The FCC rules in dispute in the lawsuit had tried to do several things. First, they clarified that the maximum franchise fee that could be levied against a cable provider is 5%, and that the 5% fee had to include any in-kind payments expected from a cable company under a franchise agreement. Further, the FCC clarified that franchise fees were only supposed to be levied against cable TV revenues and not against other products and services offered by a cable company.
Cities (referred to as Local Franchise Authorities – “LFAs”) had expanded franchise agreements to include other mandatory payments. For instance, many LFAs required cable companies to provide free cable TV service to government offices and schools. Some franchise agreements required cable companies to provide free or reduced bandwidth to schools or low-income housing. The original FCC order even citied franchise agreements that required cable companies to plant flowers in parks and other non-standard fees on cable companies.
The original FCC order said that LFAs are allowed to extract payments in-kind, but that any such costs to cable companies would count against the 5% cap on total franchise fees. The court decided that the FCC had not been clear on the definition of in-kind payments. For example, the FCC wasn’t clear if the costs of providing PEG channels (channels set aside for the use of local governments to broadcast of government meetings and other such uses). The courts said it wasn’t even clear if cable companies could claim that the costs of having to expand to unserved areas in a city could count against the 5% franchise fee cap.
This new NPRM seeks to clarify franchise fee issues. Specifically, the order asks comments on the following issues:
- The FCC proposes to treat incumbent and new competitive cable operators identically in order to not impose any restrictions that might hurt the expansion of broadband deployment.
- The FCC seeks to clarify the definition of in-kind payments and reiterates that any such payments are to be included in the 5% cap on franchise fees.
- The FCC is reaffirming that there should be no franchise fees imposed on other services like broadband, telephone or smart-home services.
- The further clarify that there can be no other provisions included in a franchise agreement that would act to regulate any service other than cable TV. For example, some LFAs have been trying to use franchise agreements to dictate things like the coverage, speeds or prices of broadband services.
- The FCC also asks if these same rules should apply to statewide franchise rules that have been created by state legislators as an alternative to local franchise authority.
It’s not hard to understand why cities fight so hard to find ways to expand franchise fees. Since the explosion of cable TV service in the 70s and 80s many cities have grown to rely on the tax revenues levied on cable TV service. However, as people cut the cord or downsize cable packages the amount of collected franchise fees is declining and cities want to find ways to protect their tax revenues. The FCC is correct in clarifying that the Cable TV Act of 1984 clearly restricted franchise fees to only cable service, and as that service declines in value the cities are going to see franchise tax revenues continue to decline in the future.
Small cable providers need to be aware of their rights when entering into franchise negotiations with cities. Cities are allowed to ask for a PEG channel for use by the city. The City can ask for the creation of an iNet (although they have to pay for the fiber). Cities shouldn’t be asking for anything else other than franchise fees. This particular set of rules will clarify that issue.
While these clarifications by the FCC are important, Commissioner Michael O’Reilly points out in comments that what’s really needed are new rules from Congress that take a fresh look at the regulation of cable industry. Franchise fees now put traditional cable companies at a competitive disadvantage compared to Netflix and other online video services which don’t have to charge such fees, and in the current dynamic video market the question of charging fees on cable need to be reexamined.