October 19, 2018 -- Client Alert
The federal Communications Act of 1934 (“Act”) empowers state and local government entities (each a “Local Franchising Authority”) to award franchises to cable operators to authorize the construction or operation of cable systems in the public right-of-way, provided that a Local Franchising Authority may not grant an exclusive franchise and may not unreasonably refuse to award an additional competitive franchise.
In awarding a cable franchise, a Local Franchising Authority may require adequate assurance that the cable operator will provide adequate public, educational, and government access channel (“PEG Channel”) capacity, facilities, or financial support.
A cable operator may be required under the franchise agreement to pay a franchise fee to the Local Franchising Authority of up to five percent (5%) of the operator’s gross revenues derived during any 12-month period from the operation of the cable system to provide cable services.
In California, state cable franchises have preempted local cable franchises since 2008. As local franchises expire, they are replaced by new state franchises. Cities with no remaining local cable franchises may not be significantly affected by the proposed rules, even if adopted.
The Proposed Rules
On September 25, 2018, the Federal Communications Commission (“Commission”) released a “Second Further Notice of Proposed Rulemaking” (“Second FNPRM”) proposing new rules that would erode Local Franchising Agencies’ regulatory control over new and incumbent cable franchises.
One proposed rule would treat cable-related, “in-kind” contributions that are conditions or requirements of a franchise agreement as “franchise fees” subject to the 5% cap, with limited exceptions. If adopted, this rule would allow local cable franchisees to count the fair market value of non-monetary contributions they are required to make under the terms of their franchise agreement, including providing PEG Channel capacity, facilities, or support, toward the franchise fee limit.
PEG Channels provide third-party access to cable systems through channels dedicated for use by the public and certain program providers, such as local governments, schools, and nonprofit groups. Allowing cable franchisees to count the value of providing PEG Channels toward the 5% limit could cause the total amount of “franchise fees” charged under some cities’ franchise agreements to exceed the limit, rendering any excess amounts invalid and unenforceable.
This rule would apply to both incumbent cable operators and new entrants to the cable market. However, build-out obligations (enforcing state rules prohibiting failure to provide cable service based on the income of residents of the area) would not be counted toward the 5% cap. Also, for franchises granted prior to 1984, PEG support and capital cost payments would not be deemed franchise fees and would not be counted toward the cap.
THE COMMISSION SEEKS COMMENT on whether cable-related, in-kind contributions required by Local Franchising Authorities from cable operators as a condition or requirement of a franchise agreement should be treated as “franchise fees” counted toward the 5% cap, and whether the value to be deducted should be the fair market value of these “contributions” or the cable operators’ actual costs. We recommend that cities with franchise agreements providing for non-monetary PEG Channel contributions submit comments opposing the proposed treatment of such contributions as franchise fees.
Another proposed rule would prohibit Local Franchising Authorities from regulating most non-cable services provided by an incumbent cable operator over a cable system, and from regulating the facilities and equipment used to provide such non-cable services. Non-cable services provided over cable systems include broadband internet and Voice over Internet Protocol (VoIP).
Under this proposed rule, while Local Franchising Authorities can regulate cable services (e.g. television and video programming) provided over a cable system, they would not be authorized to regulate either the provision of broadband internet and VoIP services over a cable system or the facilities and equipment used to provide such services. This rule is ambiguous due to the lack of a clear distinction between facilities/equipment used to provide cable services over a cable system and facilities/equipment used to provide non-cable services over a cable system. However, it could be interpreted to allow cable operators to install facilities or equipment in the public right-of-way without being subject to local regulation or fee payment obligations, and could enable franchisees to circumvent many requirements of existing franchise agreements.
THE COMMISSION SEEKS COMMENT on this proposed rule. Cities with existing cable franchise should consider submitting a comment opposing, or seeking clarification of, this proposed prohibition on local regulation of non-cable services provided over cable systems.
Comments on the proposed rules may be submitted until 30 days after the date the Second FNPRM is published in the federal register, and reply comments are due 60 days after the date the Second FNPRM is published in the federal register. A more detailed summary of the Second FNPRM and its full text, including instructions on filing comments, can be found here: https://www.natoa.org/documents/Section%20621%20FNPRM%20Summary.pdf.
For further information, please contact Lona Laymon, Elena Gerli or Benjamin Jones of the cable/franchise practice group of Aleshire & Wynder, LLP at (949) 223-1170.
Disclaimer: Aleshire & Wynder, LLP legal alerts are not intended as legal advice. Additional facts or future developments may affect subjects contained herein. Please seek legal advice before acting or relying upon any information in this communication.