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Business, Free Enterprise and Constitutional Issues; Pro-Life and Pro Second Amendment. Susan Lynn is a member of the Tennessee General Assembly. She serves as Chairman of the Consumer and Human Resources subcommittee and on the Finance Ways and Means Committee. She holds a BS in economics and a minor in history.

Sunday, April 29, 2007

The Cable Choice Bill

Who would guess that the creation of a single franchise agreement in a small Pennsylvania town could stir such emotion at the Tennessee state capitol 60 years later?

A bill, supported by 71% of Tennesseans, called the Competitive Cable and Video Services Act is meant to expand service, infuse new technology and create competition among providers in the television service market.

However, lobbyists for local governments and the cable industry are working overtime trying to defeat the bill. Their common ground is in retaining the old system of local franchising agreements and build-out, which together have tended to hurt consumers and rural areas by allowing companies to select the more populated and profitable markets and keep out the competition.

Cable and the cities maintain that competition is already possible among cable providers because communities can enter into agreements with as many providers as they chose.

Yet, most consumers know very well that just doesn’t happen. It doesn’t happen because the large capital investment needed to build-out a television service network is usually too cost prohibitive to be accomplished based on a small market with an artificially mandated contractual timeline.

To understand why the bill's sponsors want statewide franchising, it is helpful to review the history of local franchising.

The cabling of television sets began in 1947, in a small town, 90 miles away from the large television transmitting antennas of Philadelphia. A TV store owner, tired of poor reception and poor sales, installed an antenna on a ridge top and ran a cable down the mountain to his store and several homes along the way.

When a group of business men heard of his ingenuity, they organized a business and obtained permission from their local officials to run cable on the condition that the company pay a fee for the right – the local franchise was born.

Unfortunately, the idea of improving reception in small communities soon became mired in federal regulation. For more than twenty years the service remained unprofitable and capital for growth was difficult to obtain.

Regulation aside, paying for television reception seemed ridiculous until the d├ębut of HBO in 1972. The high quality programming quickly enticed city dwellers to pay for service. As demand increased, federal restrictions soon loosened, and new, innovative cable channels helped the industry to grow.

Television service is no longer the primitive antenna on a mountain top capable of serving only a single community. It is satellite technology serving the nation. It follows suit that the costly system of negotiating local franchise agreements with hundreds of local governments, state by state, also seems out of date.

The legislature has heard the many concerns of our local governments and has worked hard to address each one by rewriting the bill.

Contractual agreements often have some negative unintended consequences. However, once we discover them we should not allow them to perpetuate. We do not require telephone companies or internet service providers to operate using the same local franchise agreement process; rather, they operate statewide, taking advantage of economies of scale. In fact, the local franchise process is what has allowed companies to cherry pick the best towns and cities for years leaving rural areas without service.

Statewide franchising is a way to streamline the work required to obtain a contract to operate, stimulate the capital investment necessary to expand service, and encourage a competitive atmosphere among providers, thereby creating real choice and competition for every consumer in our state.

Representative Lynn represents the 57th House District in Tennessee, and she is the Chairman of the American Legislative Exchange Councils Commerce Task Force. Rep.susan.lynn@legislature.state.tn.us.

Sunday, April 22, 2007

Deal Breaker

Of all the issues large and small one matter seems to be a deal breaker in the question of whether we will have competition among television service providers. Build-out, or forcing a company to build-out service to unprofitable areas, is a point so contentious that inclusion may make or break the future of the bill currently before the Tennessee legislature.

The legislation has been amended to address most of the cities’ fears. However, the cable company, and the lobbyists for the cities, are insisting that build-out provisions are an issue of fairness for consumers and must be strong. They insist that state franchisees shouldn’t be allowed to pick over urban areas leaving rural areas without service. Yet for years, the practice has been to establish local franchises in densely populated areas with forced buildout only to those rural areas on the fringe.

The bill's sponsor claims that build-out stipulations prevent competition in the market and should not be included; he sights the FCC's recent directive concerning the detrimental effects local franchising has had on competition.

This deal breaker needs to be examined.

Logically, cable’s dogged insistence upon build-out doesn’t really make sense. Why would anyone insist that their competitor be required to build their network out everywhere? If another newspaper came to town, established newspapers wouldn’t insist that they be “forced” to set up distribution citywide. Such insistence would only make it easier for customers to buy the new product.

The answer is simple, because cable knows build-out cannot be accomplished; the large capital investment associated with building-out a video network is too cost prohibitive to be accomplished based on any artificially mandated timeline.

In the past, the first cable provider in an area faced expensive build-out demands but customers eagerly purchased the new service. Total market share, higher rates and avoidance of unprofitable market areas balanced the expensive demands of building-out. Traditionally, second-comers don’t find the same eager customers that the first provider did, so the expenses associated with build-out requirements are more difficult, if not impossible, to recoup in an effective timely manner.

Another question; why should the lobbyists for the cities care about build-out? They claim it is an issue of fairness. But most city residents already have at least one TV service provider. This bill won’t deprive them of programming. As new networks establish in a neighborhood, customers will have a choice of providers.

In reality, the build-out provisions meant to provide fairness have another "beneficial" side effect; increased franchise fees. Cities receive a franchise fee based on gross revenue of up to 5%. Costly build-out serves to inflate rates and franchise fees. However as noted, for second-comers, build-out keeps most out of the market entirely. Thus build-out requirements serve to reduce the risks of competition; lower rates, lower gross revenue and lower franchise fees.

Broad statewide build-out requirements will only serve to increase rates or possibly even prohibit any competition; one would expect the opposition to demand this deal breaker.

Like any business, TV service providers must be able to take advantage of economies of scale. If competitors tried to live up to broad build-out requirements, rural communities, currently without any television service provider other than satellite, would probably not be able to afford the rates build-out would produce.

Even without build-out, next-comers will have a hard time gaining market share unless they offer a spectacular product - which the competition will then compete with. Ultimately, consumers will be the winners in this scenario.

Build-out is a deal breaker that increases rates short term and long term by stemming competition. Without competition, innovation is slow, and rates are kept high long after the capital investment costs have been recouped.

Monday, April 09, 2007

Taxes, Surpluses & Public Policy

Guest Column

By: State Representative Susan Lynn
475 Words


The Governor is asking Tennesseans to help him put schools first by supporting his “Schools First” education proposal which is to enact HB2354; a .40 cents per pack, $219 million cigarette tax increase.

However, like the tobacco settlement dollars, this legislation places the money in the general fund; it is not earmarked for education. None of the money will build one school, and much of the money must be matched by local governments. This is a great concern.

When the Governor came into office he had the “benefit” of a $1 billion tax increase from the prior administration. Yet teachers and state employees have fallen behind due to one time bonuses instead of actual raises. Lottery funds continue sit idle in mass surplus instead of being used to construct new schools. And as our schools become ever more overcrowded due to illegal immigration the Governor declares the problem to be a federal issue. The final disappointment, the April Sales Tax Holiday, so helpful for families with school age children, has been stricken from next year's budget.

Since 2002, tax revenues have grown by a tremendous 39%. With such revenue growth, it shouldn’t be difficult to put “schools first” if schools are truly the Governor’s priority. In fact, the Republican proposal to put "schools first" by funding the education budget before all other expenditures would truly do just that.

Tennessee’s low cigarette tax attracts purchasers from six of the eight states that border her. If enacted, Tennessee’s cigarette tax will be higher than all eight.

We know the cigarette tax is an unreliable and declining source of revenue. If the Governor truly wants to put "schools first", why is he putting them last by hinging their future on a tax increase instead of using the natural revenue growth that we have been experiencing? Why does he seek to put "schools first" by depending on an unreliable, declining and undedicated source of revenue like the cigarette tax? Why not support the Republican proposal to put "schools first" by establishing the education budget first before funding other needs? Why should our children’s future depend on the continued poor health habits of others?

In addition, the Governor argues that increasing the tobacco tax is good health policy. If increasing the tax on tobacco products is a rationale for protecting the health of our citizens why not use a revenue neutral proposal such as one that would lower the sales tax on food to accomplish this task?

As the administration’s own figures show, this year’s tax growth at over $439 million in recurring funds, and an additional $500 million in non-recurring funds, is more than enough money to put "schools first". These figures are expected to increase after the funding board meets on May 1.

As a Republican, I am in support of putting schools first in a fiscally responsible way by using natural revenue growth, and by funding education first before the rest of the budget.

For more information, please contact:

Susan Lynn
State Representative
57th District

215 War Memorial Building
Nashville, TN 37243-0157

615-741-7462

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