Organization 19

3. Advantages and Disadvantages

a. Public Interest 20

b. Financial 22

c. Operational 25

B. Nonprofit Organization

1. Introduction ...26

2. Advantages and Disadvantages

a. Public Interest 27

b. Financial 27

c. Operational 28

C. Special Public Authority Model

1. Introduction 28

2. Organization 30

3. System Construction and Operational

Alternatives 31

4. Advantages and Disadvantages

a. Public Interest 31

b. Financial 32

c. Operational 32

VI. Summary 33

VII. Bibliography 34

VIII. Suggested Reading 34

I. STATEMENT OF PURPOSE

The advent of cable television along with its attendant implications.

political, social, technological, and financial - -has by and large taken

municipalities by surprise. This fact is simply explained: local

decision makers are faced with the responsibility of regulating a new

technology which is capable of generating a vast array of social services

but without the benefit of adequate information about this complex

communications medium.

Municipal governments must be equipped with objective information

regarding cable communications medium for several reasons:

1. To be in a position to evaluate the information provided by

prospective franchisees. 2/30*

2. To initiate their own plans for developing a cable system.

3. To make appropriate decision in developing a regulatory framework

in which a system responsive to the public interest exists.

The purpose of this paper is to identify and provide information

and factors which should be taken into consideration by a municipality

in its development of policy regarding the ownership, franchising, and

ordinance issues involved in cable television.

*Footnotes refer to the Bibliography, with the first number denoting thespecific bibliographic source, the second denoting the page numberof that source.

1

II. INTRODUCTION

In an ideal situation, planning for cable television would beginas a prudent anticipation of the future and not a3 a reaction to suddenpolitical pressures for granting a franchise. All too often, however, theinitial step in the planning process is launched by the announcement that acommercial firm is seeking information regarding the community's TVfranchise.

It should be stressed that the form of ownership of a cable system takenalone does not necessarily dictate the presence or absence of public interestcriteria. Following a thoughtful identification of some public interestcriteria, Walter Baer, in the Rand Cable Study for Dayton., Ohio, pointed outthat

...many of these features (certain enumerated publicinterest criteria) conflict with one another. In afranchise competition...the trade-offs among themmust in the end be determined by the value judge-ments of the decision makers.

A more important point is that most of these value choices areindependent of the form of ownership. The trade-off between lower sub-scriber fees and more expensive local origination facilities must be madewhether the cable system is owned by a large corporation, a nonprofit group,or the city itselfk Benefits_for_the public from cable -will. be determined/10_7as much by the terms of the local franchise as by the form of ownership. -14

The fundamental estions raised for the decision-makers of municipal-ities will focus on (1) the feasibility of financing a publicly ownedsystem which is committed to providing public services, and (2) thefeasibility of having a profit-oriented private franchise without loss ofpublic services.

The form of ownership of cable communication facilities in a cityfundamentally hinges on the threshold question of what the city and itscitizenry want and expect from the communications system of the future.Will the desired system be an essential municipal service, or will it bea private business? The question involves an analysis of a number ofother questions. What kind of system is desired? What services shouldthe system provide? Will the system emphasize public services? Is it a mean-ingful source of revenue? Is it viewed as a ancillary benefit to thecity, both now and in the futtre, or as potentially the cornerstone uponwhich municipal services will be organized?

Generally, division of responsibilities in the provision of cabletelevision service had been twofold: (1) the franchising authority asregulator (in conjunction with the FCC), and (2) the franchised systemoperator as owner, operator, controller of access and program content,and producer of programs. This arrangement, however, is not the onlyway in which these functions can be performed.

2

The franchising authority's primary interest is in assuring thathigh quality service is delivered to all subscribers, in maintainingreasonable rates and in seeking the system utilized to advance thepublic good. These objectives could be achieved through any number ofsystem ownerships discussed in this paper.

Cable television is not automatically accompanied by social benefits;the worth of the system also depends upon such considerations as the imag-ination devoted to the programming and the willingness to commit resources.

The decision,-making process employed in selecting any form of owner-ship among several alternatives cannotsAA an arbitrary one. An exam-ination of all available information by a municipality is necessaryregardless of which form of ownership is ultimately selected.

9

3

III. FACTORS OF PRIVATE OWNERSHIP.

A. Introduction

Private ownership of cable television franchise and systems connotessimply the fact that government does not own the cable system. It isgenerally accepted that private ownership conversely implies ownership andoperation by a multi-million dollar corporation of national scope. However,there is more than one form of private ownership possible. There aresmaller cable companies which are controlled by local business groups and small,regional corporations.

The financial power of a national corporation and the legal resourcesavialable make it difficult for a city to deal with them on an equal basis.Simply, there is an inverse relationship between the size of a corporationand the amount of influence a city can exert on it. A $2 million investment isless important to a corporation with $200 million in assets than one with$20 million. There are smaller, less powerful corporations in the CTV fieldwhich could be easier to deal with than the larger, wealthier concerns. Itis also possible in some places for local investors to generate the capitalnecessary to establish a community-based cable system.

The private form of ownership does not, however, preclude the necessityfor work on the part of a municipality, nor does it necessarily preclude thepublic interest being served. The form of ownership is only one factor ina complex system. Citizens could be equally benefited by a well constructedand utilized private system as they would by a well operated municipallyowned system.

Presently, there are approximately 18 municipally owned and operated CTVfranchises, about 60 nonprofit groups that are community controlled, and some5000 franchises owned by profit-making corporations. About half of these are,for the most part, small fringe area franchises; the remaining franchisesgranted for the period 1971-73 in nonfringe areas are owned by the larger cabletelevision companies.

In the old fringe area operations of 1948-1972, the service was simplythe rebroadcasting of existing TV signals into fringe areas to provide orimprove reception. The system was simple and easy to operate. Marketpenetration was high, and the system could be constructed for as little as$60 per subscriber. The franchises were almost exclusively owned by privateenterprises, and in most cases, generated large profits.

New FCC regulations now make it economically feasible for CTV to invadethe nonfringe areas and openly compete profitably with the broadcast TVindustry. This has resulted in the awarding or application for an additional5000 new CTV franchises in the past two years, twice the number of operationalfranchises developed between 1948 and 1970.

4

Cypress Communication Corporation's venture in Southwest Dayton, Ohio,is an example of a locally based effort by a major corporation. CitizensCable Corporation, was established to provide minority participation inthe organization's management and contract relationships. This minoritygroup organization will progressively gain power and finally ownership ofthe system as the loan is paid through the use of accured profits.

This is not the only possible form of community ownership, but it isone form which is being tried. Some type of community based ownershipultimately might prove to be most useful to the municipality involvedand, just as important, most beneficial to its citizens.

A private-ownership franchise does not lift from the granting citygovernment the responsibility of studying and analyzing cable television.The FCC still requires the local agency to be the primary regulatory agentof CTV. Regulation of even a small local system requires an involvement ofstaff, time, and money. Furthermore, if a city hopes to acquire concessionsfor public service in the letting of a franchise to a private firm, it willrequire as much work as the establishment of a municipality owned system.If there is not an extensive amount of research completed prior to thebargaining phase of the franchise process, the city council will be operatingin the dark.

In order to be in the proper bargaining position, there, the city councilshould have market studies and demand estimates at their fingertips. Theyshould have an idea of what the community wants or could use from cable TV.They should know the educational uses of the proposed system. The potentialuses for city government should be understood. The costs of various packagesof services proposed have to be estimated. The ability of the proposedfranchise area to support various services at a profit-making level mustbe ascertained.

This type of information is critical to the development of an intel-ligent franchise agreement. Only when a city councilman has a clear ideaabout the specific needs and economic ability of his city can he dealeffectively with a CATV corporation. Being able to point out in the bidspecifications the most desired services in order of priority and how theycan be financed will greatly enhance the power of a city's demands.

The private owner might be a local corporation formed soley for cable,an existing corporation involved in some other local enterprise, or anmultiple system operator (MSO). A franchise might be grated to provide anopportunity for minority groups to develop a neighborhood profit enter-prise in one or more franchise areas.

Presumably, these incentives could be enhanced if the city were tofranchise local corporations with a stake in the community, such as anexisting local enterprise or a new minority group corporation. On theother hand, a nationally based MSO with more resources for technicaldevelopment of new services might be in a better position to offer serviceswhich pay for themselves.

At this time in the development of CTV, the emergence of a few large,wellfinanced corporations with the ability to invest large sums inprogramming and services, appears most likely to generate innovations with-in the industry rather than retarding them. However, this doesn't precludelarger cities with both capital and technical resources from providing equalservices.

B. Advantages and Disadvantages of riP .JITOLlershiR

The private form of ownership works to the advantage of the communitywithin certain guidelines. The first of these is that the communitymust take an active interest in al] aspects of the franchising process.Secondly, important is the fact that the corporation must have a satis-factory record of performing well in past agreements. With these twoconditions met, a city can expect to attain a favorable private ownershipfranchise agreement.

Meeting the first guideline would assure that an intelligent, beneficialfranchise ordinance would be designed. A successful franchise is dependenton input from all segments of a community. Early involvement by the businesscommunity, educators, students, parents, churches -- in short, all the socialgroups -- should be encouraged by th,_ governmental unit. Economicanalysis coupled with these social inputs should result in the design of adesirable and feasible ordinance proposal, insure the protection of thecommunity's interest in the development in a comprehensive franchise ordinance,and would also increase community acceptance and use.

Meeting the second guideline is vital and more difficult. Many corp-orations view present FCC guidelines as maximums rather than minimums. Thisattitude could make it difficult to gain any concessions from potentialfranchisees. A more serious aspect of this same problem is that portionsof franchise agreements exceeding FCC guidelines might be deleted by theFCC during the certificate of compliance reviewal.

The franchising process, therefore, is threefold. First, a city mustfind a corporation willing to sacrifice immediate profit for long term gainsaccruing from improved community relations. Second, FCC approval of theagreement must be gained. The thirst iS to insure corporate com-pliance of contract provisions during the franchise length.

Presently, there is still s=e speculation as to what the FCC willapprove. However, it is quite likely that a commitrisnt of private localmonies to CTV projects could aid efforts to gain public service concessionsfrom the franchisee. If enough money is invested, local shareholders couldexert a strong influence on policy decisions of the corporation in terms oftheir municipality.

The problems, however, of the private ownership approach should not beminimized. It must be understood that a corporation is operating withina profit motivation. This frequently leads to a different view of public in-terests manifested most obviously in the orientation to mass audienceappeal programming rather than specifically aimed local programs. It is un-likely that wide appeal entertainment programs will do much to solve un-employment problems or alleviate educational deficiencies within a city..

CTV is a high-risk operation and the interest rate on capital forces aprivate concern to be highly sensitive to programming costs and returns. Aprogram that gen,eated low viewer interest is simply uneconomical. Thistype of program, however, would be uneconomical for a municipally ownedsystem also. A municipally owned 5ysico could cut some of the costs, butit is doubtful that they could cut them significantly given comparablequality. Under the private ownership system, the citizens would be fullyaware of the costs of the services they received and could express theirapproval through subscription demand level.

It should be re-emphasized that the private ownership model is onlyone alternative and only beneficial within certain constraints. A cityshould be prepared to study other forms of ownership or the limitin6 con-straints cannot be meta Private ownership should not be looked uponas a way to relieve the city administration of the work required to estab-lish a CTV system. Nor should it be approached as the ideal system. How-ever, neither is it inherently unworkable in a public service context. Itsfeasibility and usefulness hinges on the effort put in on the local leveland the cooperation of the owners.

1. Public Interest Factors:

Advantages

1. The city need not involve it-self in the political issuesgermane to a municipally ownedsystem.

2. The short run political costs ofgaining special programs for thlpoor and minorities through cablemay far outweight their advantagesin the eyes of the politician. Thisis particularly true if a privatefirm is willing to provide similarpublic service benefits.

3. An informed municipality can de-sign a franchise that would gainconcessions from the cable industryand work to the advantage of thecommunity. Much of the blame forfranchise agreements detrementalto the public interest can be laidwith the granting municipality, notthe corporation.

1.

Disadvantages

If the city does not examine otherforms of ownership, it will be in-adequately informed when dealing withprivate companies.

2. Many proposals of private prospec-tive franchises indicate a view ofpublic service which is unimaginativeand myopic and makes minimal commit-ment in the area of public interest.

3. Private ownership by profit seekingentities (many time large corporations)is likely to focus on programmingdevelopment for mass audience appeal,instead of substantially directing re-sources into programming which is re-sponsible to the true need and socialproblems of the communities which theyservice.

4. It is possible for a municipalityto fashion criteria for franchiseawards and actual franchise con-ditions so as to approximate thelevel of services which would be pro-vided by a public entity.

4. Community access channels presently pro-vided in cities having cable TV are, witha few notable exceptions, empty themajority of available time. Educatorshave failed to make comp ittments neces-sary to utilize cable media as a majorteaching tool. Cities in tightvenue situations have been reluctant toinvest in public service programming.

Advantageses

5. In the top 100 markets,, FCC reg-ulations require the providing ofone channel each to government,schools, and the public. Properuse of this channel space couldprovide many of the public serviceneeds of a community without govern-ment being involved in the entireoperational process of the system.

2. Financial Factors:

1. There is no need for the city toraise money for capital outlay andoperating expense.

2. City monies need not be vested ina risk capital venture. It is un-likely that a city would have sur-plus dollars to invest in a cableTV system that would probably notreturn any money to city coffersfor several years.

3. Some municipal services could beperformed via cable, resulting inoperational savings which in thelong run could offset the cost ofconstruction.

4. Some city revenue would be gen-erated through taxes, however,the majority of these monieswould go to county, state andfederal agencies.

3. Operational Factors:

1. The city council would not have tomanage the construction and oper-ation of the system.

2. Private MSO ownership could bringgreater management experties to oper-ate the system and greater resources todevelop new programming and new services.

Disadvantages

1. The cost of private developmentand operational capital is muchmore expensive than tax-freemunicipal financing, resultingin a higher cost to the systemusers.

2. Private corporations have to makea profit, whereas municipal owner-.ship could operate at cost or ata small profit which could bereturned to the city treasury,more than offsetting the loss oflocal tax revenue.

3. The cost of. local services leasedfrom the system owner would costmore than if leased from amunicipally.cwned system.

4. Profit making corporations ownedby interests outside the citywould remove profits from thecommunity instead of recyclingthese funds.

5. Private ownership limits cityrevenues to 3% of subscribers'fees and total revenues.

1. The 3% franchise fee would be toosmall to adequately monitor thesystem.

2. There could be difficulty in theenforcement of the contract termsbetween the franchisee and thecity. The typical enforcement

3 City would have less responsibilityin monitoring the system, any con-sumer complaintS and the utilizationof the public channel.

mechanism is the performance bond,upon which the city would have torely in order to insure system con-struction. Therefore, the city hasthe time-consuming problem of periodiAsystems review and punitive devices,such as punitive bonds for systemconstruction and operation. If thesealternatives are ineffectual, thecity is faced witn the public processof franchise revocations. In orderfor the city to protect itself againsithese processes and pursuant to aschedule of fixed amounts designatedfor specified violations offranchise/ordinance agreements, theerring cable operator is "billed" bythe city diminishing the performancebond by the appropriate amount. Thisdevice is often complemented by theultimate sanctions of revocation ofthe franchise or nonrenewal after theterm of the franchise has run.

IV. PUBLIC OWNERSHIP

A. Introduction

While there are some substantial differences betueen public and privateconceptualization of cable as an all encompassing telecommmnications servicemedium, the issue confronting municipalities does not have to be limitedto a choice between public and private development. Alternative measurescan be utilized to assure meaningful compliance with public need on thepart of private owners. This may, however, prove to be a task so difficultas to force the issue back to a choice between public and privnte ownership.This is because many private companies which are now in the process of seekingfranchises are extremely reluctant to provide anything above and beyond minimumFCC requirements. In order to implement a public service plan which exceedssome FCC requirements -- i.e., channel capacity -- FCC approval is needed.

Many of the policy factors offered in support of public ownership as theform.which will be most responsive to the need of the public must beevaluated ill light of the particular facts confronting a municipality. Thisis mentioned not to negate the validity of these factors, but rather tocaution that each policy factor should be examined in depth in order toestablish its significance for each municipality. Further, it should be notedthat certain trade-offs may be involved in opting for public)instead ofprivate ownership.* But again, the weight attached to factors which willactually be lost by selecting public ownership must be established withreference to the particular prospective franchisees. and their respectiveproposals.

5. Forms of Public Ownership

Should a city decide to opt for public as opposed to private developmentof the cable system, a choice between public models (Direct ownership by themunicipality, nonprofit corporation, special public authority) and othercombinations of private and nonprofit groups.

With respect to all models of public ownership, terms governing theconstruction, operation, and maintenance of the system must be set out, justas they are for private ownership. Such terms would be the equivalent ofconditions imposed on a private owner by means of a cable ordinance and a franchise,although the form in which they would be embodied might vary depending on themode of ownership.

C. Factors Favoring Public Onwership2/40-49

The cable television study committee, in its report to the Common Councilof the City of Detroit, identified the following factors which favor optingfor public ownership. The primary motivation in developing cable should bethe system's potential for becoming the "pervasive" communications medium forthe city and its residents.

10

*1/10-7

1. If substantial profits are to be realized at some point, the systemshould be constructed by a public entity using profits to improite the system,which could be done without foreclosing a role for private enterprise in operat-ing the system.

2. Private need for profit would jeopardize the level of servicesprovided.

3. Comparatively speaking, public borrowing is less expensive than privatebecause the returns on public bonds are tax-exempt,, and thusa.publie entitycould take advantage of lower interest rates.

4. Lower subscriber rates should be ensured through public ownerships.

5. Sensitivity to the interests of all citizens. Reasoning that the sameneed to maximize profits which in the broadcasting industry led to cateringto majority tastes will be operative in cable, the committee concluded thatthere is a greater probability that a publicly appointed board would providemore attractive and diversified programming and. maximize public servicesthan would a private entrepreneur.

6. Procur..ment of effective management and administration. The committeeacknowledges that satisfaction of these indices are a function of thecaliber of people who are recruited to manage the system, as well as the con-cerns and interest of the organization's directors. One advantage under publicownership would be the assurance that the ethnic and residency requirement ofmanagement personnel would be more easily met.

7. Maximum incentive for creating and maintaining the highest level ofservices for the city and its residents. Acknowledging the fact that it isunrealistic to expect a private entrepreneur to be willing to defer profitsand immediately implement the variety of services recommended, the committeeclaimed that a public entity with long-term financing can do so withoutpressures from stockholders to return some profits during the early stages.

8. The public utility nature of the services performed. The realities ofthe money market will dictate a private entrepreneur's need to obtain sub-stantial returns to offset the risk he has taken, while in the case of apublic authority or nonprofit corporation, all that is required is to breakeven.

9. Ability to financially withstand initial p,,ri:,do of low revenues with-out long-term financing. It is not possible for a private entity to bothprovide high service and defer profits. This fact is significant becauseduring start-up periods, subscriptions are initially slow, and funds arerequired to pay expenses for operations.

10. Responsiveness to public concerns, and the caliber and quality of theprogramming which might be provided on the cable. Private enterpreneurs have

11

almost no local origination experience, so there is little to suggest hissuperiority over tha public's. Finally, the committee asserts that apublic entity has more freedom to use revenues to improve services andprogramming than a private entrepreneur who must obtain profits.

11. Both public and private forms must be able to meet operating aidcapital expenses through subscriber fees, a public entity specificallycommittee to utilizing the cable system as a telecommunications mediumto serve the people would be more likely to ultimately direct its profitsbackinto,pp)lic service than would a private operator who would beobligated to retui'n to" investing sharpholders.*,

D. CTV Cost Factors for Hardware

The following hardware cost factors are based on information availableat the time of publication and reflect the cost of building the averageone-way distribution system, providing for both quality color fixed andmobile production facilities.

1. Capital Cost Distribution System

a. Ccble Feeder and Line

(1) Cost of the coaxial cable, gauge 59; amplifiers, andtheir placement along the street. Two estimates of$6500 per cable mile, and $9000 per cable mile. Theabove figures correspond to the estimated investmentcost of above-ground installation per mile cited in theLeague of California Cities report.

(2) Underground cable lines could cost anywhere from $10,000per cable mile and up depending on the type of streetconstruction.

(3) Trunk cable connecting the local antenna and broad-casting facilities with the master control facilityat $12,000 per mile.

b. Master antenna and control facility or the main switching stationfrom which programs originate from local broadcast centers wouldbe sent to other local systems, approximately $150,000. (Thisfigure falls within the cost range described in the League ofCalifornia Cities report.)

c. Local antennas with more than one antenna being necessary, "dueto the inevitable deterioration of the signals as they areamplified over the line," $40,000 per antenna at 150 ft.height, with inflation raising the rate to $49,000 in fiveyears.

* 1/10-10

12

2. Capital Cost for Programming

a. Professional color television studio using two Shibaden FP1200 three-plumbicon television studio cameras, color filmchain, three ore-inch helical scan IVC color video recorders,broadcast production switcher, announce booth, complete plo-duction consoler audio reel -to -reel and cartridge recorders,lighting, and all necessary hardware and cable. Basic hard-ware and equipment includes:

(1) two FP1200 Shibaden Color TV Cameras $32,520

(2) two XX111 Rank-Taylor-Gibson zoom lens 7,800

(3) two Hercules Pedestal with Cam-Link Head 1,400

(4) one HV1100 Shibaden Film Chain Camera withAutomatic neutral. 11,000

(5) one 5300 Series Laird Multiplexer with Bell &Howell JAN 16mm Projectors and a dual 35mmprojector 11,000

(6) one Visual Electronics ProductionSwitcher, installed 15,000

(7) one complete Production Console withindividual camera picture and waveformmonitors, Rapid-Q cartridge recorder,digital clock, patch bays, etc 27,000

(8) one IVC870C one-nch color Video Recorderwith assemble and insert edit; and twoIVC825C one-inch color recorder with capstanservo and record monitoring 20,400

(9) Lot, Colortan Studio Lights 4,000

(10) Microphone::, stands, hardware, cable andother items needed to complete color studiosystem (price includes engineering, deliVery,installation, check-out, as-built drawings,instructions with instruction manuals, and one-year warranty on parts and labor, 90-day imagetubes and VTR heads) 19,290

TOTAL $149,410

b. Mobile Video Color TV Unit (self-sustaining)Cost: $75,000 - $125,000 (varies as to type ofequipment).

(1) two HB1100 Shibaden color cameras $20,000

(2) two cable 200M lens 10 to 1, 200mm 2,200

(3) two pedestal cam heads 1,000

(4) one visual electronic productionswitcher 8,000

(5) one complete production console withindividual camera picture and waveformmonitors, Rapid-Q cartridge recorder,digital cick, patch boys, etc 27,000

(6) one VC870C one-inch color video re-corxer with assemble and insert edit 20,000

(7) one VC825AC one-inch color recorder withcapstan servo and record monitoring 6,200

(8) studio lighting kit 1,500

(9) Colortran studio lights 2,000

(10) Mobile van power 4,000

(11) Miblie van cost 11 000

TOTAL $104:700

3. Other Cost Factors

a. Personnel costs for the distribution system are included inthe capital cost of the distribution system.

The capital programming costs are only for equipment (hard-ware) and do not include the following cost factors:

(1) land

(2) building

(3) staff

(4) other related software costs

E. Engineering and Financial Projections 2/30, 1/2-1, 1/2-160

Engineering and financial projection studies should precede the ultimatedetermination of which form, public or private, will be responsible fordeveloping a nunicipality's cable system.

13'

Such studies are necessary in order to define prospective services thesystem will offer and to decide whether an "acceptable level of services canbe provided under alternative modes of ownership."* Based on the above reasons,the Detroit cable study committee recommended that the city declare a moratoriumon all caole television decisions so that the city will be able to undertake

such studies.

*2/2814

1. Areas of Study.

a. The demand, cost and benefits from the community, public access,municipal and educational uses.

b. Software or programming coats require initially to providethe full rang, services.

c. Benefits, including cost savings, to the municipality throughapplication of cable municipal servicas such as police andfire protection, vocational rehabilitation, inspector monitoringof construction work through mobile cameras, educationalprogramming, job information, police recruitment, etc.

d. The feasibility of having a private franchisee without loss ofpublic services, including a determination of the cost of suchservices as channels for public uses along with the requiredequipment and staff, funding of programming, training programs,cost reduction for certain users.

e. Market analysis to determine the time-frame for subscriberpPnetration.

f. The possiblity of partially supporting the cost of programmingtelevision aspects of cable through the allocation of funds fromgross revenues or revenues from advertising.

g. Evaluation of competing technologies and the complexities ofinstallation.

h. Potential revenues from pay television and non-television usesof the sytem, i.e. data transmission and alarm systems.

i. Feasibility of public financing through general obligationand/or revenue bonds.

F. Financing Public Ownership

Public services cost money. Someone will have to pay the costs nomatter which form is ultimately selected by a municipality. Logic and reasonstrongly suggest that the someone will be the residents of the community to beserved. If a private entity owns the system and the city imposes the burdenof comprehensive public services as a condition of ownership, the public willprobably end up bearing the cost through higher subscriber fees. If the publicentity is responsible for development and operation of the system, the publicagain must pay. Public ownership which will provide a multifaceted range ofpublic services increases the overall cost of the system. This is because theamount of capital needed to develop such a system is jettisoned upwards. Thepublic monies which might be spent on more urgent needs are being diverted into

15

the cable system. In addition, a more expensive system will create pressureson a municipality to raise taxes or initiate new taxes to support the system.This could mean that p2rsons subject to a city's taxing power, but who are notthemselves cable subscribers, would be forced to support the system.

The feasibility of public financing should be the object of a comIre-hensive study undertaken by each municipality itself before making theeasy choice of relegating the development of its cable system to the privatecompany sphere.

Given the overwhelming financial requirements of the new telecommunicationsindustry, it is no small wonder that the private profit-making concerns whichare more capable of raising investment capital (from the usual businesssources, banks, etc.) have dominated the ranks of cable franchise holders.

G. Requirements for Tax-Exempt Status (A Summarization of the RequirementsDiscussed in the Detroit Study, p. 42-32)*

1. The corporation must engage in activities essentially public innature. This is satisfied if the corporation engages in somethingwhich the city itself would have powers to undertake, and becausea city has the power to develop and operate a cable system, therequirements would be met.

2. The corporation may not be organized for profit. However, organization for profit for the purpose of retiring indebtedness isallowed.

3. Satisfaction of the requirement that the corporate income must notinsure to any private person is met by qualifying under the statelaw as a nonprofit corporation.

4. The state or political subdivision must have a beneficial interestin the corporation while the indebtedness remains outstanding, andit must obtain full legal title to the property of the corporationwith respect to which the indebtedness was incurred upon the re-tirement of such indebtedness. In meeting the beneficial requirement,the city could be given the right to purchase the cable system at anytime for a price equal to the indebtedness, with all shares of thecorporation's capital stock or its membership certificates held in trustfor the city. Satisfaction of the city obtaining title upon retirementof the indebtedness could be specified as part of the terms in thearticles of incorporation and/or both trust instrument.

5. The corporation and the specific obligations issued by it must havebeen approved by the state or political subdivision.

* Additional variations of these requirements may appear in the variousstates.

16

H. Social Policy Factors

1. Introduction

Since the major attraction and oft-cited advantage of public owner-ship of cable TV is the commitment to public services both in terms ofprogramming for subscribers and in terms of employment and managementopportunities for local residents, the initial discussion of public owner-ship alternatives usually is focused on an elaboration of social policyfactors.

2. Failure in Meaningful Compliance with Public Need (Example)

The purpose of the following example is to provide an illustration of thephilosophical incapatibility of committment to effectively meet the needfor public service-oriented programming geared to be responsive to communityneeds and problems and the commercially based profit-oriented nature of privateownership.

Several months ago, a major national cable company submitted an applicationfor a cable franchise to the appropriate municipal body in a large Californiacity. The application was for the entire city area, with a separate requestfor the area encompassing a Black community which represented almost 18 per-cent of the total city population. The proposal for programming, whilesetting forth plans to comply with minimum public access channel and over-the-air television signal carriage requirements (as well as other FCCminimums), emphasized entertainment and sports program packages as its sellingpoint. Taken alone, this porposal does not seem patently offensive or violativeof the public interest. However, when the demographics of the Black communityto be served are examined, a much different assessment of the entertainment andsports emphasis of the proposed "service" emerges.

This particular Black community was not substantially different from poorurban communities throughout the country in terms of its problems: grave un-employment, inadequate educational opportunities, lack of adequate recreationalfacilities, substandard housing, community-police relations problems, in-sufficient health care facilities, swollen welfare rolls and lack of meaning-ful visibility of residents or their problems afforded by the new media,especially television.

Cable television, of course, is technologically capable of providingsolution-oriented programming and services to meet many of these opportunitiesfor the residents of the community and thereby provide the system with sub-scribers so essential to its survival. A focus on entertainment and sports seemsludicrous when evaluated from the standpoint of community needs, rather than fromthe perspective commercial profit and compliance with minimum FCC public interestrequirements.

Many enlightened commentators in responding to this basic incompatibility,between meaningful response to public need and private ownership, havearticulated policy considerations which favor opting for public rather thanprivate development of a municipality's cable system.

17

3. §pe211:ELLthIcAlternativestoOwneiatProtectsiniithts

The specific alternatives to ownership which would protect a minoritygroup's right to employment and responsive programming in a municipalitiy'scable system include the following measures, proposed by the Detroit cableTV study committee:

a. Designation of the construction and certain operating functions to aspecial public authority or nonprofit corporation, the directors of whichwould be residents of the municipality to be served and would reflect theminority group composition of the municipality.*

b. Contracting or subcontracting out to local firms, including minorityfirms system-wide functions which are the responsibility of the specialpublic authority of nonprofit corporations such as: solicitation ofadvertising, obtaining programming for commercial channels, maintenance,technological improvements, operation of the commercial channels, developinglocal programming for the commercial channels, soliciting subscribers forthe system. **

c. Decentralization of programming for the public, municipal andeducational channels achieved by the creating of cable districts, theformation of which would be in part determined by ethnic group boundaries.

d. Requiring that all persons employed in construction, operation, andmaintenance of the cable system proprotionately reflect the racial andminority group composition of the population of the municipality.***

e. Requiring that the system operator not discriminate on the basis of raceand that the operator and those connected with construction, operation, andmaintenance of the system fulfill the affirmative requirements of the local,state, and federal law relating to equal employment upgrading, demotion ortransfer, recruitment or recruitment advertising, layoff or termination, ratesof pay, and selection for training, including apprenticeship.****

18

* 2/47** 2/55*** 2/111**** 2/111

V SPECIFIC FORMS OF PUBLIC OWNERSHIP

A. Municipal Ownership

1. Introduction

This di,,cussion of specific forms of public ownership will includethe following: municipal ownership; nonprofit organization; and specialpublic authority.

There are presently about 18 municipally owned cable systems, rangingfrom one of 130 to one of 5,000 subscribers. It is apparent that most ofthese systems evolved because television reception was inadequate or non-existent, and private operators were either not able or willing to serve thearea. Now, municipal ownership is being considered by a number of citiesregardless of the availability of private investment funds, primarily because ofpublic interest considerations and expansion of potential uses of cabletelevision under new regulations.

The appropriateness of municipal ownership of cable communicationsfacilities in a city hinges, fundamentally, on the threshold question of whatthe city and its citizenry want and expect from the communications system ofthe future. Will the desired system be an essential municipal service, oewill it be a private business?

The question involves consideration and analysis of a number ofissues: What kind of system is desired? Will it be primarily and entertain-ment mechanism for subscribers? Is it chiefly a source of revenue? Is itviewed as an ancillary benefit to the city, both now and in the future, or aspotentially the cornerstone upon which municipal services will be organized?

A system which is directly owned by a city could be operated (1) bya city department or agency, or (2) by a private concern under a managementcontract from the city.

2. Organization

A city operating its own electric utility may have in existence anorganization capable of financing and handling installation and maintenance ofthe cable television distribution system. Depending upon workload, someinstallation work may be best accomplished by contract. Head-end and studiofacilities and equipment should be engineered and installed under contractbecause of the specialized knowledge and experience required. Cities withoutelectrict utilities would have to establish an organization capable of installingthe distribution system, both overhead and underground.

Additional technically qualified personnel would'have to be hired tomaintain the electronic equipment in the head-end, studio, and distributionsystem.

Most of the supporting services, such as financial accounting and billing,personnel administration, engineering, and legal services, may be provided

19

entirely by the general government organization once sufficient training isgiven to orient existing staff to any unique requirements of cable TV.

Program management is the challenge presented by cable television withwhich cities are least familiar. If a city is highly motivated to do itsown program management, trained and experienced personnel may be obtained ifcompetitive salaries are offered and an extensive recruitment is conducted.The staff would have to include an experienced director of program managementto be effective.

Another approach would be to contraoi, with an established cableTV company for program management services, ensuring that the public interestis protected through specific guidelines built into the contract. Themanagement contract concept could be broadened to include expansion of thedistribution system, service connections, maintenance of the entire system,and customer relations. This approach would be especially attractive tocities leithout electric utilities. However, someone within the city governmentshould be assigned responsbility for close administration and monitoringof the management contract, if adequate public control is to be maintained.

In the interests of economy, cities with electric utilities should makeevery effort to absorb as many cable television functions as possible withinthe existing utility and general government organization, with the exceptionof program management, which probably can be best accomplished undermanagement contract.

3. Advantages and Disadvantages of Municipal Ownership

a. Public Interest Factors

Advantages

1. It is possible to view cable communications as essentially a municipalservice in the nature of a publicutility. Broadband communicationscarries with it the use of cable foressential municipal services (policeand fire surveillance, traffic con-trol, meter reading, and education,including interactive instructionaltechniques, interactive community in-formation retrieval and computer as-sisted instructions). This view ofcable emphasizes the public service-public interest approach to cable withthe television and entertainment por-tions of the cable communicationssystem viewed as ancillary.

2. Because it is tied more directly tocommunity, a municipality will prob-ably emphasize the public servicenature of cable communications by:

* 1 /10 -10

Disadvantages

1. Cable investment may take neededmonies away from the other pressingneeds a city has in the provision ofessential city services. Bread-and-butter issues, such as the deseg-regation of the educational system,reduction of welfare rolls, un-employment and the like, may havegreater priority for immediateredress than would the developmentof a new communications mediumpossibly taking many years to breakeven financially.*

2City ownership poses a possibilitythat the city's competitive inter-ests as an operator could conflictwith other communications modes inthe city, i.e. newspapers, radio,and TV broadcasters.

(a) building and maintaining a systemof the highest possible quality andflexibility; (b) attempting to achievemaximum penetration, as close aspossible to 100 percent of all house-holds; (c) airing controversial pro-grams aimed at informing the citizenryand protecting their rights; (d) beingmore responsive to users' needs and com-plaints by striving to make reasonablerepairs and program changes as dictatedby public demand.

3. The city, as operator, would have theoption of increasing the FCC minimumtechnical and channel requirementswithout securing agreement fromanother party to seek a waiver.

L. Municipal ownership will also make itpossible to take a more direct con-trol in changing the system as com-munity needs and demands change andas technology advances.

5. There is considerable sentiment thata municipally owned system will bemore innovative, more willing to ex-periment with programming than aprivate operator. (Proponents of thisview assume that motivation to providepublic service is stronger than theprofit motive.)

6. Municipal ownership may offer betterprotection of free speech than privateownership hpnause of municipalities'vulnerability to legal recourses forfailure to abide by the First Amend-ment. Private owners are lessvulnerable to such control. The onlyreal recourse is the FCC and thesubscribers, who could disconnect.

7. The municipality could be a better pro-tector of privacy than a privateoper-ator. This conception assumes thatthe municipality will have more citizeninvolvement and control than would aprivate operator.

21

3. Although the FCC has absolved theowner from responsiblity for suchmatters as obsenity on public ac-cess and leased channels, the gov-ernment may be charged with theresponsiblity by the public, forexample the use of profane languageon a channel during apresentation.While the private operator mayreceive letters and some publicridicule, the municipal owner ismore likely to receive demands thatsuch conduct be prevented.

4. Municipal ownership might increasethe possiblity of abuses of per-sonal freedoms of speech, press andprivacy, as guaranteed by the U.S.Constitution.

5. The potential of two-way cable hascaused concern about the right ofprivacy. Many insist that murd-Apalownership brings closer the 1984concept of author George Orwell,where personal rights and freedomsare sacrificed to the interests of"Big Brother" because of the pos-sibility that the home of the viewercould be more easily monitored withtwo-way cable.

6. If the municipality owns and/oroperates a cable communicationssystem and provides local news withor without editorials, the govern-ment becomes a potential officialcommunity voice and will possiblymake ambiguous the notion of a freeand independent press.

7. finny current municipal systems (e.g.police protection and trash col-lection) are often criticized asinefficient and not necessarilyin the public interest.

b. Financial Factors

Advantages

1. Municipalities and private non-profit organizations are in a betterposition to tap sources such asfederal and state governments andfoundations for research anddemonstration funds.

2. Municipal governments can borrowmonies at much lower rates thancommercial operators reducing thecost of system construction.

3. Cities empowered to issue generalobligation bonds or revenue, bondswith a secondary pledge can usually bemarked at lower interest rates thanrevenue bonds. Lower debt servicecosts reduce the cost of cableservice.

4. With lower system capital costs re-sulting from municipal funding, thecity can anticipate positive cash flowfrom its system sooner than a privatelyowned system. Moreover, net revenueswill be larger, since the city does notpay federal income taxes and capitalcosts are less. This surplus can beapplied .ho system improvement, lowersubscriber costs, or other publicpurposes.

5. Financially, municipal ownership canproduce more public revenues than themunicipality could realize under fran-chise agreements which restricts it to3% of annual subscribers fees. (E.g.

the city of San Bruno, Calif., expects$200,000 in surplus revenues in yearseven alone. This is much more thancould be expected in ten years offranchise fees4

6. Most arguments favoring municipal owner-ship focus primarily upon the alloca-tion of the surplus or profits gen-erated by the system. Many municipal

* 2/41

** 2/41

22

Disadvantyes

1. Financing a modern cable system 3.n-volves heavy capital expendituresduring the first years of con-struction and operation. Moreover,low intial operating revenuesnormally result in a negative cashflow in early years.

2. Notwithstanding the ability of acity to issue revenue bonds or gen-eral obligation bonds, severalhurdles must be overcome: federaltax restrictions which present acrucial consideration. The ex-istence of certain federal tnxrestrictions may severely limitthe saving in inturest cost soughtthrough financing by neellsmunicipal bonds.* The cruxfederal tax issue is that a bondissue which would be used to financethe construction of the systems couldlose its tax-exempt status if thesystem were to be leased to a pri-vate operator.** Even if only apart of the bond issue would bethreatened, this result is dictatedby the 1968 revision of the In-ternal Revenue Code which deniesthe tax-exempt status to bonds wherea major portion of the proceeds areused in a trade or business withrepayment being secured either byproperty acquired with the proceeds"or by rentals for its use.

3. Municipalities may be required bystate law to begin debt service with-in a year or eighteen months afterthe revenue bond issue. Sincecitizens are not required to becomesubscribers, there is no guaranteethat the system will generatesufficient revenues to cover debtservice in the first years of op-eration.

officials see cable as a way to solvecity financial problems through theproduction of revenues over a longperiod of time. If the municipalitycan raise the required capital andoperate with a negative cash flow forfive years, cable could, at some point,pay off the debts it has created andproduce a surplus.

7. There is also the possiblity thatsurplus could be used for such thingsas reducing subscribers fees and in-creasing services.

8. Municipalities that operate publidutilities have experience in develop-ment, construction and operation andmanagement of systems similar to CTV.

9. Cities may own the poles or under-ground conduits necessary for systemconstruction, thereby lowering de-velopment costs.

23

4. Cities should be prepared for aheavy lobbying effort by the in-dustry against municipal owner-ship, especially at the point ofattempting to raise revenues througha bond issuance, even facing aseries of delaying lawsuits. If theindustry does not fight the bondissue, there aro a rambor of localsources that might: existing broad-casters, newspapers, private non-communications industries, or publicinterest groups.

5. Frequently, the bond issuing agencyis required by the terms of the bondcontract to raise subscriber rateswithout recourse to the public when-ever the service is threatened withoperating deficits.

6. During the life of the system, im-provements must be made so th,' thesystem does r.)t become obsolete.justments may become necessary toimprove signal strength or raisechannel capacity. Operating fundsmay not be sufficient for the pur-pose, and the municipally ownedsystem may have to go into debt againto make the needed changes.

7. In many states, revenue bond lawsrequire--in the interest of financialsecurity of the bonds--that the rev-enue producing service be operatedby an independent service or publicauthority. California, however, doesnot appear to be bound to this re-quirement.

8. Federal tax laws generate a strongsubsidy to private industry throughtax credits for operating lossesand depreciation. Thus a privatecable system operator is bufferedagainst the enormous negative cashflows typical of the cable industry.A municipally owned system, since itpays no federal income taxes, is notsimilarly protected, and the city canexpect to make up major operatinglosses in its cable system operationfor the first 2 to 5 years.

9. A potential danger of businessfailure would be in the r tirementof outstanding debts. Generalobligation bonds would place thefinancial burden on the city. How-ever, revenue bond Losses would haveto be absorbed by the revenue bondholder.

10. Taxes which might be necessary tomeet new fiscal demands generatedby cable may be met by a growingdissatisfaction with increased tax-ation, including community sentiment,which may not support the notion thatmunicipal ownership is the best long-run strategy for developing cable TVpotential for local Theshort-run costs may be sufficient toenv'ee considerable political back-lash when priNate organizations areready to bear these costs.

11. There is the possibility of 13t:suits resulting from system oper-ation. Even though insurance woulaprobably cover the financialliability, the system owners andoperators may be subject to enoughpressure to adversely affect systemoperation and utility.

12. There are presently 18 municipallyowned systems in the U.S. However,in most cases municipal systems in-cludo a significant proportion oftheir subscribers from fringe re-ception areas. There is no municipal-ly owned system in existence whichservices a clear signal area. Eventhe city of San Bruno G1V system,which is in one of the 100 largestmarkets, includes a fringe area ofapproximately 25 percent of its sub-scribers. This fringe area pro-vides a financial base for the el.oration. Consequently, financial dataon economic liability of municipallyowned systems is limited.

24

c. Operational Factors

Advantages

1. Private operators have been criticised 1.

for building, then not maintainingtheir system adequately. If this isthe franchising experience of a par-ticular city, they may have less powerto insist on quality performance (asopposed to performance "adequate" tofulfill general franchise requirements)than if the municipality owned thesystem.

2. If the city has strong regulatory goalsfor a system's development, these mightbe easier to carry out if the city ownedthe system, particularly by easing theprocedure of seeking FCC approval of avariance from normal standards.

3. Some claim the municipality will moni-tor technological improvements andmake them more often and more readilythan private operators. The rationaleis that the municipality's first concernis the public interest and that, as themost direct link to the populace, it willrespond to subscribers' demands to main-tain a high quality system.

4. Cities that own and operate electricand water utilities already share anumber of operational similaritieswith cable: utilities have employeeswith many of the necessary skills forcable installation and service, withexperience in handling service calls,bookkeeping and billing.

25

Disadvantages

The ability of the municipality tomake capital improvements largelydepends on the availability of oper-ating funds. Opponents to municipalownership point out that municipal-ities are less likely than privatecompanies to make changes becausemunicipalities must use public fundsto make substantial improvements. Inthe face of an ever-present need forrevenues for other priorities, thecity will have to justify expendituresfor cable improvement to the

2. The complexity of cable management--marketing, financial accounting,advertising competition, contracting,labor, copyright, legal problems,weather problems, maintenance, l'.1-surance, and other vexing problems--constitutes a negative factor formunicipal ownership as the munici-pality has no viable operationalexperience in the CTV industry.

B. Nonprofit Organizations

I. Introduction

An increasing form of public ownership of cable television systems ij evidentin the nonprofit corporation type, of which there are some 60 in operation in thiscountry.

A nonprofit private corporation is pertinent to modern cable television becauseit is a hybrid between public and private enterprises. Nonprofit status assures thatmanagement will not have a financial obligation to stockholders. It eliminatesmunicipal management of the cable system as well. Depending upon its charter, anonprofit corporation may be exempt from paying income taxes, thus increasing thepossibility for retention of funds for local purposes, in addition to being ableto provide cable service to the subscriber at a lower cost.

It is necessary to identify and resolve the legal problems relative toestablishing a public corporation and to determine how its potential memberorganizations, particularly cities and schools, may participate and commit publicfunds to partially offset the initial operational costs.

So as to develop a detailed description of the proposed agency's goals andobjectives, and specifically to identify the types of services that will be madeavailable to member organizations, it is necessary to ascertain the position tobe taken on questions such as these:

a. What is the main function of the corporation, i.e. would it ownand operate the cable system or would the municipality own thesystem and the nonprofit corporation operate it? (Of interest inthis connnection is the cable system in Frankfurt, Kentucky, whereoriginally the system was owned and operated by the city. However,the city soon felt it was not able to manage the system in thebest possible way, and a nonprofit corporation was created to operatethe system while the city retained ownership.)

b. What type of a governing body would there be and what relationphipwould it have to the community and the city?'

X c. Should the corporation have different types of memberships?

d. What are the projected staff needs during the first five years,and what duties will they perform?

e. Would noncorporate entities be eligible for services?

26

2. Advantages and DIsadvantlges of Nonprofit Organizations

a. Public Interest

Advantages

1. Corporate management is free to empha-size as much public service as prudentexpenditures will permit.

2. Increased involvement of the communitymembers in the corporation should im-prove public involvement in the develop-ing and utilization of local program-ming.

3. Because management is locally based, de-cision-making would be local and moreresponsive to public need.

4. Management is free of municipal control.

b. Financial

1. Nonprofit corporations, under somecircumstances, are allowed by theInternal Revenue Service to issuetax-exempt bonds to be issued onbehalf of a political subdivisionof a state, thereby significantly de-creasing the cost of capital outlay.

2. An example of sources from which theinitial "risk capital" amount of moneycould be obtained would be foundations,participating nonprofit organizationsand a variety of governmental agencies.*Additional benefits may be derived byutilizing as a source of capital suchas loan guarantees and interest sub-sidies. Loan guarantees by agencies orfoundations have been suggested as amethod of making lending institutionsmore receptive to extending loans tononprofit corporations created for thedevelopment of public cable.

3. Already there have been successfulexamples of the nonprofit corporationapproach in cable construction andoperation, such as the joint effort

* 1/10-24

Disadvantages

1. Nonprofit management may, to a degree,substitute for subscriber wishes itsown conception of the public interest.The city regulatory mechanism wouldhave to provide balancing incentives.Whether this arrangement would bemore in the public interest than therelationship between the city and aprofit maker is fundamentally a valuejudgment.

2. Special interest groups might gaincontrol of the system and proselytethe system to its own interests.

1. Difficulty in assembling a community-based organization which would act asa catalytic agent necessary to designthe basic corporate framework andmanagement system and, more importantly,to raise initial risk capital requiredto obtain the additional borrowed capitalnecessary to sustain the corporationthrough its early unprofitable years.

2. The current high interest cost for riskcapital would tend to reduce the feas-ability of borrowing money during periodsof extreme high interest rates. Thedegree to which this would be a dis-advantage would be determined primarilyby the percentage of the system rasiedor provided by the corporation. The lessamount needed to be borrowed by thecorporation, naturally, thelower theinterest rate.

Although it is feasible for a nonprofitcorporation to secure capital through theisuance of tax-exempt bonds pursuant toIRS Revenue Ruling 63-20, this form offinancing au run contrary to state lawsrelating to municipal finance. Carefulscrutiny of such laws must be included inexploring this facet of public-finance.

s.

of the Unit..: Church Christ andthe Barfora insurance Co., anc Norwalkand Waterbury, Conn. A different ap-proach using the same basic concept isusing the combination of public municipalownership in combination with a sep-crate non-profit corporation operatingthe system.

4. Overall advantage to this approach isthat financing required to build andoper,,t, system has lower interestcost which reduces the overall totalcost of system development and use, there-by providing opportunity of reducing in-stalation and subscriber fees, and in-creasing resources for the developmentof public service-oriented activities.

5. An appropriately constructed governingboard would provide a non-profit corp-oration with consulting serviceswhich could donate management at nocost, thereby reducing costs.

. Profits generated h a non-profit corp-oration would be retained in the com-munity instead of being paid asdividends to absentee share holders.

c. Operational

1. Sqch a nonprofit organization mightcontract with a private, profit-seek-ing corporation to operate the cablesystem, retaining for itself theownership and policy-making functions.As an alternative, a nonprofit groupalight negotiate with a private operatorto share ownership of the system in ajoint venture with the non7profit corp-,.uaLion r.tintaining controling interest.The organization would maintain localcontrol over the system's operation whileutilizing managemcnt and technicalcapabilities of private enterprise.

A broadly based, properly constitutedlocal corporation would be more sensitiveto community needs and would be motivatedto allocating a higher portion of thesystem's resources for reducing subscribercosts and improvement of public services.

28

1. Being able to bring together a diversegroup of local representatives whohave the time, business experience andmotivation and capability to work to-gether to provide necessary leadership to:develop, operate and manage the CTVsystem. can be an almost impossible task.

2. Voluntary-type of leadership is, inmany cases, transitory and difficult tomaintain viable board of corporatedirectors who would be capable to pro-vide leadership and continuity to thecorporation.

3, In the selection of board members froma diverse group of participating organ-izations making up a non-profit board,political struggles could result, there-by providing substandard members whichmight adveraly affect the system'smanagement..

i. The careful selection of anadvisory committee which bringstogether variety of appropriatespecialized skills related to CTVsystem operation can provide valuableconsultant resource material tomanagement.

4. Local ownership and operation of thesystem not only makes it more re-ceptable to the needs of the com-munity and subscribers, but also be-cause it is geographically availableto thee:L.

4. This type of organizational end eper-ational system might casue managementproblems because of the selfinterestspromoted by individuals and groupsconstituting the corporation.

5. It might be more difficult t6 hire capablemanagement personnel to work in a systemgoverned by a non-profit oriented layboard of decision-makers

representing avariety of interest levels.

5. This type of system organization wouldmake it possible to develop and im-plement affirmative action personnelpolicies regarding the hiring of em-ployees and the purchasing of equipment and supplies. This should serveas a positive influence in dealing withlocal unemployed, underemployed andlack of adequate opportunities forminority parties and businesses.

C. Special Public Authority Model

1. Introduction

A Special Public Authority may be the best means of providing cable televisionservices to contiguous geographical areas encompassing more than local governmentjurisdiction. Such regional service may be desirable in terms of economy (onehead-end and studio facility; one set of management and administration personnel;larger market area and revenue base to justify more sophisticated technology andprogramming) and in terms of uniting with one communications link interdependentarea having common interests. If a cable television system is to be limited to asingle jurisdication, then it should be under direct control of general purposelocal government.

There are two possible approaches to establishment of a Special Public Authority:(a) state enabling-legislation that would permit establishment of a "special districtfor the specific purpose of financing, constructing,operating and maintaining a cable,television system;* (b) a joint exercise of powers agreement between two or more localjurisdictions.

The legislation or agreement would define the structure and powers of the entityto be created and would establish system specifications and service standards in muchthe same manner as a city franchise to a private operator.** Further, the legislationor agreement would specify the method of selection of members of the governing board,either election or appointment by city councils of the jurisdictions involved inaccordance with an equal repreocntation formula.

* 2/42** 2/101

2. 2rmal4ation

a. Membership

Whether elected or appointed, members of the governing board should meetcertain minimum qualifications to ensure a knowledgeable interest in cable com-munications. Backgrounds in business, finance, education, law, and communicationsshould be represented, if possible, because of the nature of decisions that willhave to be made. Thought should also be given to structuring the governing boardto ensure representation of a cross-section of the community's groups andorganisations.

b. Restrictions Imposed Upon Members

(1) Members should be subject to conflict of interest regulationssimilar to those governing actions of city councilmen and otherpublic officials.

(2) The legislation or agreement should contain provisions bindingmembers to act in accordance with the terms of the legislationor agreement.

(3) Meetings should be announced in advance and open to the public.

c. Areas of Responsibility

(1) Define the type of system to bp built, determine the bidspecifications, design application procedures, evaluate andselect the bids.

(2) Construction of the system.

(3) Operation of the system.

(a) Business management.

(b) Regular programming and local origination programming.

(c) Supplying channels, equipment, and facilities to agenciesresponsible for programming the free municipal, educational,and public access channels.

(d) Administration of excess channel leasing.

(e) System for public information and prompt handling ofcomplaints.

(4) System maintenance, scheduled evaluation, and improvement ofthe system's capability and operation.

d. Staffing

The Special Public Authority would be permitted to hire sufficient staff tofulfill its responsibilities and to contract for equipment, supplies, and servicesas necessary.

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Decieieee as to what, should be done by staff and what should be done bycontract are matters of management judgment which may vary from one location andset of circumstances to another. The possibility of contracting with the sponsoringgeneral-purpose jurisdictions for business management and certain constructionand maintenance work should not be overlooked.

3. fptem Constructianancigverational Alternatives

a. The system could be constructed by a private enterprise and operatedby the special public authority's staff.

b. Construction could be accomplished by the special public authorityand operation of the system could be subcontracted to a private enterprise.

c. A subcontract could be issued for both the system construction andoperation with different or same organizations.

4. Advantages and Disadvantages of the Special Public Authority Model

a. Public Interest

Advantages

1. A better, more efficient cable tele- 1.vision service can be provided if twoor more small cities join together,forming a larger market area and avoid-ing duplication of certain facilitiesand equipment. The suggested optimumscale of economy would be a system ofapproximately 10,000 subscribers.

2. Where citizens, feel strongly that theircity councils may not be responsive topublic opinion and community needssufficiently, a separate public authoritydealing solely with CTV would providegrater influence and control over thesystem's management and operation.

3. 7r governing board is structuredto be broadly representative of thecommunity, the decision-making processwill more closely reflect the public'swill than do elected city councils. Inother words, there may be less politicsinvolved in the decision-making process.

Disadvantages

A separate public authority for cableTV purposes may result in duplicationof municipal agencies which might be-come competitiVe instead of cooperative,and, therefore, would tend to diminishthe degree of public service providedby the system.

2. Experience with special public author-ities or "special districts" in Calif-ornia has shown that these organizationstend to become "invisible" and are lessresponsive to public opinion and, needsthan general purpose.

3. Proliferation of public authority hascaused concern on the part of somelegislators, many of whom appear in-creasingly reluctant, to create legis-lation which would establish specialinterest community agencies.

The increased participation of the com-munity in the control and operation of theCTV system would promote higher degreesof community involvement, in the system.

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Advania

1. Econbmisand r:ilintenance

would be realized by a multi_.

jurisdictional cable Lolovi;don In-stallation, thereby r.,tducing over-all financial requirements.

2. FuJAof revenue

bonds w,111.) rot riivestingother funds necest,ary otdir essentialmmicipal ?ervices

-3. Enabling legislation can be writtento permit sale of revenue bonds with--out approval by the electbrate, asis required undr sane general purposegovernment- chartero.

4. Capita] outiv, in tarns of interestcost, would be ..Inificantlydereasedby using tax- Fe bonds, thereby re-sulting in lower subscriber costs.

. OneraticrIal

1. A special public authority rodelmay proVide more -Fublic scritiriyover operations to ensure pro-teltic)n of the public interest.

tiTh,.._:-poiicy--makALg body Find'exec-uti,4o staff would be dedicated to

mers and wouldtor!:for be more effective in

operating a- -cabletiAeviion system.-

. A f_ec;-, tJic 3riorLt.y would;,r rI.ore effive use of the

fn, :e public C... ,l fhanprivate operat,:-

4. A special public authority model :0overcome the ccur:.-,nly held fear of-government control of cOmvunications,which ,lay be an Issue under themunicipa] ownership model.

5. II- ..;ovorningL:1:lorpored by the

profit-r,otiv- cnr:i;traiz,t m12.;ht be morepr,,ne t- imdert,;kt more creative ex-perier,

adequatelymeet the compavdty's needs.

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Disadvantages,

1. Raising of capital resources might bedifficult for the following reasons:(a) th,. State may be reluctant to forma special district and revenue bond-capacity to finance it; (b) revenuebonds for this type cf high risk enter-prise would be difficult to sell, eventhough thf::y carry a higher interest rate;(This disadvantage could be overcome bydiscounting the face value of the bondswhich would thereby

proportionally in--crease the interest

cost, resulting inincreased service debt for the authority.)(c) general Ordinance bonds-that wouldrequire any type. of bonding format re-quiring.publ approval and- whoseprinciple value in interest would begvaranteed by municipal tax revenues,would Le difficult to get tax payere'

1. Thk:re may be more opportunity for un-crutinized, behind--the- scenes decision

neking because of the traditional "invisftliity" of the special-district formof (),;3nization.

2. Separate propriety agenciev sometimesbecome tf n -idependent and fail to co-.ordinate wit) other relevant publicpolicy makers, -resulting in decreasingcooperation vlth municipal governmentto coordinate services to-the sameconstituents.

VI. Summary.

CHOICE NOT CHANCE. "Cable television today," wrote the Sloan Commission onCable Communication, "is at a stage where the general exercise of choice is stillpossible. If for no better reason than that there is a history of governmentregulation in the field of television, it remains possible by government action toprohibit it, to permit it, or to promote it almost by fiat. Citizens may stilltake a hand in shaping cable television's groth and institutions in a fashion thatwill bend it to society's will and society's best. intentions. It is not as yetencumbered by massive vested interests, although that day may be no longer remote.It is not yet so fixed a part of the national scene, as for example conventionaltelevision is, that it appears almost totie to attempt to redirect its energies.There is, in short, still time."

EDUCATIONAL PROCESS. The first and most important step to be taken by anygroup of city decision-makers relative to cable TV is to become knowledgable, notso much in the technological aspects of CTV, as with various ownership options,the available alternatives in writing a cable television ordinance, and the mostadvantageous means of putting together a cable franchise. The general public mustalso be made aware of the basic capabilities of cable television, what cable is,what it is not, and how it can serve the viewers, both in public services and asentertainment. With a good background in cable TV information, the orderly, mostdirect procedure can be implimented in bringing cable television to the community.

As the Sloan Commission reported, "Cable technology, in concert with otherallied technologiesi'seems to promise a communications revolution." Cable TVas a viable means of communication, not only within the separate community, butalso intercommunity and nation-wide, is resogaized as a prime communicationsrevolution. Although it is difficult to pinpoint the date in time when therevolution will break out in full force, the time is now to begin becoming informedconcerning cable communications and its ramifications. "The problem of the innercity," wrote the Sloan Commission, "will not he v-OlfrA by communication alone, butcommunications may be brought to play a most-significant part. If cable technologyproves indeed to be the heart of a communications revolotion, its impact upon society'smost immediate needs might be enormous."

in the great amount of literature now emerging on cable television, a fewstand -ut as being exceptional. Among these are the publications of the CableTelevision Information Center of the Urban Center, 2100 M Street, N.W., Washington,D.C. 20037, prepared in a loose-leaf binder format and sectioned for easy reference.These publications are continually updated. In addition, valuable cable informationis available from several publications produced by The Rand Corp., 1700 Main Street,Santa Monica, CA 90406.

Both publications provide the two uasic ingredients for local decision-making: (1) the background information necessary prior to decision-making, and (2)a decision-making process that involves both city management and representativecommunity groups.

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VII. Bibliography

1. Baer, Walter S., and Ascnointes. Cable Communications in the ')aytonMiami. Valley: Basic Report. Santa Monica, CA. The Rand Corp.,R-943 KF/FF, January 1972.

2. Cable Television in Detroit. Report of the 1972 Cable TV StudyCommission.

3. Ledbetter and Mendolson. Television and the Wired City. UrbanCommunications Group, 1972.

4. Tate, Charles, editor. Cable Television in the Cities. The UrbanInstitute, Cable Television Information Center, 1971.

VIII. Suggested Reading

Baer, Walter S. CTV: A Handbook for Decisionmaking. Santa Monciai CA.The Rand Corp., R-1133-NSF, 1973.

Boulder Cable Communications Experience: Negotiation Process and PermitOrdinance. Boulder, Colo. Bureau of Government REsearch and Service,University of Colorado, 1973.

Cable TV: Options for Jacksonville. Washington, D.C. Cable TelevisionInformation Center, The Urban Institute, 2 Vols., 1973.

Cable Television Information Center. Publications Service. (Various looseleaf publications on cable television.) Washington, D.C. Cable Tele-vision Information Center, The Urban Institute, 2100 M Street, N.W.,Washington, D.C. 20037.

The Rand Corp. For a bibliography of selected Rand publications on cabletelevision, write The Rand Corp., 1700 Main St., Santa Moncia, CA.90406.

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